Сrisis of legitimacy
Following the debacle of Enron, Andersen, Worldcom - and even Leisurenet, Regal and Saambou Bank on our own doorstep, the business of wealth creation has been severely tarnished. However, globalization is alive and well! World trade is greater, in relation to world output, than ever before - while barriers to trade are lower. In fact, globalization is growing as a direct consequence of decreasing barriers to trade, and the driving force behind this is surely the concept of "self-interest" - the sole reason for seeking profit-maximization. Human capital is vital for success.
As technology progresses, more brainpower is needed and hence a continuous demand for skilled workers. Gone are the days of F. W. Taylor, once known as the father of scientific management, when it was considered that certain functions were better suited for utterly stupid people. Lower-level employees are now given some decision-making rights and the tools to develop to the best of their abilities. At a recent national workshop it was postulated that the biggest obstacle to economic growth in South Africa is the lack of entrepreneurial skills.
De-regulation is almost a "buzz-word" today, but how far can it go? Probably to the point where it marginally imposes on the rights of individuals, or other legal entities. To be more precise, to the point where marginal utility equals marginal cost (imposition). Certain regulations viz. , taxes, antitrust and international are, nevertheless, essential and constitute a major factor in the business environment, together with markets and technology. From a global view, the growth of banking is taking on the following characteristics; the "new world" capturing the key strategic changes in the banking industry.
My firm, the Absa Group, is one of the largest banking groups in South Africa. It also has branches, subsidiaries and other interests around the world, including interests in a number of banks in Africa. The main shareholder is Sanlam with 23,7%. The group is quoted on the Johannesburg Securities Exchange and employs in excess of 32. 000 people. Its ultimate goal is to be a truly South African organization, that is globally competitive. The answer to the above question is an unqualified "YES" - my firm is a profit maximizer!
In fact, based on the definition of economics, viz. , economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses (Robbins, L. 1932), even a charity or non-profit organization can be classified as a "profit" maximizer. It simply boils down to the profit phenomenon as the difference between revenue and costs i. e. , maximizing revenue and minimizing costs, which is occasioned by scarcity and the resultant need to make choices.
My firm operates no different to any other firm or even the larger economy for that matter - it maximizes self-interest or profit and it efficiently allocates the use of resources at its disposal to achieve profit maximization. In economic terms accounting profits are taken into account, but they also include opportunity costs - the cost of not exercising the next best alternative. In my firm, for example, the cost of establishing an overseas branch is foregoing the opportunity of extending the local branch network. Profits are maximized at a point where marginal revenue equals marginal costs.
Why? Because if the cost to produce one more unit of a product (or service) exceeds the revenue gained from this additional unit, a loss will result from that last unit of production, and profits will be reduced accordingly - not maximized. As can be seen from the above table, MR=MC at an output of 8 units. To produce the ninth unit, marginal cost will exceed marginal revenue. This will result in a reduction in total profits. Profits are therefore maximized on the production of 8 units, which produces the maximum profit of R7-50.
Evidently, chasing revenue at all costs will result in a loss of R2-50 after the tenth unit is sold and greater losses with each further sale. Obviously, my firm will exert all its resources to achieve profit maximization through continued growth and acceptable returns for its shareholders in the current financial year. This is essential for sustained investment by the shareholders and for good media reports (invisible yield). It does, however, appreciate that to continue to grow and be successful in the longer term, it also needs to consider the interests of all its other stakeholders.
As technology progresses, more brainpower is needed and hence a continuous demand for skilled workers. Gone are the days of F. W. Taylor, once known as the father of scientific management, when it was considered that certain functions were better suited for utterly stupid people. Lower-level employees are now given some decision-making rights and the tools to develop to the best of their abilities. At a recent national workshop it was postulated that the biggest obstacle to economic growth in South Africa is the lack of entrepreneurial skills.
De-regulation is almost a "buzz-word" today, but how far can it go? Probably to the point where it marginally imposes on the rights of individuals, or other legal entities. To be more precise, to the point where marginal utility equals marginal cost (imposition). Certain regulations viz. , taxes, antitrust and international are, nevertheless, essential and constitute a major factor in the business environment, together with markets and technology. From a global view, the growth of banking is taking on the following characteristics; the "new world" capturing the key strategic changes in the banking industry.
My firm, the Absa Group, is one of the largest banking groups in South Africa. It also has branches, subsidiaries and other interests around the world, including interests in a number of banks in Africa. The main shareholder is Sanlam with 23,7%. The group is quoted on the Johannesburg Securities Exchange and employs in excess of 32. 000 people. Its ultimate goal is to be a truly South African organization, that is globally competitive. The answer to the above question is an unqualified "YES" - my firm is a profit maximizer!
In fact, based on the definition of economics, viz. , economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses (Robbins, L. 1932), even a charity or non-profit organization can be classified as a "profit" maximizer. It simply boils down to the profit phenomenon as the difference between revenue and costs i. e. , maximizing revenue and minimizing costs, which is occasioned by scarcity and the resultant need to make choices.
My firm operates no different to any other firm or even the larger economy for that matter - it maximizes self-interest or profit and it efficiently allocates the use of resources at its disposal to achieve profit maximization. In economic terms accounting profits are taken into account, but they also include opportunity costs - the cost of not exercising the next best alternative. In my firm, for example, the cost of establishing an overseas branch is foregoing the opportunity of extending the local branch network. Profits are maximized at a point where marginal revenue equals marginal costs.
Why? Because if the cost to produce one more unit of a product (or service) exceeds the revenue gained from this additional unit, a loss will result from that last unit of production, and profits will be reduced accordingly - not maximized. As can be seen from the above table, MR=MC at an output of 8 units. To produce the ninth unit, marginal cost will exceed marginal revenue. This will result in a reduction in total profits. Profits are therefore maximized on the production of 8 units, which produces the maximum profit of R7-50.
Evidently, chasing revenue at all costs will result in a loss of R2-50 after the tenth unit is sold and greater losses with each further sale. Obviously, my firm will exert all its resources to achieve profit maximization through continued growth and acceptable returns for its shareholders in the current financial year. This is essential for sustained investment by the shareholders and for good media reports (invisible yield). It does, however, appreciate that to continue to grow and be successful in the longer term, it also needs to consider the interests of all its other stakeholders.
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