Business School Business School Strategic Management Module Code: 26390 Student ID: 201019522 Module Leader: Steve Braund Word Count: 2365 Due Date: 15 March, 2012 Introduction Profit was the well-known significance of the enterprise’s existence in the past, because the enterprise was considered as private property of its shareholders. Naturally, profit-maximisation is the objective what the enterprise pursues. With the development of the time, many people began to query the significance of enterprise. Meanwhile, corporation social responsibility was considered by many scholars that to replace the enterprise’s significance which is profit.
On the other hand, though profit-maximisation is unprocurable, many companies still pursue profit-maximising. Barney and Hesterley (2006) believed that adopting a simple profit-maximising perspective can have positive impact for firm. Many people disagree with above assertion. They worried about that enterprise which pursue profit-maximisation will be blinded its reason by short-term profit, thus damage society interest. However another part of people argue that profit-maximisation is the driver for enterprise development. The enterprise will lose its competitiveness without profit-maximisation.
This paper is to discuss above assertion with appropriate examples. On the same time, the writer believes that profit-maximisation and taking corporation social responsibility (CSR) are not opposite; they are interdependence. Therefore, this paper will also use a range of models and examples to analyse how profit-maximisation and CSR supplement each other, and have the positive impact on the firm. Impossibility of achieving profit-maximisation In the past, the enterprises were considered as private property of their owners, and shareholder is the only group that management needed to be sensitive towards.
Then, Friedman (1970) pointed out that “the social responsibility of business is to increase its profits”. Therefore, people used to believe that the objective of enterprise is profit-maximising. It means the companies should pursue maximum profit as possible as they can. However, in reality, no enterprise is able to achieve profit-maximisation. Because Freeman (1984) considered that enterprises should be also concerned about the interests of other stakeholders when taking strategic decisions. With the times progress, Freeman’s opinion was accepted most people.
Therefore, the enterprise has to takes responsibility to its stakeholders as above picture shows. There are different needs between each stakeholder of the enterprise. For example, consumers expect that company provide high quality products with low price. The government expect that company is able to pay taxes as high as possible, and also expect company provide employment. Moreover, “the operation of each firm is in the hands of the management, but ultimate control lies with the owners”. (Wenders, 2001) This means the enterprise may conflict with its owners, when the different objectives appear between management and ownership.
Therefore, it is too difficult to satisfy all the parts of the company’s stakeholders. Balance the stakeholders’ interest would raise the operational cost. Consequently, it is impossible to achieve the object of profit-maximising. On the other hand, writer tries to use Porter’s five forces model to explain why profit-maximisation is unachievable. In general, there are three ways to make profit. The first is that sell more; this means sell the products or services to customers as more as possible. It is mainly influenced by the threat of potential entrants and the threat of substitutes.
The second is that sell for more; this means increase the price of products of services as high as possible. It is mainly influenced by buyer power. The third is that buy for less; this means reduce the cost as possible as the company can. It is mainly influenced by supplier power. However in reality, the company cannot control the forces what above mentioned. A company achieved profit maximisation means that it is able to provide the product/ service which converges the traits that are irreplaceable, inimitable, indispensable, and low cost. It is impossible to achieve.
Although as well-known that profit-maximising is unachievable in the reality, many companies nowadays still adopt a simple profit-maximising perspective. Barney and Hesterley (2006) believed that adopting a simple profit-maximising perspective can have positive impact for firm. Against comments Many people oppose above assertion. Firstly, the enterprises were considered to take corporation social responsibility (CSR). Carroll (1979) and other researchers believe that people should judge corporations not just on their economic success but also on non-economic criteria.
More and more people worry about that the firm may ignore CSR, and just focus on profit-maximisation, thus damage welfare of others. Virtually in recent years, a lot of companies were seeking too much profit but did not take social responsibility that damage social benefit. For example, British Petroleum Company cause oil spill event in the Gulf of Mexico; Sanlu Group cause the event of melamine powdered milk; Foxconn cause its employees suicides; etc. These mentioned enterprises were commented that excessive pursuit of profit but ignored the corporation social responsibility.
Moreover, an enterprise which pursues profit maximisation is considered that too much focus on short-term benefit thus damage social benefit. Pursuit of profit-maximisation will cause enterprise become selfish and irresponsible. On the other hand, Zhou (2006) thought that there is not thoroughly consider the rate of return on investment when an enterprise puts profit maximisation as objective. For example, two projects are chosen one of for investments. Both the two projects could bring 1 million pound profit, but one need 5 hundred thousand pound investment and another need 4 hundred thousand pound investment.
It is difficult to estimate which project is efficient if the enterprise only care about profit maximisation. Zhou (2006) has also pointed out that the enterprise which takes profit maximising does not consider risk. For instance, a company respectively earns 1 million pound from two projects. And both the two projects were invested 5 hundred thousand pound. But one of the projects’ profits is totally change into cash; and another projects’ profits just still is account receivable. If the company just focus on profit maximisation but ignore rise, it is not able to estimate which subject is better.
Supportive comments Numerous people believe that adopt a simple profit-maximising perspective can have positive impact for firm. Smith(1776)had pointed that people through the self-interest to achieve altruism. Therefore, profit has to be the most important core of enterprise. Because every enterprise face to competition since it just be established. In the competition environment, the enterprise has to continually fight for survival chance. Many people believe that profit maximisation is useful to helps enterprise to survive and develop.
Arnold (2000) thought that maybe the short-term activities what the enterprise did are inconsistent with profit maximisation, but all of these activities are help to maximise the long-term profit of the enterprise. As the core of enterprise, profit is the thing what every company to pursue. Profit maximising perspective was considered that is the drives to help the company to fight for competitive advantages. Moreover, many people worry about that enterprise will be encumbered if it takes too much social responsibility. Some scholars have pointed out that enterprise should focus on its own duty which means create profit as possible as it can.
Base on this, adopt profit-maximising perspective can have positive impact for enterprise. Because the perspective helps firm concentrates on its own duty thus continually to improve itself. Sustainable development and Long-term profit maximisation The limitation of above comments is that profit- maximisation and corporation social responsibility are put into opposite. It means much people thought that the enterprise will be less effective when it take corporation social responsibility, or the enterprise will not take social responsibility when it adopt profit-maximising perspective.
In the writer’s opinion, the firm which adopts profit-maximising perspective does not mean that the firm will do everything for earning profit, no matter satisfy other people benefit. It should means the firm take corporation social responsibility and pursue profit within reasonable scope. Social responsibility and profit-maximising could complement each other when the firm takes both of them. In other words, writer believe that it can have positive impact on the firm, if the firm pursue profit maximisation and take corporation social responsibility on the same time.
As well-known that business organization is born for profit. Therefore, profit maximisation is the instinct what the most firm pursue. However, the writer divides profit maximisation into two kinds in this paper, one is long-term profit maximisation and another is short-term profit maximisation. On the same time, the writer believes that only adopting long-term profit-maximising perspective can have positive impact on the firm. Because most short-term profit-maximising activities through damage social interests to obtain profit.
The above mentioned cases such as British Petroleum Company, Foxconn Company are appropriate examples of this activity. However, if the enterprise pursues long-term profit maximisation, that means the enterprise actively maximise it profit through positive activities which are accepted by its stakeholders and society. Drucker (1954) has pointed that the customer is the basic for enterprise’s existence. He repeatedly emphasize that creating consumer is the only reason for enterprise’s existence. In the writer opinion, customer what Drucker mentioned is generalized consumer.
In fact, everyone is the potential customer (e. g. government, citizen, even employee). And the customer is the only element to bring profit and decide the enterprise value. Therefore, the long-term profit maximising perspective has already included corporation social responsibility. Porter (2007) said there are interdependent between enterprise and society. And he further pointed that the enterprise should take CSR into its consideration of development strategy. In other words, profit maximising perspective is the main driver that help enterprise to develop.
And taking corporation social responsibility is the useful way which helps enterprise further approach profit maximisation. For example, Nestle Company first time to entry India market at 1962. The Indian government allow it to operate in Moga. This area had backward economy, and be full of poverty. Most dairy farmers are just able to feed only one dairy cow. So it is impossible to require the milk farmer prepare their own milk refrigeration equipment. This situation made Nestle Company unable to normally operate in Moga. Because the Nestle Company highly rely on fresh local milk source for production.
As well-known that Nestle Company enter Indian market for making profit, not doing good deed. However, Nestle Company paid for establishing the local mike source supply network. It established the milk refrigeration base; built transport team to purchase milk from the milk farmer’s house; dispatched numerous professional employees to guide the milk farmers that produce high quality mike. Thus, not only Moga was developed, Nestle Company also earned high return. And this is the reason why Nestle Company glad to take corporation social responsibility.
From the next part, writer will analyse how enterprise use CSR to assist their strategy, thereby increase their profit. Porter’s value chain model Michael Porter divided the activities which could increase the company value into two kinds: support activities and primary activities as above picture shows. These two kinds of activities constitute a company’s value chain. It is not every value activity creating value. For the different enterprise, just only a part of specific value activity could create value. The enterprise should keep its core value according to the value chain.
However, almost all of the value activities which were mentioned by value chain model are relevant with CSR. For instance, “technology development activity” could be relevant to subsidize the university develop technology. “After-sell service activity” could be relevant to enforce the quality of after-sell service. And so on. The value chain model shows that the enterprise could enhance its core value through taking CSR thus increase more profit. Porter’s diamond Model This model deems that there are four main factors decide an industry’s competitiveness; and these factors effect on each other as above shows.
The other extra factors are chance and government. Chance could not be controlled, and government could not be ignored. Porter (2007) said that the four main factors are deeply influenced by social environment. In other words, the external competitive environment of the enterprise could be changed by social environment. If the enterprise does not consider CSR as the element of its strategy, it would not adapt the external competitive environment thus lose its competitive advantages. Davis (2001) thought that taking CSR is prudent risk management activity, rather than philanthropy.
It means taking CSR could bring business chance, and provide long-term profit. Example of Nike Company Ten years ago, Nike Company was suffered large-scale boycott. Because of It was exposed a range of scandals. Such as Nike Company hired large number of child labourers in developing countries; unduly exploited its workers and so on. This bring serious PR crisis to Nike Company. In these few years, Nike Company has already taken CSR as important as its profit. Because the above mentioned crisis has become history lessons, and blended in Nike’s company culture.
In 2007, Nike published its corporate responsibility report. The report explained a range of company objectives which face to the future, and further blended CSR in its long-term development plan. These objectives included as follow: to improve the working environment for the workers; to promote application of recyclable material; to arouse the potential movement of young people; and so on. Mark Parker, the guy who is the CEO and president of Nike Company indicated that company should consider social responsibility as important as what the government undertake.
He further indicated that CSR is one of the most important factors which help enterprise to create profit. Consequently, nowadays Nike Company’s profit is higher than before. Conclusion This paper has briefly introduced profit-maximising perspective, and used a range of examples to discuss the argument of the perspective. Then illustrated the advantages of taking corporation social responsibility for the company. In conclusion, as a business organisation, firm behove to pursue profit, and regard the profit as its significance. However some enterprises too much focus on short-term profit thus damaged social interest.
These cause many people argue that enterprise pursue profit maximisation would not have positive impact. The writer thinks that they may misunderstand the true of profit-maximisation caused by the immoral behaviours of a part of enterprises, because “The true of profit maximization must include all behaviour of the enterprise”. (Wenders, 2001) This means the enterprise should crease the environment of long-term profit-maximisation; to clearly consider that balance the benefit of its stakeholder; and to undertake corporation social responsibility.
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