When a firm applies profit maximization, it is basically saying that its primary focus is on profits, and it will use its resources solely to get the biggest profits possible, regardless of the consequences or the risk involved. Profit maximization is a generally short-term concept. Application usually lasts less than one year, although some companies employ this strategy exclusively, constantly jumping on the next big trend.
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Corporate Governance
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Pursuing a profit maximization strategy comes with the obvious risk that the company may be so entrenched in the singular strategy meant to maximize its profits that it loses everything if the market takes a sudden turn. For example, a company may find that it gets the most profit selling the Wii gaming system, so instead of keeping a balanced inventory, it invests solely in buying Wiis to sell. If the Wii goes out of favor or the makers of the Wii begin to limit the price that can be charged for the system, the company that relied solely on its investment in Wiis could lose everything. Similarly, if a company focuses only on maximizing its profit, it may miss opportunities for investment and expansion.
Expectation and Goodwill
You also need to consider consequences of profit maximization. If a company pursues a profit maximization strategy, it creates an environment where price is a premium and cutting costs is a primary goal. This, in turn, creates a perception of the company that could lead to a loss of goodwill with customers and suppliers; for instance, a company may win subsequent contracts with a client by bidding the first job low. It also creates an expectation of shareholders to see immediate gains, rather than realizing profits over time.
Cash Flow
For all its drawbacks, profit maximization carries the big