Profit maximization is a better objective in a sole trade business but where management and owners are different, and then this objective becomes ineffective. Explain why profit maximization becomes ineffective
In a sole trade business, the owner is also the manager and decision-maker of the business. Therefore, profit maximization is a logical and effective objective as it directly benefits the owner/manager. The owner can make decisions based on maximizing profit without having to consult or consider the interests of others.
However, in businesses where management and ownership are separate, profit maximization as the sole objective can become ineffective. This is because the objectives and interests of management and owners may not always align.
Management may be focused on other goals such as growth, employee satisfaction, customer service, or social responsibility. For example, investing in employee training or improving customer service may lead to higher long-term profits, but it may not result in immediate profit maximization.
Furthermore, pursuing profit maximization at all costs can sometimes lead to unethical or short-sighted decisions that can harm the long-term sustainability of the business. For example, cutting corners on product quality or employee wages to increase profits in the short-term may damage the company's reputation and lead to decreased profits in the future.
In these cases, it may be more effective for businesses to pursue a more balanced approach that takes into account multiple objectives, including not only profit maximization but also sustainability, employee well-being, customer satisfaction, and social responsibility. This can help ensure the long-term success and viability of the business while still achieving sustainable profits.