Capital Entrepreneurs and Profits - Assignment Example

Introduction An organization can be viewed as a consortium of like-minded people who come together to achieve a common objective. Objective here could imply anything, from garnering profits to creating social awareness or something else, which that group could feel that would make a difference in their internal and external environment. The purpose of this dissertation is to analyze the various common objectives of different leading organizations around the world and find out if profit-maximization is the sole objective of contemporary organizations. Strategy management will play an instrumental role in this research as strategies of various organizations will be studied and then a comprehensive analysis will be made on the same to find out if profit-maximization is the major driving force that runs these organizations. When small groups of people come together and work on a project, they invariably have to analyze as to what their mission and goal are. Organizations are usually classifies into different types like public sector (Central governments, state government run offices, schools, colleges, public welfare systems), private sectors (small business partnerships, limited companies, cooperatives, multinationals etc.), Quasi-Governmental organizations, Organizations in the charitable sector and even the churches and trade unions can be referred to as organizations. (N.Kumar, 1997) Hence, every organization issues a mission statement, which includes the purpose of setting up the organization. In social sciences, organizations are perceived from different dimensions. The general study of how an organization works is termed as organizational behavior or analysis. The whole of organization's behavior revolves only around one aspect-its goal. Every organization should have, irrespective of the field it operates in, a distinct goal. (N.Kumar, 1997) A goal, not only gives them a direction of persuasion, but also gives the much required motivation to the employees to work towards it, thereby helping them achieve their potential along with the company's growth. Likewise, a conceived state of an organization in a stipulated amount of time is referred to as 'Vision'. 'Vision' is extremely crucial for an organization as it gives a glimpse of the state of the organization after a certain period of time to the employees and stakeholders. 'Vision' can be taken as a benchmark for the company's performance in the future and can be used for comparison of various results recorded by the company. (Davenport Hines, 1990) Private-owned organizations usually have profit-maximization as their sole objective. (Susan Grant, 2000) However, many economists have different views over how an organization's objective should be formulated. Different people have come up with different theories over the issue of organizational objective. Many of them clashed, many of them overlapped and new theories were born out of the overlapping theories, but a general consensus is achieved that profit-maximization should be the sole objective organization though other objectives cannot be safely put aside. In this dissertation, I'd like to analyze the various theories put forward by economists and then draw a suitable conclusion from the same. I will also be studying a few patterns of various industries by taking certain specific examples of how a few companies overcame different situations keeping in their minds profit-maximization as their sole-objective. Literature Review As said above, it is imperative for an organization to identify its objectives before venturing and investing resources into the venture. So what is/are the goals a financial manager in a company will seek. In the first impulse, the only objective, which comes to, the mind, is profit maximization. Any business enterprise aims at earning profits; hence, it may be argued that profit maximization should be the sole objective of the organization. It is needless to say, that earning profits sustains the company's existence and can motivate the company to expand its market and improve its share over it, which implies that the company will look out for more profits. However, many economists warn that blind pursuit of profit maximization could be counter-productive in the long run, though it may be rewarding in the short run. A short example is illustrated about the above-mentioned fact. Assume that a company having an annual turnover of 50 million incurs profits worth 5 million. In the following year, assume that the same company has a turnover of 100 million and had incurred 7.5 million. Though it can be seen that the profit value had increased, the growth rate with respect to the turnover had drastically fallen. There could have been many reasons, one of which could've been fall of profit incurred per product. Hence, it can be easily said that an enterprise is clearly a risk-prone and a highly speculative affair, though if practiced effectively, could, be really beneficial. (Davenport Haines, 2001) Profit maximization, undoubtedly, will benefit the stakeholders and the management financially, but the management should also focus on improving other aspects of their work culture, which will clearly enhance the trust of the stakeholders towards the company, which is inevitably help in improving in helping the company improve its market share without having to spend much on publicity. Many economists point out that profit maximization at the cost of social and ethical standards is a shortsighted policy. The objective of profit maximization gets diluted if any of the stakeholders withdraws or reduces his support. Profit maximization should also involve proper plant maintenance, as the company needs to see to it that there's a proper synchronization between the supply and the demand. There have been instances when companies closed down due to loss of synchronization between the supply and the demand generated due to profit maximization techniques implemented by the management. Good public relations with institutions like Banks, suppliers, and government officials are instrumental to the growth of the firm. Other than that, the firm should never turn a blind-eye towards development of internal infrastructure in the process of attaining the profit maximization stages. The reputation and performance of the company is reflected on its value of stocks at the stock market. If the value of the return per share is really competitive and attracts various stakeholders, the management can be considered to be well off. Value of a firm is represented by the market price of the company's stock. The market price of a stock represents the focal judgment of all market participants, as to what the value of the particular firm is. It takes into account the present and prospective future earnings per share, the timing and risk of these earnings, the dividend policy of the firm and many other factors that bear on the market price of the stock. (Van Horne, 2001). Economists have always felt that profit-making organizations have realized that there's much more impact an organization can have on a society than mere providing financial security to its stakeholders. Of late, we have seen many organizations contribute to societal work with regards to improvement of the general infrastructure in the name of 'Corporate Social Responsibility'. But the fact remains that these organizations have a long-term goal of profit maximization in their minds when they embark on these types of activities by increasing their public image and also get a lot of benefits, which include tax relaxations from the government. Many major MNCs do feel that indulging in these activities not only boosts their public image and loyalty but also helps them in capturing a significant share of the market. There have been instances when governments have reduced the taxes to be paid by those companies. When Microsoft decided to set up a corporate office in India, which was followed by its CEO's visit and commitment towards financial contribution towards to the exponentially growing AIDS problem in the country, there were huge amount of tax relaxations showered on the company. Following this, it wasn't surprising to see many other companies follow Microsoft in contributing towards empowerment of downtrodden individuals, thus enjoying various benefits from various governments across the world. Obviously, tax relaxations would definitely help the companies in maximizing profits. Asian countries such as China have seen a very rapid economical growth over the past few years and Chinese economical practices have become a sort of benchmark for other countries in that region. China's rapidly growing economy has been attributed mainly to the opening up of the economy in 1978 by its leadership then, which helped various MNCs from different parts of the world in helping them provide resources for their production. In this context, I'd like to bring up the example of Wackermann, a German electronic manufacturer. This plant employs more than a 7000 people in southern China. For a monthly salary of 500-700 Yuan a month, they are made to manufacture electric fuses. The number of people it employs in China is much more than the help taken by the cheap labor it takes in its home country i.e. Germany. This is a clear cut illustration of the fact that the companies throng China only looking at the cheap labor and free trade restrictions the country offers to the outside players. (Carol Cary forth, 2004) Ironically, large portion of the electric fuses manufactured in China are generally sold in Germany, which can give much higher value to the product than in China. Another interesting fact is that the company only employs 200-240 employees in its home country, Germany. The company's representatives try to justify by saying that the very cost of production coupled with the rising value of euro against dollar make it hard to restrict the escalating operating costs. (Geoffrey Port, 2001) We have a number of MNCs thronging China only for exploiting the cheap labor. The Chinese government puts forwards no restrictions on them just for the reason that these companies provide employment to their citizens and can help in solving the problem of unemployment which has been plaguing the country for long. Hence, it can be well comprehended from the above facts that Business Enterprises today, are leaving no stone unturned to maximize their profits and focus on expansion. Confusion has always existed over 'Profit Maximization' and 'Utility Maximization'. I'd like to take here the views of five well-known personalities (Mas-colell, Whinston, Green) in the field of economics and analyze their stands towards the above-mentioned aspects. Mas-Colell, Winston and Green mentioned that Profit Maximization is not a self-justified principle and needs a strong foundation. (D. Prasada Rao, 2005) They also propagated that 'Utility Maximization' is a self-justified principle over which the 'Profit Maximization' principle is formulated, thus, utility maximization is the principle over which the Profit Maximization is built. They mention it in their findings in their report as follows. "Although it is logical to take assumption of preference maximization as a primitive concept for theory of the consumer, the same cannot be said for assumption of profit maximization for the firm. Then why this objective rather than having an objective of maximizing sales returns or maximizing the labor force'Fortunately, it is possible to resolve these issues and give sound theoretical ground for profit maximization technique" The above-formulated idea did not go all that well with many economists questioning what is to be maximized by the firm. The apprehensions expressed were basically on this front and people started questioning the very basis of the purpose of the firm. According to the above report, it is evident that the three economists were trying to propagate that the firm is for employing more people making the most use of them and not solely work on the profit-maximization basis. The strategy used by the above three authors to justify the position of profit maximization, and not employment or market share maximization is the outcome of optimum utility maximization. Mas-Colell, Winston and Green acknowledged that it is ultimately profits, which should be the outcomes of the ventures of these organizations. This implies that other variables like employment, market share will be fluctuating depending on the requirements of the firm. Hence, the firm will employ or fire workers depending on profit maximization strategies they derive from time to time. The basic crux of the whole report was clearly maximization of utility functions, which in turn helped in maximization of profits. The point made was since profit is just the means to utility maximization; profit maximization too is just the means to utility maximization. As they put it, profit is not just the end-goal of the firm but a means to the true end goal, which is utility maximization. The greatest flaw, which economists found in the above model, was that the authors completely discarded the alternatives to profit maximization, which include market share and employability (Yanis Varoufakis, 1998). To another economist named Scitovsky came up with a report on the relation profit maximization had with other factors' "'That the entrepreneur is aiming at maximizing his profits is the most fundamental assumptions in the economic theory. So much so that it has almost been regarded as a rational behavior, and as axiom, which is self-evident and needs no proof or justification'" Profit maximization implies zero income elasticity of supply of entrepreneurship. Thus the very activity of profit maximization is ideally the activity of profit maximization and not the outcomes of it. This means that profit maximization has absolutely no relevance; whatsoever to the 'Utility' maximization and the firms do not generally maximize profits to improve the utilities of the stakeholders. In other words, the growth of the organization is not related to the welfare of its employees but the welfare of its employees is directly impacted by the profits acquired by the organization. "At the first sight, it may seem strange and unrealistic to attribute to an entrepreneur a type of behavior that would fulfill his condition. For, if his aim is to make more money, the amount he has should affect the ardor and energy, with which, he seeks to earn more" Scitovsky suggested that the monetary result of profit maximization would affect the "ardor" and energy" if the sole aim of the venture was to maximize utilities of its owners (Alan Shipmen, 2001). According to Scitovsky, thus, profit maximization is an unconditional principle and bears no direct resemblance to the utility but it clearly illustrates that the pursuit of profit is not a function of utility but it is usually the vice-versa. Conclusion Organizations have different goals and missions. But as pointed out above, all of them work in the same direction- towards attainment of profit maximization. Though different economists add a few dimensions to the existing theory of profit maximization, it won't be wrong to say that profit maximization is clearly the guiding stone for the management to formulate their strategies. Whether it is reduction/increase in the employee intake or closing down a few subsidiaries or whether it is closing down a few plants, all of these activities revolve around only one aspect -profit maximization. There are firms, which believe in generating wealth out of the human resources and have clearly illustrated that human welfare is dependent only on the economic stability it enjoys and clearly not on the utilities, which they've been given. Hence, I conclude by saying that profits are crucial for any organization's sustenance and should be used in the right direction in order to generate further profits. REFERENCES 1) Carol Cary forth (2004), " BTEC First Business", Harcourt Heinemann 2) Geoffrey Martin (2001), Economics and Utopia, Routledge 3) S.Davar (2004), Modern Management marketing on a global context, Progressive Corp. 4) Davenport Hines (1990), "Capital Entrepreneurs and Profits", Routledge 5) Yanis Varoufakis (1998), "Foundations of Economics: A beginner's Companion", Routledge 6) D.S.Prasada Rao (2005), An Introduction to efficiency and productivity analysis", Springer 7) Susan Grant (2000), "Economics in context", Harcourt Heinemann 8) Alan Shipmen (1999), "Market revolution and its limits", Routledge 9) N.Kumar (1997), "Managerial Economics", Anmol Publications Read More