Strategic Management with The Key Focus on The Topic of Profit Maximisation - Essay Example

? Strategic Management Grade This paper is about strategic management with the key focus on the topic of profit maximisation. The key statement of the paper is adopting a simple profit-maximising perspective…can have positive impacts for a firm. The paper will discuss this strategy of business operations while throwing light over it from various perspectives. It will evaluate up to the extent this strategy is applicable in the business industry. It will also look into the business approaches both conventional and contemporary to analyse how this strategy evolved over the period of time and what was its level of acceptance. The term strategic management refers to the overall vision, mission and goals of the business which lay the foundation of any organisation. The functional departments of the organisations may be the same for all the market players yet the way in which these functions are carried out, is devised by the strategy. The strategy defines the code of conduct and values for the organisation which must be reflected in the operations of the business. The strategy of the business varies from the level of organisational growth and the type of industry it is part of. A service oriented organisation focuses on intangible parts of the operation more than it emphasizes on the tangible characteristics of goods and services. PROFIT MAXIMISATION IN THE BUSINESS FIRM Business is established with ongoing concern with the core objective of earning profits. This statement is valid for commercial organisations and not for the charity forms or NGOs. Charity firms and NGOs like UNDP, UNESCO is not considered part of business industry; rather their association is more towards welfare sector. The business sector in its each form; entrepreneurship, partnership and corporation, is established mainly to promote economic activity and generate profits. Business model running in losses is not legal business model. It should serve both the economic interests of the investors and society. Businesses earn profits through positive deviation of revenue amount from the cost amount. The higher the deviation, the greater the profit margin is. The portion of profit is reinvested in business for growth and development purposes. The remaining portion is used for lifestyle uplift of mainly the investor and profit holder. Keeping in view the two above mentioned definition of business and profits, a simplistic conclusion is; the more profit, the better it is. But it is not practical option when evaluated with the perspective of other stakeholders of the business. The business does not have the investor as the only stake holder. The customers, suppliers, regulatory body, competitors, unions and society at large are the stake holders of the business and the organisations must consider all of them when conducting businesses and devising the profit plans. For instance, an airline while operating its flights, should consider the pollution effects it puts on the environment, the noise its take off and landings produce, which can disturb the citizens. It is, therefore, operating flights at night in US is legally prohibited. There are two approaches of profit maximisation i.e. increasing revenues and decreasing costs. The next sections discuss these two options in detail. Profit Maximisation though Revenue Increase It is important to note here that business sector earns revenues by customers, who consider the price of the product or service as the cost. Customers invest their hard earned income in buying goods and services. The price for businessman is cost for customers who incur this cost to fulfil the need for which product or service is designed. The interest of customer is to pay as low price for the product as possible. On the other hand, the interest of the businessman is to charge as high a price as possible. This trade off between the interest of purchaser and seller is set at an equilibrium price at which the seller receives considerable amount of profit and the buyer fulfils his needs at an optimum price. It is also possible that the set price may not seem reasonable to the target market. In this case, consumers tend to search for substitutes of the products and services which are offered at competitive prices (Netessine & Shumsky, 2005). For example, there are many detergents available like Surf Excel and Arial. Tooth paste has even more brands like Signal 2, Medicam, and Colgate etc. Same is valid for shampoo like Head & Shoulders, Pantene, and Sunsilk etc; hence, in the lust to earn more, the seller loses the lower but attainable profit margin. The target market becomes more and more concentrated (Lan, Gao & Ball et al, 2008) and people tend to evaluate whether the price justifies the features of the product or service. In this era of globalisation when concept of open market has emerged, price competitiveness has become core business issue for the sellers (Guttal, 2007). There are many substitutes available in the market continuously threatening the profitability and even survival of an expensive player. In order to sustain in the market, the business sector focuses on lowering profit margins. There is another related issue with concentration of target market. Brand awareness is a need of the hour and out of many products placed at the shelf, the customers choose the one they are familiar with. In the case of tooth paste, Medicam has the image of medicated formula; hence health conscious people buy it while others tend to prefer other brands. Henceforth, brand awareness and good word of mouth lead to basic marketing strategies for the business which lead to repeat business and customer loyalty. In order to capture the available market at competitive rates, organisations tend to offer their products at lower rates. A common example in this regard is of telecom operators which offer cheap night, weekend and holiday packages. Telenor and China Mobile operators are common examples. The network traffic is low in this time period while the fixed cost remains the same. The operators offer these packages to generate possible amount of revenue by incurring small variable cost. It leads to simple conclusion that profit maximisation through the approach of increased revenues is not a practical option in all cases. Particularly speaking in the context of present era of 21st century, adoption of this option is even more difficult. Profit Maximisation through Cost Reduction In order to ensure existence in the industry and remain profitable, the seller focuses on cost reduction techniques to enjoy considerable profit margin. There are many approaches for cost reduction. Described below is the summary of most commonly used options. The organisations cut down the functions they consider unnecessary. In this regard, the two core curtailed activities are employee training and corporate social responsibility. Cutting down expenses in these two heads is a dangerous approach and affects revenue generation as well. Training of employees pays back to the organisation in terms of increased performance and better service to the customers. Organisations curtail training budget assuming that training is the core responsibility of employees themselves and organisations do not need to invest in this field. It is not true because training when enhances employees’ capabilities, at the same time also gives them the sense of attachment to the organisation and increases loyalty. Employees become more customer and profitability centric through trainings. Quitting training program altogether keeps the employees focused to their own benefits and they pay less heed to the customers’ concerns and organisational development. Hardly any employee learns new skills on his own to perform his duty in a better manner. The other domain of cost reduction in business sector is of corporate social responsibly. Organisations tend to ignore it considering it a secondary function which does not affect the performance and profitability of the organisation positively (Banerjee, 2007). However, this is not the case. CSR leads to better the image of organisation (Perrini, Pogutz, & Tencati, 2006) and gives the stakeholders a feel that organisations are part of society and they are concerned about the betterment of society as well (Hindery, 2008). They are not only profit centric and willingly share their revenues with the other stakeholders of the society as well (IEEE Xplore, 2009). The above mentioned two approaches for cost minimization for profit maximisation are not fruitful in true sense. There are many other methods and techniques which guarantee cost reduction without any negative impact over revenue generation. Consequently the profit margin is increased. Few examples are mentioned below. Cost reduction is possible through elimination of waste from production cycle. It is ensured through Kaizen’s Management and Lean Six Sigma techniques (Antony, Kumar & Labib, 2008). Other methods to reduce cost are related to elimination of defects from the products so that returns and warranty claims can be minimized. Yet another way is to remove duplication of work from the processes so that they become cheaper, faster and better (Albright & Lam, 2006). In this way, less cost will be consumed to produce same amount of quality product. Cost reduction is also possible through streamlining supply chain and distribution channels. Many organisations tend to select short number of suppliers and distributors and maintain long term relationships with them so that they do not spend time and other resources in getting satisfactory services from a huge number of partners. In manufacturing concerns, the cost of holding raw material and finished goods is an area requiring special attention. In this regard, the concept of Just-In-Time (JIT) is introduced which enables organisations to minimize the inventory holding cost at maximum possible extent (Wang & Toktay, 2008). Toyota Motors is a well known example for implementing Japanese system of management. Analysing this option for profit maximising is more applicable than the previous one. It is because; it is based on the win-win condition for both buyer and seller. The unnecessary cost is eliminated which automatically lowers down total cost while revenue is kept constant. It increases profit margin and helps organisations grow. Profit Maximisation through Intangible Assets Having discussed the numeric profit equation, it is important to shed light on the intangible factors of the business which lead to profit maximisation. One of such factors is discussed above. It is corporate social responsibility. It creates brand awareness and enhances customer loyalty (IEEE Xplore, 2010). Corporate social responsibility is related to not only customers and employees, but also to environmental protection and consideration for disabled citizens. It is also associated with helping people in the hour of need such as natural disasters and calamities. Airlines provide free of cost carriage of relief goods to the victims of earthquake and flood. Telecommunication companies provide free of cost connections to the affected areas. The celebrities conduct shows and concerts to donate money for deprived sector. All these activities lead to intangible benefits which can be converted to monetary benefits in the long run. The other factor contributing in profit maximisation is goodwill. Organisations reflect goodwill in their books of accounts under the head of intangible factors by associating certain monetary value to it. Another intangible factor driving profitability for the organisation is related to good word of mouth which directly affects customer purchase behaviour and share price. Share price is the function of uncountable tangible and intangible factors. Share price fluctuation within short span of a second is the matter of daily routine. It is quite unlikely that changes occur in the organisational internal environment on the daily basis. It is primarily the external environment which influences the share price of every organisation. This paper is about validation of profit maximisation approach by the organisation. In other words, it explains whether the focus on profit maximisation should be a desirable approach or not. To answer this question, various perspectives of organisational business are discussed in the above sections. Two approaches of profit maximisation are discussed along with their limitations. It can be said that profit maximisation is the core objective of business sector and no organisation should target losses in its business plan. However, profit maximisation through price increase is not a desirable approach. It is because; many customers are price sensitive and can churn out of the target market. It is not feasible in terms of economic circular flow. The income transferring from consumers to producers is not the only goal of macro economics. There is an important element of saving as well, which is mainly associated with consumers. They need to reserve a portion of their income so that they can use it in the hour of need or invest somewhere to get financial gains out of it. In the particular context of monopolistic competition, whereby the organisations price structure is largely unaffected by the market conditions, the role of regulation comes in. The regulatory body and governmental forces tend to place a price cap so that the tendency to attain undue profits can be discouraged. It allows other smaller operators to enter the market and meet the requirements of the customers. A prominent example in this regard is of aircraft manufacturing industry where Boeing and Airbus are in competition and Airbus is notorious for offering cheaper rates to the operators after getting subsidies from EU. It is also important to note that the price does not consist of cost of production only. The final distributer and retailer of the product sets the price after including his transportation cost, shelf cost, outlet cost, rentals and profit margin. The price the final consumer pays consists of all the direct, indirect expenses and profit margin of all the intermediaries involved in the production and distribution process. Hence, the product becomes expensive for the end customer though it was produced at cheaper rates by the producer. Same drawback was realised by numerous industry players. To transfer the cost benefit to the final customer, Dell Computers eliminated distributers and intermediaries from its supply chain and dealt with customer directly. Many organisations offered e-offices whereby they could minimize the cost of physical office (Caldentey & Vulcano, 2007). British Telecom is one of these examples. Keeping in view the global dynamics, where the world is moving towards free movement of capital, goods and labour (Kali & Reyes, 2007), the need for cooperation has replaced the focus on competition. Many mergers are taking place globally so that the small and medium enterprises can still enjoy the profits in the situation of upcoming new challenges. Many organisations are going bankrupt and the survival of business sector is possible though mutual efforts of all industry players. This is the time where profit maximisation is not the core concern, rather survivability with marginal profits are more important. CONCLUSION In the light of above discussion, the answer to the question whether the organisations should adopt simple profit maximisation approach cannot be explicitly given in affirmation or negation. A balance is required between the profit orientation and societal orientation (IEEE Xplore, 2009). It is because organisations operate in the society and they are ethically bound to share their gains with the entities that support generation of the profits. The clear cut statement is; in no circumstances the organisation should operate in losses. Attaining profits is the core objective; however, maximisation of profits can be compromised based on the environmental conditions and requirements. The case of monopolistic competition is discussed in the above paper. It is an unlikely situation for all the stakeholders except the business owners (Parente & Rull, 2005). This approach is minimized in the theories and practices of all times of business sector. In short, the business sector, that drives investment and economy, should focus on win-win conditions for all stake holders (Kotler and Lee, 2005). It is pretty fair to state that the major chunk of profit remains in the hands of investor while rest of the stake holders get the returns of cost in terms of satisfied need or other intangible benefits. The focus of business sector should be achieving the realistic equilibrium whereby they can balance out the demand and supply of its products and services (Bell & Zhang, 2006). 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