Wealth Maximization
Wealth maximization is a modern business concept where the organizations evaluate their capabilities, shortcomings, and best possible outcomes to maximize their stockholder wealth component. This is usually considered as the goal of modern businesses (Roe, 2001). But wealth maximization is not essentially synonymous with profit maximization where the short term benefits becomes the primary target than long term achievements. Clearly, unlike profit maximization, wealth maximization is not a continuous process, especially in the case of a single business. It is possible that the company may run into a saturation level beyond which its expansion might become extremely difficult. For instance, it is believed that the sales of personal computers have run into such a saturation level where further expansion is almost impossible as most households and every offices have finally acquired an upgraded computer system which is more than enough for their computing requirements. This is why multinational companies such as IBM, Intel, etc are looking towards diversification.
Diversification, in the general sense, is the process of investing in a variety of products, services, or markets instead of one. For instance, if the personal computers are not selling properly, IBM can focus more on their cloud servers and ERP (Enterprise Resource Planning) softwares, etc. This ensures that the company as a whole will never run into a stage where further expansion is impossible (Pandya & Rao, 1998). But this is not the case for everyone. It might take several years for other businesses to reach such a saturation level since this is heavily dependent on the product or service they are selling as well. For instance, online cab service providers such as Uber have registered an exponential unhindered market expansion since its establishment in 2009.
So the question is what are the factors that determine whether a single business will continue or halt its wealth expansion at one point or another. This elusive concept can broken into a few simpler factors 1.External environment of the product or service 2.Customer satisfaction 3.Brand name or appeal of the product or service 4.Market trends. The external environment of the product or service will greatly determine the expansion of the particular business associated with it. For instance, the oil industry in Saudi Arabia, ran into such saturations levels a long time ago (mainly due to the international business treaties). But the further expansion of stockholder wealth was not essentially hindered by this issue. Due to the ever expanding energy consumption requirements, oil companies continued to expand until extensive use of sustainable energy shifted the consumption spectrum.
Also, customer satisfaction and the brand value of a product will definitely come to play a leading role in determining whether the product’s market shares will continue to increase. The expansion of brand names such as Apple and its Iphone has been deemed to be based on the feel of the product or its appeal than exactly customer satisfaction. The next component that have a profound effect on wealth expansion is market trends. The market trends is based on the orientation of the customers to trends and fashion. This is where diversification can prove to be effective. For instance, at a time the company is incurring dulled sales (or loses) it can pool in wealth from other products to adapt to the current trends. In conclusion, whenever the product’s (or service’s) market trend is shifted, brand value is lost, or the external environment is hindering its further expansion, then its stockholder wealth expansion will become a fruitless strategy with a single business. In such cases, diversification is the only viable solution.
References
Pandya, A. M., & Rao, N. V. (1998). Diversification and Firm Performance: An Empirical Evaluation. Journal of Financial and Strategic Decisions, 11(2), 67–80.
Roe, M. J. (2001). The Shareholder Wealth Maximization Norm and Industrial Organization.
