PROFIT MAXIMIZATION VS WEALTH MAXIMIZATION

PROFIT MAXIMIZATION - It is one of the basic objectives of financial management. Profit maximization aims at improving profitability, maintaining the stability and reducing losses and inefficiencies.

Profit in this context can be seen in 2 senses.

1. Profit maximization for the owner.

2. Profit maximization is for others.

Normally profit is linked with efficiency and so it is the test of efficiency. However this concept has certain limitations like ambiguity i.e. the term is not clear as it is nowhere defined, it changes from person to person.

2. Quality of profit - normally profit is counted in terms of rupees. Normally amt earned is called as profit but it ignores certain basic ideas like wastage, efficiency, employee skill, employee’s turnover, product mix, manufacturing process, administrative setup.

3. Timing of benefit / time value of profit - in inflationary conditions the value of profit will decrease and hence the profits may not be comparable over a longer period span.

4. Some economists argue that profit maximization is sometimes leads to unhealthy trends and is harmful to the society and may result into exploitation, unhealthy competition and taking undue advantage of the position.

WEALTH MAXIMIZATION - One of the traditional

Approaches of financial management , by wealth maximization we mean the accumulation and creation of wealth , property and assets over a period of time thus if profit maximization is aimed after taking care , of its limitations it will lead to wealth maximization in real sense, it is a long term concept based on the cash flows rather than profits an hence there can be a situation where a business makes losses every year but there are cash profits because of heavy depreciation which indirectly suggests heavy investment in fixed assets and that is the real wealth and it takes into account the time value of money and so is universally accepted.

PETER DRUCKERS VIEW ON ENTREPRENEURSHIP

Peter Drucker has aptly observed that, “Innovation is the specific tool of entrepreneur’s, the means by which they exploit changes as an opportunity for a different business or a different service. It is capable of being presented as a discipline, capable of being learned and practiced. Entrepreneurs need to search purposefully for the sources of innovation, the changes and their symptoms that indicate opportunities for successful innovation. And they need to know and apply the principles of successful innovation.”

Systematic innovation, according to him, consists in the purposeful and organized search for changes and in the systematic analysis of the opportunities such changes might offer scope for economic and social innovation.

According to Drucker, three conditions have to be fulfilled.

1. Innovation at work. It requires knowledge and ingenuity. It makes great demands on diligence, persistence and commitment.
2. To succeed, innovation must build on their strengths
3. Innovation always has to be closed to the market focused on the market, indeed market- driven. Specially, systematic innovation means monitoring sources for innovative opportunity.

The first three sources lie within the enterprise, whether it be a business or a public service institution or within an industry or service sector. They are therefore, visible primarily to people within that industry or service sector. They are basically symptoms. But they are highly reliable indicators of changes that have already occurred or can be made to occur with little effort.

These four source areas are:

1. The unexpected success, the unexpected failure, the unexpected outside event.
2. The incongruity between reality as it actually is and reality as it is assumed to be or as it “ought to be”.
3. Innovation in industry structure or market structure that catches everyone unawares.
4. The second set of sources for innovative opportunity, a set of three, involves changes outside the enterprise or industry:

• Demographics (population changes).
• Changes in perception, mood and meaning.
• New knowledge, scientific and non- scientific.

MC CLELLAND’S THEORY OF ACHIEVEMENT AND MOTIVATION

David McClelland has developed an achievement motivation theory. According to this theory, an individual’s need for achievement refers to the need for personal accomplishment. It is the drive excel, to strive for success and to achieve in relation to a set standards. People with high achievement motive like take calculated risks and want to win; they like to take on personal responsibility for solving problems and want to know how well they are doing. High achievers are not motivated by money; but instead employ money as a method of keeping sure of the achievements. Such people strive for personal achievement rather than the rewards of success. They want to do something better and more efficiently than has been done before.

Need for achievement is simply the desire to do well not so much for the sake of social recognition or prestige but for the sake of an inner feeling of personal accomplishment. It is the need for achievement that motivates people to take risk. People with high need for achievement behave in an entrepreneurial way. Need for achievement stimulates the behavior of a person to be an entrepreneur.

The following psychological factors contribute to an entrepreneurial

motivation:

1. Need for achievement through self- study, goal setting and interpersonal support.
2. Keen interest in situations involving moderate risk.
3. Desire for taking responsibility.
4. Concrete measures of task performance.
5. Anticipation of future responsibilities.
6. Energetic or novel instrumental activity
7. Organizational skills, etc.

Some societies produce a large percentage of people with high need for achievement. Entrepreneurship becomes the link between need achievement and economic growth.

 Mc Clelland considers the need for achievement to be most critical to a nation’s economic development. He held that a strong ‘inner spirit’ in individuals to attain is a measurable variable arising from a need, which the individual develops mainly in childhood and seeks to satisfy throughout his life. This ‘inner spirit’ which he called need for achievement, if higher, would produce more energetic entrepreneurs capable of generating rapid economic development. High need for achievement or ambition motivates an entrepreneur to take risks, work hard, find new things, save more, and reinvest the savings in industry and so on. The limited empirical evidence supports the hypothesis that need for achievement contributes to entrepreneurial success.

Mc Clelland rated the achievement motivation of different countries on the basis of ideas related to need for achievement contained in the children’s stories. This has come to be known as n-factor rating. He established a correlation between n- factor rating and the prosperity of the countries a generation ahead.

The criterion on n- factor rating was the inherent concern for achievement or non- induced achievement motivation.

Mc Clelland found that achievement motivation was lower among people under developed countries than among these of developed nations. Even in USA only about ten percent of the people were actually high achievers. It is the level of aspirations or ambitions that explains the lack of enterprise underdeveloped countries. Ambition is the level of all motives and aimless life a goal- less game. Ambitions motivate men, activate them, broaden their vision and make life meaningful. Ambition builds up achievement pressure in the individual and provides the base for Mc Clelland’s n- factor. Ambition is the lever of all motives. The initiative intentions of an individual are directed by his ambitions. It is the ambition electrifies man’s actions. Therefore, what matters are not merely the people are their aspirations and the means to achieve the goals? Therefore, it is the duty leaders and teachers to build up ambitions into the minds of the young people however ambitions differ greed and windfall. Greed results in disaster a windfall makes one speculator .Sometimes personal ambitions may come in way of family aspirations or national aspirations. Unfulfilled ambitions passed to the next generation who may chase the goal with redoubled effort and vigor

Thus, ambition nourishes achievement motivation and brings economic growth. The biggest obstacle to economic progress in countries like India is perhaps the limited ambition of people. The initiative of an individual is directed by his ambitions, which nourish the entrepreneurial spirit and bring about economic development. Hence, what matters are not merely the people and then talents but their aspirations? However, ambitions differ among individuals on the basis of environment in which they are born and brought up. Galbraith has also attributed the backwardness of many Asian and African countries to lack ambition.

Types of Advertisement Themes

(i) Pride – This theme can be used to popularize luxury articles among riches, the possession of which gives them a distinctive status and a feeling of pride.

(ii) Beauty – This theme is used in advertisements for cosmetics, perfumeries, toilet soaps etc., for men and women.

(iii) Health - In drugs and food products advertisement they use of this theme is used.

(iv)Economy – It is central theme in advertisement of clearance sales or bargain purchases.

(v) Comfort – The advertisements for fans electric appliance refrigerators etc. generally contain this feeling of comforts.

(vi) Fear – Themes stressing the fear of death accident personal loss through burglary frenetic. and other untoward happenings in life are generally used by insurance companies or banking companies. The traffic police is also using this theme in their notes of caution i.e., life is short Don’t make is shorter’

(vii) Parental Affection - All advertisement copies of products meant for children such as toys body foods and dresses etc use this feeling.

(viii) Patriotism – This theme may be used in advertisement for those who use foreign products.

(ix) Achievement – This theme is used generally by large concerns engaged in the production of goods necessary for the development of country’s economy.

(x) Emulation and Imitation – This theme is used where people buy more not to satisfy their genuine requirement, but as their neighbors happen to possess them..

QUALITIES OF ADVERTISEMENT COPY

The important of a good advertisement copy can hardly be overemphasized.

All the planning, research and expense would go waste if proper care is not taken in drafting an advertisement copy that will achieve the purpose of advertising. The psychological aims of an advertisement are that the public must be made to (i) look, (ii) like, (iii) learn and (iv) buy. In other words a scientifically drafted copy should (a) attract primary initial attention, (b) hold attention in an interesting way, awaken and stimulate interest, (c) bring about an association of impression which will have permanence or memory value, (d) convince persuade, and induce to purchase the product, and (e) suggest and lead to specific response to encourage the decision to buy.

The person who drafts and prepares the copy, must be thoroughly acquainted with the mental process and be imaginative enough to think of words and patterns which may produce at desired effect on prospects i.e., it must creates an urge in the minds of prospects to go for the product advertised.

A good copy of advertisement should possess the following characteristics or qualities or values-

1. 1. Attention value,
2. 2. Suggestive value,
3. 3. Memorizing value,
4. 4. Conviction value,
5. 5. Sentimental appeal value,
6. 6. Education value,
7. 7. Instinctive value,

1. Attention Value- An advertisement copy must attract the attention of the potential consumers. If it fails in this mission, the whole money and efforts will go waste though it possesses all other values because everything else follows this. So, it must have display value. The copy should be planned, drafted and displayed so ingeniously that it may compel even the most casual or involuntary reader to notice it and read it with interest. It should be designed in such a fashion that the attention of a busiest person may be drawn immediately.

Various devices can be used to make the copy attractive such as:-

• Use of Pictures. Picture has the immense display and attention value.
• Use of Display Type or Heading. Use of appropriate to headings enhances the value of an advertisement copy to a great extent. To invite attention, the heading should be brief and meaningful, made up of three or four words and should be printed in emphatic bold display types.
• Boarder etc. – Attractive boarder can be used to compel the attention of the readers. The boarder must have a distinctive look so as to separate it from the rest of the setting.
• Price Quotation – Prices should not be quoted on the advertisement copy except when they are very low as in clearance sale or special offers. But if an appeal is being made to high class customers who care more for quality than for price, a price quotation should be avoided and emphasis should be laid on quality.
• Reply Coupons – Reply coupons inserted in an advertisement in an unusual setting are yet another way of attracting attention of the readers to the copy.

(2) Suggestive Value - The next task would be to offer a suggestion about the use and the utility of the product that may remain inscribed on the mind of the reader even when he forget where he really saw the advertisement. Slogans, Pictures, phrases and suggesting may be used for this purpose. They should be drafted and used as to drive home to the reader the utility of the product in everyday situation.

(3) Memorizing Value – The copy of the advertisement should be so drafted and laid out that the product will stick to the mind of the individual reader. Repetition of advertisement with slogan is an effective method of creating a memorizing value. Pictures and photographs confirming to the suggestion will have tremendous memorizing value.

(4) Conviction Value – An advertisement copy can prove effective and achieve the desired end when the suggestion contained in it is backed by convincing arguments. The advertiser must be careful to include the statement in the advertisement copy which does not conform to the product.

(5) Sentimental Value – Sentiments play a very important role in advertising, particularly in the case of food articles. Sentiments reflect the personal feelings and attitudes of an individual towards various things. They indicate reactions of a person in favour or against a particular product. The advertiser or manufacturer should make a sincere attempt to make an appeal to the sentiments of as may prospects as possible.

(6) Educational Value – A good copy of advertisement must possess educative value because the object of modern advertising is not merely to satisfy the existing demand but to create future demand. So a good copy of advertisement should educate the general public about the uses of the new product or the new uses of the same product. It will certainly increase the demand of the product and demand creation is one of the most important objectives of the advertisement.

(7) Instinctive Appeal Value – Human thoughts and actions are guided by instincts and inclination. All that one thinks or does has its roots in one instinct or the other. Instincts are the underlying forces which compel the men to act in certain ways. The most important function of an advertisement copy is to induce, persuade and motivate the prospects to think’ well of a product and to take to its use. Advertising, essentially, is the motivation of the potential consumer and for  this purpose; the advertiser should attempt to make an appeal to some basic instincts to get success in motivating the prospects.

Generally speaking, the following are the basic instincts which an advertiser should keep in his mind:

• Self Preservation Instinct – Many of our thoughts and actions are inspired by our anxiety to preserves our person our health, our family and our belongings. The sale of products like medicines, clothes etc., may be promoted by appeal to this anxiety.
• Hoarding Instinct – Banking institutions, insurance companies or other government and non- government saving organizations serve to hoarding instinct of the people. Slogans like ‘Up and Up go your Savings’ may be used for this purpose.
• Parental Instinct – Parental instinct takes the form of love and affection for the children. Those advertisers who deal in children requirements like garments, toys baby food etc. May promote this instinct in parents i.e., motherly feelings of women or parental sentiments of men through their advertisement copy.
• Self Display Instinct – Instinct of self display is promoted by the advertisers of readymade clothing, women’s dresses. Jewellery etc. An advertisement copy drafted for these products must be directed towards the aesthetic sense of the people by showing happy and likeable people in dresses and jewellery that are being advertised.
• Something for Nothing Instinct – Everybody has a vague desire to get something without paying anything for it. This desire is, more or less, present in everybody irrespective of the status or income. An advertisement copy that contains an offer of a prize of a gift is likely to tempt quite a many of the customers. This instinct in widely used by lottery ticket sellers by offering one free ticket with the purchase of 10 tickets or by drycleaners by the offering ‘three for two’ bargain.