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Profit Maximisation

Profit maximization is assumed as a strategy in all traditional economic analysis and, in that context pricing ,product variation or differentiation advertising, costing, quality control, discounting facilities, deferred payment facilities, etc., are all treated as tactical and practical operations to word achieving profit maximization strategies.

Though profile remain the primary focus of market operation of the firm, because it constitutes pay-off, yet in the short run, firms may not always follow a policy of maximizing profit. We will make a detail examination of alternatives to profit maximization strategies in term of empirical reference subsequently.

Market strategies are normally defined in terms of a statement of objective (short-term and long-term), ordering priorities in the list of objectives and identifying the list of constraints confronting the firm. Once such strategies are normally defined then they can be fine tuned by way of techniques such as ‘maxima strategy’ or ‘maximin strategy’, ‘minimax strategy’ or some other kind, as suggested by the Game Theory of the economist.

1. Lowest cost Producer: A firm can aim to be the least or lowest cost producer, thereby under-pricing the completion. It is important that the buyers do not read this low price as ‘cheap and nasty products’. Low price is a good penetration strategy but it should couple with the tight-belt-of-quality strategy.

2. Product Differentiation: Firm can develop differentiated products through innovation and charge premium prices. Such a policy of high skimming prices may lead to a ‘focus strategy’ (i.e., focusing on particular or broad areas or markets). ‘Niche Market’ is a concept of focus strategy. A firm which is neither the lowest cost producer nor the producer of differentiated products lack ‘competitive advantage’. Such firm “stuck in the middle”, do fail in competitive markets.

Porter has extended his analysis to explanation “Competitive Advance of national”. While explaining success or failure of nations in competitive markets, Porter argues that there are four broad attributes of nations which determine success.

The four attributes are as follows:

1. The quantity and quality of factors of production, e.g., (skilled labor force and infrastructure).

2. The nature of demand for products (especially demand for high quality goods).

3. The existence of related and supporting industries which are international competitive.

4. Firm’s strategy, structure and rivalry.