Maximizing Profits as the Main Goal
The traditional theory (neoclassical) assumes that firm’s primary
objective is to maximize profits. That is if the firm is owner
controlled. This assumption is based on that firms makes the output
and price decisions. Also, that firm takes all necessary actions to
earn the greatest profit possible. The managerial theory assumes firms
do not necessarily act in order to maximize profits. The basic tenet
behind this is the separation of ownership from management, complexity
of the organisation and the firm’s manager maximizes his own utility
and growth rather than profits. The reason for this is that managers
may be judged by the level of sales revenue. I will be providing
supporting arguments for and against this assumption “that the firm’s
main motivation is to maximise profits” and draw a conclusion by
analysing the firms behaviour as well as further discussing the
theories of firms.
Profit maximising assumption is based on two premises, firstly that
owner is in control of day-to-day management of the firm and secondly
that the main desire of owners is to make a higher profit then the
amount they invested in the firm. Since this assumption is based on
two assumptions, therefore if these two premises don’t hold is it
understandable to believe that firms goals is not to maximize profits.
Well, this will depend on the motivation of individual firms.
If a firm’s ownership and control are in the hands of a single person
or small groups of people, then it’s reasonable to assume that the
firm’s owners’ goal is to maximize profits. But most of today’s firms
are owned by shareholders and other large cooperation, but day-to-day
control of the firm is under management. Therefore, the objectives of
managements may differ from the shareholders and conflicts may arise.
“For example Baumal (1959) suggest that the manager-controlled firm is
likely to have sales revenue maximization, as its main goal than
profit maximization favoured by shareholders” (Applied Economics 7th
ed. p54). Also, studies of 177 firms between 1985 and 1990 by Conyon
and Gregg (1994) found that the pay of top executive of large firms in
UK was mostly related to sales growth.
Other studies have found that profit was the most important
determinant of executive income. For example “A survey by Management
Today in 1990 asse...
... middle of paper ...
..., argued that regardless of how actual firms may behave
and constraints on rationality they may be subject to, the surviving
firms are those who attained high profits. Due to the strength of
these arguments, we tend to accept profits maximization theories are
justifiable.
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Recommendations to achieve a sustained competitive advantage: Online, mobile, and store purchase will certainly increase customer traffic with the online and store combinations gives Target Corporation with a best possible low-cost price. A best-cost provider strategy allows Target to position itself and compete with low-cost providers such as Walmart. In addition, it employs a competitive strategy with a designer label along with superior supply chain, increased operational capabilities, and skilled employees. . The strategy of sending coupons are huge for a customer, so increase discount based on their purchase history and use the store brand credit card to attract more customers.
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...hese events happen or minimize the negative impact when they happened. This will stabilize the distributable profit.
CEO compensation has been a heated debate for many years recently, and it can be argued that they are either overpaid or that there payment is justified by the amount of work they do and their performance. To answer the question about whether CEO compensation is justified it must be looked at by the utilitarian viewpoint where the good of many outweighs the good of one. It is true that many CEO’s are paid an exorbitant amount of money; however, their payment is justified by the amount of money that they bring back to the company and the shareholders. There are many factors that impact the pay that the CEO receives according to Shah et.al CEO compensation relies on more than just the performance of the CEO, there are a number of factors that play a rule in the compensation of the CEO including the fellow people who help govern the corporation (Board of Directors, Audit Committee), the size of the company, and the performance that the CEO accomplishes (2009). In this paper the focus will be on the performace aspect of the CEO.
Best Buy, one of the biggest consumer electronics retailers in the world, provides products from smartphone, computers to large electronic appliances. It aims at offering a large variety of products with outstanding customer service at a comparably economical price. Yet, it has been facing internal and external challenges in the recent years. Bottom line and the share price are slightly catching up after a fall in 2013 but still barely satisfying the shareholders and customers are changing their purchasing habits which may threaten its future.
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Jensen, M.C and Meckling, W.H (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, October, 1976, V. 3, No. 4, pp. 305-360. Available on: http://www.sfu.ca/~wainwrig/Econ400/jensen-meckling.pdf. [Accessed on 20th April 2014].
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