Profit Strategy: Meaning, Assumption, Limitations and More

Profit Strategy: Meaning

Profit Strategy is the strategy in which, the only target of the company is to maintain profitability by hook or a crook. It is a type of corporate-level stability strategy, where the profit generation takes place in a forced strategic way by the management of the company. And the management of the company, in order to achieve profits, tries to slash costs, cut additional investments, try to increase the efficiency or productivity level, raise the selling price or can adopt any intense steps in this direction.

The profit strategy is generally implemented for a shorter period of time to overcome some unavoidable situations. Moreover, this adverse situation can be either internal or external and as a result, it becomes difficult to maintain profits level in such a situation. And the only thing which remains constant here is the temporary nature of this adverse situation.

Profit Strategy continues to use the old technology, at the time of technological change. And under this strategy, the management does not replace the old or obsolete technology with new technology in any case. Moreover, even if the replacement is inevitable, then the partial acquisition of technology takes place. Thus this Strategy focuses on capitalizing as much as possible, out of the current situation.

Assumption 

The concept of Profit Strategy is dependent on the biggest assumption that the difficulties or unavoidable circumstances are for a shorter duration. Management of the company assumes that sooner things will normalize, and thus this difficulty is only for a shorter time. But the condition of the organization deteriorates when this difficulty gets an extension for a longer period of time.  

Limitations 

This Strategy has few limitations, which are as follows:-

  • This strategy is fruitful only in a shorter duration. Implementation of such a strategy for a longer time frame gives a negative trigger and impact on the customers.
  • In the midst of achieving profits, sometimes the companies increase the prices too much. And as a result, the prices of goods reach a record-high, which becomes unaffordable for most of the customers.
  • There are high chances of quality deterioration in this strategy. Since the management here tries to reduce costs as much as possible and so there exists high chances of product quality deterioration.
  • Sometimes the market share of the company gets compromised in the process of achieving high profits. Customers with low loyalty can easily switch to competitors looking to high product pricing.

Profit Strategy Vs Revenue Maximization Strategy

These two strategies are often confused as same, they are not. Both of these strategies are useful for the short term only. Moreover, the only difference is that both of them serve different objectives. Let’s look at their difference:-

The main target of the Profit Strategy is to achieve high profits. The main target of the Revenue Maximization Strategy is to achieve high sales volume. The earlier strategy increases prices to earn higher profits. Whereas, the Revenue Maximization Strategy decreases the prices, to increase sales volume. In the case of a profit plan, there are higher chances of customers switching to competitors, while a Revenue Maximization Strategy attracts more and more customers.

Ultimately the two strategies help businesses in different situations.

Profit Strategy

Profit Strategy Vs Growth Strategy

Growth Strategy and Profit Strategy are different types of strategies useful for management. Their major differences are as follows:-

Profit StrategyGrowth Strategy
This strategy is mostly implemented for a shorter duration on time.The implementation of the growth strategy is generally for a longer duration of time.
This strategy helps the organization to get out of a difficult situation.Growth strategy helps the organization in the expansion and growth of the business.
Any external investments are completely avoided under this schemeA lot of investments take place under this strategy.
Cost-Cutting is one of the main targets, under the Profit Strategy.Cost-cutting is not at all the target under the Growth Strategy. Rather a lot of expenditures are incurred for achieving the desirous growth.
Profit, without long term growth, is acceptable under this strategy. And it is the most important criteria.Profit, without long term growth, is not acceptable under the Growth strategy. Moreover, Growth is the most important criteria.
This strategy does not require any additional external funding.This strategy might require external funds.
Selling off assets to generate cash is possible under this strategyIn a Growth Strategy for expansion purposes, the organization usually buy various assets to increase production.

Profit Leverage Strategy

This strategy can be used as a sub-plan of our main Profit Strategy. The main target of the Profit Leverage plan is to reduce operating costs as much as possible rather than focusing on increasing sales. And according to this strategy, the procurement stage gives the best platform for reducing total costs in short term. Thus with the help of leverage strategy, the management can earn profits by reducing operating costs in the short run.

Conclusion

Today the world has become a global trade center. As a result, the company has to change its strategies to stand in open markets. Profit Strategy is a corporate-level stabilizing strategy, which helps in sustaining profits. And this strategy works best when the company intends to come out of any unavoidable situation. Moreover, by implementing this strategy, the company can get out of any such situation by earning enough profits. But the management needs to be very careful while implementing this strategy. Because, if this strategy gets extended for a longer period of time, it can create a negative impression in the minds of customers. Thus the management should be very particular while implementing this strategy.

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Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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