Sunday, June 9, 2013

Profit Maximisation: Is It As Bad As Many Think?

Profit maximisation has been taken to such an extreme by too many, short-sighted, myopic  shareholders and organisations that the original concept has been totally distorted; to the extent that the term itself seems to leave a bad taste in one’s mouth and makes most people think of ‘greed’ and ‘unethical’ business. Wherein this scenario the single goal is to drive costs down to such a level that quality and service suffer, sometimes to criminal levels, in the pursuit of corporate profit and maximisation of shareholder wealth.
But even though the theory looks at maximising revenue and minimising costs – the theory never purported that this should be done at any cost – and certainly never suggested that profit maximisation was about inferior quality; corporate lies and/or mis-selling; or many of the other organisational behaviours that seem to take place in today’ business environment to reduce costs in the pursuit of their perception of profit ‘maximisation’.
There was a time when to try to differentiate between the ‘malpractice’ often exhibited in the drive for profit maximisation – academics and organisations would talk about profit optimisation – implying that optimisation takes place by keeping ‘the parameters of good business’ in place and by focusing on sustainable organisational growth over the long-term – rather than the constant pursuit of profit in the short-term at whatever cost.
As a theory ‘profit maximisation’ has been subjected to such corporate abuse that the term only seems to be applied with resentment and scorn by those who witness it as a business principle.
Research in 2009, which was developed from survey data gathered from 520 business organisations in 17 countries, found that if a CEO’s primary focus is on profit maximization, employees develop negative feelings toward the organisation. They tend to perceive the CEO as autocratic and focused on the short term, and they report being somewhat less willing to sacrifice for the company. Corporate performance is poorer as a result.
The research found that when the CEO makes it a priority to balance the concerns of customers, employees, and the community while also taking environmental impact into account, employees perceive him or her as visionary and participatory. They report being more willing to exert extra effort and corporate results improve (Source: Nathan Washburn; HBR; 2009).
But if an organisation is looking for any sustainable profitable growth then they must take their customers and employees into account- it’s just basic business sense.
The other scenario is where the organisation is a monopoly; or the organisation supplies essential services and is in some form of collaboration or collusion with other suppliers; or the ‘customer’ has been ‘taught’ that they can no longer expect ethical business and are happy to accept that’s ‘this is’ just the way current business is and there’s nothing they can do about it.
So those that have moved beyond ethical business practice to maximise their wealth at the expense of customers, staff and their community have bastardised the theory around profit maximisation to give ‘credence’ to their behaviour – and the customer has in many cases just gone along with it – believing it to be a sign of the times and why we find the world in a financial crisis.
But profit maximisation that keeps within the boundaries of ‘sensible and good business practice’; that takes account of the organisations customers, employees; as well as their suppliers, community and shareholders can maximise profit within these confines; and look towards sustainable growth and be proud of their achievements.
There are many arguments against profit maximisation – but many aren’t logical statements if extrapolated into the future. For example one argument against profit maximisation is that the organisation is so ‘entrenched’ in its current profit maximising activities that it can’t adapt to a sudden change in the market. Well I’m sorry but if the organisation is genuinely looking to maximise profit, but within the parameters of sensible and good business practice – it’s hardly focused on a maximisation strategy if it isn’t prepared to adapt to market changes.
The problem is that shareholder and organisational ‘greed’ and ‘corruption’ have given profit maximisation a bad name – and under these conditions it has no place in the business environment. But an organisation that is focused on sustainable growth along with profit maximisation, while looking after the interests of its staff; customers; community and other stakeholders is the kind of businesses we need – since until there is a radical change in the world we live in – organisations need profit to re-invest in infrastructure; job creation; product and service development; customer interaction; and talent development.
Washburn, N.T. (2009). Why Profit Shouldn’t Be Your Top Goal. Harvard Business Review. December.

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