Survival, growth, and social responsibility

Survival is an obvious objective. Other objectives can be accomplished only if the business enterprise survives.

Growth is an objective because business does not stand still. Market share increase, personal and individual development, and increased productivity are important growth objectives. The growth of Compaq Computer and Wal-Mart to multibillion-dollar enterprises is often used as an example of business success accomplished through growth.

In recent years, meeting social responsibilities has been recognized as an important objective. Businesses, like each person in society, must accept their responsibilities in areas such as pollution control, eliminating discriminatory practices, and energy conservation.

Profit: two views

Although survival, growth, and social responsibility are important objectives, the profit objective plays the major role in business. Profit, however, means different things to different people because of their values, attitudes, and perceptions.

Business profit. Typically, a businessperson calculates profit by subtracting all the costs, including taxes, from the revenue received for selling a product or service in the market. The difference is referred to as business profit. For example, the franchise owner of a Wendy’s fast-food restaurant subtracts all expenses (for supplies, staff wages, property, advertising, and so on) from all income to determine the business profit.

Successful business organizations earn a profit because their goods and services effectively meet customers’ needs and demands. Basically, profits reward a business enterprise for effectively conducting a number of activities.

Risk taking. The business may earn a profit when it takes risk by entering a new market or by competing head-on with another business. For example, Toyota invested millions of dollars in promoting and selling small cars in the United States. Today, this Japanese corporation is the largest small-car seller in the U.S. market.

Evaluation of demand. Business organizations that evaluate consumer needs and demands and then move efficiently into a market can earn substantial profits. Xerox in the photoreproduction industry, Compaq Computers in personal computers, and Domino’s in the pizza business are examples of companies whose accurate assessments of consumer demands resulted in good profits.

Efficient management. A major cause of business failure is improper or inadequate management of people, technology, materials, and capital. Efficient planning, organizing, controlling, directing, and stuffing can earn satisfactory profits. Some of the most profitable enterprises (e.g., Ethan Allen, Molly Maid, Blue Bell Ice Cream, H & R Block, and Coca-Cola) are also known as well-managed businesses. Such well-managed enterprises earn, on the average, about 5 percent profit a year on total sales. Of course, business profit rates vary greatly by industry, size of business, and location of the business, as well as managerial effectiveness.

Economic profit. The economist, like the businessperson, subtracts expenses from income to find profit. But the economist also considers opportunity cost, the cost of choosing to use resources for one purpose while sacrificing the next-best alternative for the use of those resources. For example, Jana Neal, owner of a small florist shop in San Antonio, pays herself a salary of $9,000 for operating the business. But if she could earn $20,000 working for a large wholesale florist supply house, her opportunity cost is $11,000. The opportunity cost is a measure of everything a person sacrifices to attain an objective. Economic profit, then, is what remains after both actual expenses and opportunity costs are subtracted from revenue earned.

One practical difficulty with the economist’s view of profit involves calculating opportunity costs. In some cases, passed-up alternatives cannot be measured in dollars. Assigning a dollar value to a missed job opportunity, to refusing a promotion, or to not meeting with a potential customer because of another meeting is difficult. The businessperson’s view of profits is easier to calculate.

Reading tasks

A. Understanding main points. Answer these questions:

1. What are important business activities?

2. What is business responsible for?

3. What does profit mean?

4. Is risk taking important for the business?

5. How can management effect business success?

6. What does opportunity cost mean?

7. What does economic profit mean?

Date: 2016-04-22; view: 2187