Organizations have a number of objectives to be fulfilled. However, among all objectives of an organization, profit is the key and foremost objective for its survival.
An organization needs to be a profitable organization, irrespective of its other goals, such as sales maximization, increase in market share, or maximization of utility function.
Therefore organizations should adopt a practical approach. The target of achieving profit may differ from organization to organization. For example, some organizations may have a target of achieving standard profit. On the other hand, some organizations aspire to make reasonable profit or target profit.
However, most of the organizations set a target of achieving reasonable profit due to various reasons, which are shown in Figure-5:
The reasons for achieving reasonable profits (as shown in Figure-5) are explained as follows:
i. Restricting the entry of competitors:
Refers to tile fact that maximizing profits under imperfect market conditions results in high pure profits. If the profits are high in a particular industry, it would attract more competitors, especially under weak monopoly. Therefore, most of the organizations strive to achieve reasonable profit, so that potential competitors keep away.
ii. Maintaining a positive public image:
Helps in increasing the sales of organizations. An organization needs to adopt a profit approach that should not to be too high that may create dubious situations for government officials. On the other hand the profit target of the organization should not to be too low that may create negative public opinion for the organization. Therefore, an organization should strive to earn reasonable profit, so that it can perform operations smoothly.
iii. Limiting trade union demands:
Implies that high profit may influence the trade unions to demand high wages Thus if profit is reasonable, demand for higher wages can be avoided.
iv. Preserving customer goodwill:
Play a significant role in stimulating the demand for the organization’s products and services.
The goodwill of a customer depends upon the quality and price of the product. In most of the cases, organizations keep the price of their products low in the short run and sacrifice their profit to attract customers. This creates high profits for organizations in the long run.