Businesses strive to achieve the maximum possible revenue to stay competitive. This essay will compare profit maximization strategy with satisficing.
Maximization implies a continuous chase for the highest possible profit margin (Qiu, Bai, and Lu, 2020). It allows a company to gain a competitive advantage at the cost of significant risks and grow exponentially in case of a breakthrough. In turn, satisficing implies following an acceptable result, rather than the most optimal, as a way to create products or services for consumers who are not actively seeking the best option (Papi, 2018). This approach makes a company more limited in its competitiveness since it aims for moderate profits, yet there are fewer risks involved (Luetge, 2013).
While it is vital for a company to sustain itself, a strict focus on maximizing profits is not always the best choice of strategy. Maximizers are more willing to search for alternative ways, risking time, costs, and efforts when trying to discover new potentials for optimization (Wu, Olson, and Dolgui, 2015). Profit maximization requires some betting, as it is impossible to predict all the variables, such as changes in demand, overstaffing, and other issues (Gartenstein, 2019).
Profit maximization was the primary mindset for many companies, although the situation has begun to change. Baumol’s theory reveals that a firm is not always perfectly competitive since many companies, once they reach acceptable levels of profitability, switch to maximizing value (Tisdell, 2017; Berg, 2014). In their paper, McCann and Shinkle (2016) suggest that “firms frequently do not price to achieve maximum profit” (p. 584). As a result, Agafonow (2013) argues that entrepreneurs should instead try “maximizing on value creation” and consider social aspects first (p. 709). While Friedman once said that maximization is a company’s social responsibility, it does not mean that there are no other social obligations it has to uphold (Colander, 2017).
Many firms have accepted that profit maximization is not their only goal, as social responsibility and sustainability have come into the spotlight. Xerox can serve as an example of a company that was heavily focused on maximization, as the company was set on chasing the goal of satisfying every single user via its products (Drucker, 2014). Macy’s retail chain, which is constantly below Walmart in terms of popularity, is an example of the satisficing approach.
Reference List
Agafonow, A. (2013) ‘Toward A Positive Theory of Social Entrepreneurship. On Maximizing Versus Satisficing Value Capture,’ Journal of Business Ethics, 125(4), pp. 709–713. Web.
Berg, N. (2014) ‘Success from satisficing and imitation: Entrepreneurs’ location choice and implications of heuristics for local economic development,’ Journal of Business Research, 67(8), pp. 1700–1709. Web.
Colander, D. (2017) ‘How to Market the Market: The Trouble with Profit Maximization,’ Eastern Economic Journal, 43(2), pp. 362–367. Web.
Drucker, P. F. (2014) Innovation and entrepreneurship practice and principles. London: Routledge.
Gartenstein, D. (2019) Advantages & Disadvantages of Profit Maximization, Chron. Web.
Luetge, C. (2013) ‘Risk Taking and the Ethics of Entrepreneurship,’ Business Ethics and Risk Management, pp. 3–14. Web.
McCann, B. T. and Shinkle, G. A. (2016) ‘Attention to Fairness versus Profits: The Determinants of Satisficing Pricing,’ Journal of Management Studies, 54(5), pp. 583–612. Web.
Papi, M. (2018) ‘Price competition with satisficing consumers,’ International Journal of Industrial Organization, 58, pp. 252–272. Web.
Qiu, T., Bai, Y. and Lu, J. (2020) ‘Taking risks for the best: Maximizing and risk-taking tendencies,’ Judgment and Decision Making, 15(4), pp. 499–508. Web.
Tisdell, C. A. (2017) ‘Bounded rationality, satisficing and the Evolution of Economic Thought,’ Economic Theory, Applications and Issues Working Papers 264873, University of Queensland, School of Economics.
Wu, D., Olson, D. L. and Dolgui, A. (2015) ‘Decision making in enterprise risk management: A review and introduction to special issue,’ Omega, 57, pp. 1–4. Web.