Challenge in Maximizing Profit for the Large Firms - Essay Example

Evaluate the major challenges, in the past 70 years, to the assumption that large firms and TNCs seek to maximise profit Introduction The developmentof business activities worldwide has been differentiated in accordance with the social and cultural characteristics of each region but also the customer needs and their financial status. In this context, the behaviour of firms and their priorities have changed in the last decades representing the radical changes of the political and financial conditions in all countries around the world. Current paper focuses on the differentiation of the firms’ efforts to increase their profitability referring to the last 70 years, i.e. the mid 20th up to early 21st centuries. Moreover, only firms of a specific size, i.e. large firms and TNCs are examined in this study in terms of their behaviour regarding the increase of their profitability. In the literature, it is noticed that the priorities of firms have changed during the above period under the pressure of the financial and political turbulences worldwide. We could indicatively refer to the study of Becerra (2008) where it is made clear that the firms’ profitability is developed under specific conditions: ‘(a) value uncertainty, (b) resources specificity, and (c) firm-level innovation’ (Becerra, 2008, 1110). It is not made clear in the above study whether the above conditions refer to the development of profitability of all firms or whether there are related only with the performance of firms of a specific size. The studies published on the specific field show that there is a relationship between the aspects of firms on profit and the political/ social and financial conditions of a particular region. In the 21st century, the increase of profit has been a significant priority for managers of large firms and TNCs; however, it seems that in the previous century – the 20th – different views on profit have been developed by the firms of this size; emphasis was put rather on the personal development of employees and the promotion of specific principles, like equality, across firms of all sizes. The fact that most of the large firms and TNCs of the 20th century were under the control of the state could possibly have affected the views of managers of these firms on profit. 1. Why in much of the 20C, has it been argued that large firms and TNCs do not seek to maximise profit As noticed above, in the 20th century, firms’ priorities have been differentiated by those of firms operating in modern market. The role of the state in the development of business activities has been major during the specific period; on the other hand the 20th century is characterized by the promotion of social theories when explaining the various aspects of organizational behaviour. The specific issue is highlighted in the study of Warhurst (2006) where the development of operational activities of a firm controlled by a trade union was examined; in the above study it is noticed that profit was the priority of the firm’s managers; the personal development of employees was left behind. In the specific work, the existence three different periods in the improvement of the firm’s operational activities is revealed: ‘old firm, a transitional firm and a new firm’ (Warhurst, 2006, 285); the use of these periods for the evaluation of the firm’s operational priorities is critical. In accordance with the finding of the specific study, ‘the above three periods correlate to the changes of political economy and institutional configurations within which the case study firm is embedded, suggesting that such embeddedness is a key issue for the firm and its orientation to welfare or profit’ (Warhurst, 2006, 285). Despite the fact that the above study sets a series of criteria for the identification of the role of profit in the 20th century’s firms, it is not related – at least clearly – with a firm of a particular size; in other words, it could be used in order to explain the behaviour of large and TNCs towards profit during the 20th century. In any case, the above study leads to the conclusion that profit had a significant importance for firms of the 20th century – as also for firms of the 21st century – as it will be analyzed furthermore. So, the argument that during the 20th century the firms did not focus on the increase of their profit is not justified by the findings of the above study. However, it should be noticed that firms in the 20th century were not developed equally; more specifically, it is supported that ‘industrial concentration and the rise of large corporations lead to stable and persistent differential profit rates between industries and size classes of firms’ (Semmler, 1981, 39). The above assumption represents the main aspects of the theory of the monopoly capital; the industries around the world are characterized by the existence of large corporations that continuously increase their power; under these terms, the competition around the world is not appropriately developed; the profits of firms present high differences in accordance with their size and their impact on the local/ national economy. At this point, it should be mentioned that differentiation in firms’ profits cannot lead to the assumption that profit has been the priority for firms operating in the 20th century; the expansion of commercial activities has been rather the priority of these firms; the increase of their profits towards their competitors followed as an expected outcome. Through the above study (Semmler, 1981) the increase of profitability has not been the priority of firms in the 20th century; profit has been used as a criterion to identify the firms’ position in the market and its ability to expand its activities in the global marketplace. Another issue that needs to be highlighted here is the fact that profit could not be a priority for firms in the 20th century under the pressure of political and financial turbulences worldwide – especially under the influence of the two World Wars that caused severe damages to the economies of most countries around the world. In this context, profitability could not be a priority for large firms and TNCs during the specific period; rather the protection of the employees’ rights had to be guaranteed and the survival of the firms within the extremely adverse political and social conditions should be achieved. On the other hand, even if globally the political and military conflicts led most firms to severe financial losses, it has been proved that firms in the European Union managed to develop their activities more effectively than their American counterparts. Regarding this issue, it is supported that ‘for most of the postwar period both labour and total factor productivity growth in the EU was higher than in the US; the 1990s witnessed a change in this trend with the US experiencing higher growth rates for the first time in decades’ (O’Mahony, 2002, 72). In accordance with the above study, the increase of productivity of firms globally can be influenced by their participation in specific bodies/ unions; firms that cooperate with other firms can achieve a higher rate of growth if compared with those firms that try to establish a ‘monopoly’ practice within their industry. In other words, the development of firms’ performance in the 20th century is related with the ability of the firms to establish strategic alliances within their industrial sector; the profitability of the firms of this period is not recognized as a strategic priority. Firms in the 20th century had to align their strategies with the existing political and social conditions. In USA, the development of the concept of New Deal during the decade of 1930s led to the need for the improvement of the country’s infrastructure. Regarding this issue it is noticed that ‘competitiveness in the new economy requires greater development of human resources and information infrastructures’ (Marshall, 2001, 59). The specific study also highlights the importance of human resource management for the development of the performance of firms operating around the world during the 20th century; again the profit as a criterion for the development of the firms’ performance is left behind. On the other hand, the development of non-profit organizations during the 20th century led to the decrease of the role of profit as a criterion of success within all industrial sectors (Chell, 2007). Non-profit organizations were used as a vehicle for the limitation of taxation of firms operating in specific industrial sectors; this fact has also led to the development of other criteria that can be used for the evaluation of performance of large firms and TNCs around the world. The trend for the limitation of the role of profit in the evaluation of the performance of firms worldwide is also presented in the study of Burris (1980) where it is made clear that ‘the capital accumulation process’ (Burris, 1980, 17) is developed within specific conditions among which the ‘the tendency toward a decline in the rate of profit’ (Burris, 1980, 17). In other words, the development of corporate activities worldwide during the 20th century has not been based on the increase of the firms’ profitability; other priorities – like the ones described throughout this section – have been set by firms around the world. Large firms and TNCs also follow the specific practice. In the 21st century, the priorities of all firms (including the large firms and TNCs) have been changed as it will be explained below. 2. Why, in the early 21C, is it believed by some that large firms and TNCs have to maximise profit In the 21st century, the priorities of firms worldwide have changed; competition has become stronger while the demands of customers have become more difficult to be met. On the other hand, the cost of operations has been increased for all firms operating globally (apart from the non-profit organizations and those firms that are established in regions with no tax obligations, the so called ‘tax heavens’); in other words, within the 21st century, the need for profit for firms of all sizes has become emergent. Of course, factors that can influence the firms’ performance, like the human resources management or the development of strategic alliances are also critical for the performance of firms in modern market – including large firms and TNCs. The specific issue is noticed in the study of Berger et al. (1993). In this study – where a series of firms operating in the hospitality industry are carefully examined – it is revealed that in order ‘to remain viable, hospitality organizations will need to create partnerships with employees, guests, and universities’ (Berger et al., 1993, 87). There is no reference to profit as priority in the strategic planning of these firms. However, a series of HRM sectors is presented as having critical importance for the employees’ performance; compensation is one of these sectors. In this context, profit needs to be at a good level in order for a firm to be able to respond to its obligations towards its employees. At the level of the state, the scheme of national minimum wage adopted by many states around the world cannot be applied in practice unless the profitability of the state is satisfactory. The specific example which is presented in the study of Metcalf (2008, 489) can be used in order to understand the importance of profit for the realization of business projects and the achievement of the corporate targets in all industrial sectors. Only if a firm’s profits are at a good level, the firm’s HR plans – as also all its plans – can be effectively developed (Griffin, 2000, 479). In accordance with the above, large firms and TNCs in the 21st century have placed profit among their priorities; the similar approach adopted by their competitors is not the only fact that led to this outcome. Conclusion Profit can directly influence the performance of a firm – if the level of a firm’s profit is not satisfactory the various business plans will be difficult to get realized. On the other hand, the remuneration of the firms’ employees will be lower in firms the profit of which is limited. The approaches used for the explanation of the role of profit for large firms and TNCs in the 21st century seem to be more realistic and applicable compared to the those referring to the profit as one of the priorities of firms of the 20th century. In this context, it is proved that ‘firms run by new capitalist owners and autonomous professional managers exhibited a greater tendency than firms run by established capitalist owners to complete diversifying acquisitions in the 1960s’ (Palmer et al., 2005, 385). On the other hand, the increase of profitability of firms operating in the modern market cannot guarantee the quality of services/ products offered; it could be an issue of short-term development – not appropriately supported. The examples of the severe financial losses of firms operating in various industrial sectors because of the failures of their employees – the case of corporate scandals – prove the above assumption. The specific issue is highlighted in the study of Kuhn et al. (2003, 20) but also in other studies referring to the specific field. It should be also noticed that the change in the position of profit within the organizational context – importance of profit for the development of corporate activities – has led to differentiations in the managerial structures applied on firms around the world (Heames et al., 2006, 29). Moreover, it is proved that still during the 21st century, the role of employees to the increase of firms’ performance is significant. In this context, it is supported that ‘skill flexibility contributes to cost-efficiency ‘(Bhattacharya et al., 2005, 622). In other words, in 21st century the importance of profit for the development of activities of large firms and TNCs has been increased – in the 20th century profit was only taken into consideration after the careful examination of the other factors influencing the firm’s performance (as analyzed above). The performance of modern firms (referring especially to large firms and TNCs) compared to those operating in the 20th century leads to the assumption that profit is not a critical criterion for the development of a firm’s strategic plans; for this reason, it should be evaluated in combination with other factors influencing firms’ performance, like the employees’ performance. Works Cited Bhattacharya, M., Gibson, D., Doty, H. (2005) The Effects of Flexibility in Employee Skills, Employee Behaviors, and Human Resource Practices on Firm Performance. Journal of Management, Vol. 31, No. 4, 622-640 Becerra, M. (2008) A Resource-Based Analysis of the Conditions for the Emergence of Profits. Journal of Management, Vol. 34, No. 6, p.p. 1110-1126 Berger, F., Fulford, M., Krazmien, M. (1993) Human Resources Management in the 21St Century: Predicting Partnerships for Profit. Journal of Hospitality & Tourism Research, Vol. 17, No. 1, p.p. 87-102 Burris, V. (1980) Capital Accumulation and the Rise of the New Middle Class. Review of Radical Political Economics, Vol. 12, No. 1, 17-34 Chell, E. (2007) Social Enterprise and Entrepreneurship. International Small Business Journal, Vol. 25, No. 1, 5-26 Griffin, J. (2000) Corporate Social Performance: Research Directions for the 21st Century. Business & Society, Vol. 39, No. 4, 479-491 Heames, J., Harvey, M. (2006) The Evolution of the Concept of the Executive from the 20th Century Manager to the 21st Century Global Leader. Journal of Leadership & Organizational Studies, Vol. 13, No. 2, p.p. 29-41 Kuhn, T., Ashcraft, K. (2003) Formulating the Contributions of Organizational Communication Studies. Management Communication Quarterly, Vol. 17, No. 1, 20-57 Marshall, R. (2001) Rural Policy in the New Century. International Regional Science Review, Vol. 24, No. 1, p.p. 59-83 Metcalf, D. (2008) Why has the British National Minimum Wage had Little or No Impact on Employment? Journal of Industrial Relations, Vol. 50, No. 3, p.p. 489-512 O’Mahony, M. (2002) Productivity and convergence in the EU. National Institute Economic Review, Vol. 180, No. 1, 72-82 Palmer, D., Maher, M. (2005) The managerial revolution revisited: the moderating impact of top managers’ social class position. Strategic Organization, Vol. 3, No. 4, 385-430 Semmler, W. (1981) Competition, Monopoly, and Differentils of Profit Rates: Theoretical Considerations and Empirical Evidence. Review of Radical Political Economics, Vol. 13, No. 4, p.p.39-52 Warhurst, C., Darr, A. (2006) From Welfare to Profit: The Transformation of a Trade Union-Owned Firm. Economic and Industrial Democracy, Vol. 27, No. 2, p.p. 285-309 Read More