Principles of Finance I WEEK 6: Discussion Prompt #2 – Compare and contrast the

Question

Principles of Finance I WEEK 6: Discussion Prompt #2 – Compare and contrast the decisions that are consistent with the firm’s share price maximization goals. In your response, provide at least two peer-reviewed sources to support your answers. As we have discussed, one of the main goals of the organization is to maximize the profits in the organization to increase the firm’s share price. Consider your own organization or a previous organization, what goals were set to maximize the profits? Did these goals come at the “cost” of other important goals for the organization? Discuss your experiences.

Explanation / Answer

The answer is based on my personal experience. Hence, it may differ from other person's opinion.

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The most important goal of any organization is to maximize shareholder's wealth. However, it is not necessary that wealth maximization can be achieved only through earning profits. Establishing a healthy reputation of the business (such as through strong corporate governance and compliance with established ethical standards) in the market can also add value to the organization which in turn increases shareholder's value. In our organization, the focus is on quality at lowest possible price. The following goals have been established at our organization to maximize profits:

Goal 1: High Quality Low Price

We believe that high quality results in repetitive purchasing and "word of mouth" publicity which in turn helps in adding more customers without spending too much money on advertising and promotional campaigns. Low prices result in more buying and through that we are able to maintain our margin.

Goal 2: Reduce Returns

At our organization, each product is checked by three independent executives to identify any defect/problem with the item and only after it has been inspected and approved by all the three team members, the product is packed and dispatched. This helps in reducing returns on account of product related issues.

Goal 3: Communicate Openly and Ethically

We encourage our employees to communicate openly with the customers. If there is an issue with our services, we don't hesitate in communicating the same to the customers. This helps in establishing trust and retaining customers as they understand our problems and sometimes even cooperate in resolving the issues.

These three goals help us in creating a strong customer base which keeps on expanding and in turns increases our profit margins.

No, these goals didn't come at the “cost” of other important goals for the organization. It is because we have established very simple and realistic policies for our business processes. It is as simple as "What you give is what you get". The cycle starts from selling quality products, building customer confidence and establishing trust and keeping them satisfied. Happy customers always add value to the organization and that's how we are able to create value for our shareholders.

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