What is profit maximization? definition and meaning

Profit Maximization

UK Profit maximization

Traditionally profit maximization has been considered the objective of business. This viewpoint has the great advantages, from the standpoint of the ethics of decision making, of clarity and certainty.

The businessman is never in doubt about what he is trying to accomplish. Price and output are set at the levels where marginal revenue equals marginal cost. All decisions are made on the basis of their impact on profits. A service is worth a certain value to the consumer, luxury services such as cosmetic dentistry is not a necessity therefore the people looking for the service are wanting a luxury service meaning that they are willing to pay a luxury price. The area of the business can also greatly impact the price. It is expected of London based businesses to charge more for their services than a competitor in a more rural location.

The businessman need not consider any values or goals that cannot be expressed in money terms and which do not affect the profit position of the enterprise. Therefore, the businessman can operate on a completely rational and objective basis. He need not take into account subjective and psychological phenomena in making decisions.

The economic climate has given businesses a good hammering over the past couple years with many high street names and brands disappearing into the abyss. In these tough financial times it's important to priorities spending while understanding that certain aspects such as marketing and advertising are necessary. It's important to spend effectively on marketing which means using every possible means of tracking marketing effectiveness.

For example, a business may decide to track the effectiveness of a printed advert by using a specific non-geographical number to track phone calls – these can be purchased online from companies such as: http://www.dbs-uk.co.uk/ . Web effectiveness is usually much easy to track as long as you have some form of analytical package on your website, which means you're able to see what traffic came from where and what converted into a sale, form submission etc.

The doctrine of socially responsible management complicates the decision-making process. If management is responsible to several groups in society, this means that the enterprise will have multiple objectives which reflect the goals, values, and ends of these groups.

Clearly there will be conflicts among these goals (e.g., customers desire lower prices, employees want higher wages, and stockholders want greater dividends). Such conflicts complicate the decision-making process because now management is faced with several alternative means-ends hierarchies, depending upon which objective is considered most urgent, instead of a single means-ends hierarchy, as in the profit-maximization case.

Therefore, the ethical component of decision making is tremendously enlarged in scope. When profit is the objective of decision making, management has a clear picture of ends; and it is factually oriented because its major problem is to select the best means to the end of profit maximization.

But when social responsibility is the objective of decision making, management must determine the best combination of ends as well as the best means to those ends. It must take into account a wide range of value phenomena in deciding on ends, phenomena which are inherently highly subjective and psychological in nature. see Wolfram Demonstrations Project or Freelance PPI

Suppose a decision must be made whether or not to move a branch plant from a small town in which it is the economic mainstay to another area where production costs are lower. Whichever decision is made will have differential effects on the various groups involved. If the move is made and production costs are appreciably lower, profits may go up and lead to higher stockholder dividends; hourly earnings of workers may go up because of increased productivity; and customers may get a better product, a lower price, or both. On the other hand, the small town may become economically stagnant, and workers who are well settled in the town may face the choice of dislocation (and perhaps a cut in wages) or loss of job.

If profit is the sole objective of decision making, profit is the only relevant value to take into account in making the decision. The impact of moving or not moving the plant on worker, customer, and community is significant only insofar as it affects profits.

But if social responsibility is the objective of decision making, a host of other values are relevant (e.g., achievement, success, humanitarianism, efficiency, practicality, progress, equality, freedom). Furthermore, there will be conflicts between these values. The move may further practicality and efficiency, but it may be opposed on humanitarian grounds. In order to make a socially responsible decision, it is necessary to determine which values are involved and decide what priority they should have where they are in conflict.

What next? Online Marketing Management