This article throws light upon the top ten ways of profit maximisation in agro and agri-industries. The ways are: 1. Cost Minimisation 2. Product Management 3. Sales Maximisation 4. Advertisement, Publicity and Propaganda-Discounts 5. Pure Theory of Firm and Profits 6. Sales Maximisation 7. Internal and External Economies and Diseconomies 8. Availing Tax Concessions 9. Availing; Grants and Subsidies 10. Productivity Route & HRD Management.
Profit Maximisation in Agro and Agri-Industries (with top 10 Ways)
Profit Maximisation Way # 1. Cost Minimisation:
Good firms and farms reduce all types of costs like costs of physical inputs, monetary costs (buying at the cheapest source without compromising with the quality), and opportunity costs. (Opportunity costs are the “incomes from the next best alternative”). In other words, if a firm choses “A” business while it could have entered some other competitive businesses within its power to be into, it should be ensured that the best possible alternative is chosen and less profitable ventures are left.
Cost minimisation will be there (i) the same outputs are obtained with lesser inputs or (ii) higher outputs are obtained with the same inputs (electric switches now-a-days use much less real material).
Cost minimising requires that there should be no slack/slag in the payment to the factors of production. No factor of production should be paid more than the “marginal productivity” and certainly not above the average productivity.
There should be no over-payment of wages, interest, salaries or rents. (Over-payments are “slacks”.) However, it should be kept in mind that exploitation of labour in the name of avoiding slag is counter-productive in the long run both from the micro and macro points of views. If a firm pays less to the workers, there will be “severance” (good workers will leave) or low productivities due to low motivation.
At macro level, lower wages means the working class will have low purchasing power. Individual gains will become collective handicaps. If low rates of interests are paid by the bank, the households which save will be very adversely affected. Their saving habits will go down. Destroying capacity and willingness to save is as serious as over-saving. The first thing will reduce capital formation and investment; the second thing will reduce effective demand.
At micro level long-term benefit will be there if best quality factors and inputs are taken at the minimum possible prices and then utilised well.
Profit Maximisation Way # 2. Product Management:
The products have to be of good quality produced at the least possible costs and then there has got to be “product positioning” which means taking right things to the right persons at the right time and at right prices. (It does not make sense to take luxury cars to poor rural people.) Purchases of “monthly budget” are of non-durable convenience goods.
Convenience goods sell themselves in the sense that food items or items of upkeep (soaps and toothpaste……..) can be purchased from the nearest shops and routine advertisements are there for some items e.g., soaps. Shopping goods are those which people purchase when they are out for “special marketing/buying”, e.g., clothes of all types and designs to be used by males/females and children. They can include durables also. Since they are not routinely purchased, the buyers see the quality, price, style and conformity with “fashion trends”. Ultimately all settle for things which are within the purchasing power.
Sales maximisation is possible when product selling strategies for different goods are followed.
Durable goods are sold to the urban, rurban and rural buyers keeping in view the chance incomes or transitory incomes or seasonal incomes. If urban working class buys many consumer durables from bonus, the rural population buys them immediately after the harvesting season.
Credit availability in all seasons helps the sale of consumer durables in all seasons. That reduces the overheads of the sellers that they incur in slack or “off-seasons”. Repayment of the credit can be steady spread over a period of (say) two years or the buyers can pay off when their seasonal incomes accrue.
Industrial products are inputs that can be bought by investors. Agriculture provides inputs to agro-industries; agri-industries provide inputs to agriculture. Industries provide inputs to other industries. Sales maximisation in such cases will be a function of all round development.
Services exist and will be used as per needs e.g., hospitalisation facilities; many others are used on permanent basis like electricity. Sales do not depend upon sale-strategies alone; they depend upon the purchasing power and that depends upon healthy economic development.
In case of unhealthy economic development (with inequalities, as in India), that class of consumers will be approached by one and all which has purchasing power. Then these buyers will either select “A” or “B”. If purchasing power or entitlements are well distributed over all classes of persons/ the tasks of sales maximisation will be easier.
Same product is available for different income groups e.g.:
(i) Very poor,
(ii) Low income group,
(iii) Lower middle class,
(iv) Upper middle class,
(v) Rich class, and
(vi) Super rich class.
Broad-banded products are sold with least overheads. All electronic items can be sold from one outlet. General stores can sell anything; in rural areas they also buy produces of the rural people. Infact in the small towns the shopkeepers can accept barter rates also. Product-line sales are common in big cities; diversified selling from one point is common in small cities or in the mohallas of big cities also.
We will emphasise once again that both price and quality count and that is the reason why such things are said:
“Not TV but we are selling Samsung TVs………the very best models in the world”.
“People do not buy things; they buy the utilities (benefits or qualities) congealed in them”.
All products have their cycles. They are introduced and slowly pickup in the market. Then there is the stage of growth; first increasing at the increasing rate and then increasing at the decreasing rate.
Then plateau stage comes when the demand is said to have “matured” i.e., found the maximum limit. Then the product may lose market as it becomes obsolete. Agricultural products never become obsolete; their demand is repeated as human-beings require eatables about 2 to 4 times a day. Product life cycle theory applies to industrial goods.
When the cycle is near complete some defensive battle can be fought. Thereafter innovative products or innovative features will have to be introduced. There can be price reductions, incentives, better quality but nothing may succeed. Small mopeds and chain- system kick-start scooters have lost market for ever. So have the cars which, used to be started with a handle when the car starter used to be a strong man who could rotate the starter-fan of the car!
Markets can be tested before launching the sales in a big way; they can be tested during the sales by organising consumer clinics for interaction with the past buyers. Good products need branding/ labeling and attractive packaging. These can be in sizes that suit all pockets. Big packages are always proportionately economical.
Packaging itself should be least costly and most attractive. It should increase the shelf-life of the product and should check the product from getting damaged. Packages should conform to the sanitisation norms. Now-a-days gift coupon gimmicks are also there. They give benefits to some but the costs are recovered from other buyers.
Profit Maximisation Way # 3. Sales Maximisation:
This is a little bit more difficult than minimisation of costs. There is critical minimum below which the costs may not be minimised. There are institutional prices to be paid. One’s buying market is someone else’s selling marking, who will be trying to maximise the sales and revenue. Since buyers assume greater importance to the sellers than sellers to the buyers, sales maximisation becomes a little bit more difficult, relatively speaking. The tricks of the trade are simple, but simple things are most difficult to implement.
Sales maximisation depends upon price of the product in question and the prices of complementary, supplementary and more importantly of competitive goods.
The present and future sales depend upon the quality of the product and competitive prices. Users’ perception about the quality will hold good and not the pretensions, claims made by the sellers.
After sales services are important; the best products are those which rarely require ‘after-sales-service’. If they do, as most of the capital goods and consumer durables do, the problems should be attended to well and promptly. Indians are notoriously slovenly in providing after sales service; all the respect shown to a prospective consumer evaporates when the consumer visits the same seller with some complaint.
Warranties and guarantees carry little meaning. It is seen that most of the sellers catch the consumer unawares. They may not put the date on the guarantee/warranty document, or may not fix the seal or may leave any loophole to find escape route from their responsibilities. Many Indian sellers have devious means of hoodwinking the buyers.
Some goods have high price elasticity e.g., luxury goods and they can be sold more by charging a low price.
In case the price-elasticities are low, high prices can be charged but high sales are not guaranteed. Through trial and error method and/ or through various techniques available, the point of optimum combination of price-revenue can be and should be found. If the prices of essential goods are reduced, they cannot be sold in larger quantities……just a marginal increase may be noticed that too in low level income economies/groups of buyers.
Profit Maximisation Way # 4. Advertisement, Publicity and Propaganda-Discounts:
Advertisements promote the product/sales. They can be informative, highlighting important features of the product. Some advertisements can be very effective even without making pleas to buy their products, TATA advertisements used to be about their social achievements or the achievements of their workers and then they used to write “we make steel also”. Indian Oil Corporation also made similar advertisements.
Advertisements can be persuasive whereby they covertly persuade the potential buyers to patronise the products. The qualities-features and the competitive prices are highlighted.
Dissuasive advertisements are not of good taste, they highlight the missing features by the name of the rival product. The essence of such advertisements is that the advertised product outscores all other products in the matter of good quality. Overkill in advertisement is counter-productive, as it happens in weird advertisements.
Advertisements promote sales while “sales promotion” brings down the brand name. If one company advertises 15 per cent discount all the year round. No one rushes to buy the products of that company. Then the people understand that the prices were first hiked by 15 per cent and then a discount is given.
Discounts, if given for a brief period and by a margin not exceeding 20 per cent, will be taken at their face value like discounts at the time of important festivals. If discounts are more than 20 per cent of the price, people get antagonised because they start believing that there was rack-renting. [If 50 per cent discount is given people will take this in two ways (i) the producer was earning such a high profit as 50 per cent plus and that he must be making profit even after 50 per cent discount, or (ii) the products/produces on sale must be the “seconds” or defective.
Publicity and propaganda are high pitched and highly focused advertisements for a short period. They may be intended to the targeted clientele. They may be undertaken in special regions where the presence of the producers/sellers was sub-optimum. Advertisements in media may be missed by those who are not in contact with the media (newspapers, magazines, TV or radio). Publicity and propaganda may be done by the pamphleteers or door to door canvassers.
If publicity and propaganda take the form of sales promotion on door to door basis, people act with caution. They start searching for traps. [The one crore-prize advertisement is believed by a few only. It is generally believed that these prizes are either not given or they are given to someone who permits being photographed for such a prize in lieu of a paltry sum. Income tax problems are also taken care of.]
Profit Maximisation Way # 5. Pure Theory of Firm and Profits:
A “Maximum” profit is a vague concept if one thinks in concrete terms. What is the maximum of the “maximum maximorum”? One can say “sky is the limit” but where is the sky?
Hence optimum profit is a better concept. Another criterion is that profits should be as high as they become “coalition” profits that satisfy all.
In a firm the profits should be as much as:
(i) Investors get adequate returns,
(ii) Reserves can be built to change obsolete technology/ machines and additional investment can be made for enlarging the scale and scope of operations,
(iii) The managers and the workers get adequate bonus and incentives also,
(iv) Consumers get good goods and still some sops,
(v) Governments get higher revenues from rates and taxes. Everyone can be satisfied if the costs are minimum and the sales are maximum and the productivity levels are at the highest possible point.
The firms and the farms can and should produce upto the point where marginal revenue is equal to the marginal cost. In agriculture, farm management is informal and not formal. Intact in countries like India these management practices are followed implicitly rather than explicitly.
It is presumed that all categories of the firms, farmers and economic entities know about “maximum possible” profits. Similarly most of the firms do not draw the type of diagrams that the academicians draw to find the point of production that will yield maximum possible profits. Yet the trends in costs and revenues are known or should be known to them. Let us draw a simple diagram of perfect competition and know about the point of equilibrium of the firm and of the maximum possible profits.
I. It is well known that as production increases first there are declining costs and then rising costs. Hence the marginal and average costs decline. It is the decline in the margin which brings a decline in the average.
Costs go down due to internal economies exceeding the internal diseconomies. Then in the long run internal diseconomies will exceed the internal economies and increasing costs will be obtained. Here again the MC will rise at a faster rate than the average costs. The marginal costs curve will intersect the average cost curve at the lowest point of inflection.
II. Price remains the same for all customers and all quantities of the output at a point of time. In other words all producers and buyers are price-takers who transact business at the same price which comes from the interaction of total demand and total supply. Each participant is of atomistic size and hence no single seller can increase the price and no buyer can get the price reduced.
Prices under perfect competition are set blindly but not arbitrarily. The paradigm of perfect competition is like a magic box; no one asks how a piece of cloth becomes rabbit inside it as the “mechanism” is concealed in the magic box. Similarly demand and supply are “inserted” from one side and the prices come out” from the other side.
III. Equilibrium point is where MC=MR and additionally the AR=AC also at this point and hence AR =MR=MC=MR. It is to be noted that since “unlimited” quantities can be sold at the same price (at a point of time) the price is the same as AR which is equal to MR at all points.
IV. MC curve cuts the MR curve at two points ‘e’ and “E”. Both are equilibrium points but production will be carried on till E. If it is stopped at ‘e’ then potential profits shown by the shaded portion will be forgone. In the language of diagram we say that the equilibrium point will be at a point where, the MC curve cuts the MR curve from below.
V. At this point AC is tangent to MR and AR curve. Hence at point E all the four all equal. Here is the maximum possible production and maximum possible profit. [Profit is at the normal rate; by definition costs of production include normal profits and hence when AC=AR, it is not a situation of no profit and no loss].
Monopolies and Oligopolies also maximise their profits by (i) first taking production up to the point where MC = MR and then (ii) charging price according to AR which is in all conditions except when out of control, will be higher than AC. Thus super-normal profits are earned. [See managerial economics for all the details].
VI. In the above diagram AR and MR curves slope downwards to the right showing that the monopolies or oligopolies have to reduce the price in order to sell more. They have been given a little bit of steep slope here.
VII. Total production for national and international market comes from the same production lines. One does not know which part will be sold in which market. (The same can be said about different national markets.)
VIII. International price is taken as price under perfect competition and P=AR=MR is a horizontal straight line.
IX. Production will be carried on till the MC equals the international MR. This is the total production OQ. Out of this OQh will be sold in the domestic market and the rest OQh- OQ in the international market. OQh is sold at a price higher than the international price and super-normal profits are earned, shown by the shaded portion; MR=MRj, home and foreign MR will be equal.
X. AC curve is tangent to the AR=MR=MC at the E equilibrium point for the total; “e” was domestic equilibrium point. Hence normal profits are earned in the international market.
Profit Maximisation Way # 6. Sales Maximisation:
Sales maxisation should require that the market widens beyond the national territories. For this comparative advantage in costs will be necessary.
Countries have to specialise in produces that are to be exported. Capital and labour will have to be diverted to the production of those commodities. [Here we are not taking the extreme theoretical case of “A” country specialising in “x” product “B” country specialising in “y “product in two country, two commodity and two factor model]. It is not the complete specialisation that is necessary in a few products but partial specialisation in relative terms.
The fundamentals can be put as under:
(a) Specialisation is best pursued in the production lines which the factor endowments favour. If a country, is capital-surplus it should import labour-intensive produce and export capital intensive goods.
If the country is labour-rich, then labour intensive goods should be exported and capital intensive goods should be imported.
That is as far as balance of payment position does not allow as many imports as desired.
(b) Factor abundance is not to be calculated in absolute terms. India has more labour and capital than Bangladesh has however, Bangladesh has relatively more labour per unit of capital and India has more capital per unit of labour. Hence India is capital rich vis-a-vis Bangladesh but is labour rich vis-a-vis the USA. USA is labour rich vis-a-vis Canada and Canada is capital rich vis-a-vis the USA.
(c) Abundant factor should be utilised intensively and scarce factor should be utilised sparingly i.e., not intensively. Partial specialisation on these lines will maximise sales and profits.
Profit Maximisation Way # 7. Internal and External Economies and Diseconomies:
External economies are “relatively neutral” though absolute advantage comes to all the producers. A good road can be used by all firms and the farms of the region. External economies come free to the people, household, firms and farms. However, in recent years many types of erstwhile external economies are no longer free.
Governments are virtually withdrawing from education and public health in the sense that there is lesser and lesser investment and the quality is going down. Public sector units which used to absorb diseconomies of the private sector and used to generate economies for the private sector are being denationalised (disinvestment).
Government created mess for itself in India; for example the State Electricity Boards and the State Road Transport Organisations cannot earn profit and are saddled with huge losses………so much so that capital consumption took place. They supply electricity, water, land etc. free not because of their interest in production and because of their narrow interests in vote banks. External diseconomies can become internal diseconomies.
Costs per unit go down and markets widen (sales maximisation and profit maximisation take place) when following economies are high in the producing units:
(i) Commercial- They accrue when the raw materials and inputs can be bought cheaper in the required quantities without comprising quality. The same holds true for power if the producing units can establish their own efficient power units for steady power supply all the year round against the erratic supply from the government power plants.
(ii) Technical- If producing units have the modern technology (congealed in the capital goods) production will naturally be efficient ensuring comparative advantage in costs. We can include in them the economies of internal and efficient maintenance and repairs of the production machinery.
(iii) Financial- They accrue when credit is cheap or the producers have their own sources of finance. There should be no dead-weight burden of the high interest charges on borrowings.
(iv) Linkage- They are economies of handling “locational weights” i.e., inputs transported in and outputs transported out. They also relate to efficient backward (upstream) and forward (downstream) linkages.
(v) Management- Everything else (in addition to four types above) can come in this category. Firms/farms/ economic entities which can ensure economies of scale and economies of “scope” (broad- banding), which can have office establishment and IT combinations of ISO or any other standard can ensure low costs. Risk aversion and risk reduction are also included in this. They help in keeping the costs down.
Profit Maximisation Way # 8. Availing Tax Concessions:
All governments have their own policies for promoting the production and sales in certain lines of production of goods, commodities and services. The governments offer “packages of concessions” not merely in taxation but also in the sale ‘or dispensation of land, water, credit or power.
Tax concessions are available in the form of:
(i) Remissions fully or in part for some initial number of years,
(ii) Tax holidays…….no tax for some years but tax dues to be kept in deposit with banks on which interest can be earned and then given to the governments, or
(iii) Tax refunds contingent upon fulfilling some conditions.
Tax evasion and illegal actions are uncondonable.
Profit Maximisation Way # 9. Availing; Grants and Subsidies:
Government seldom, if ever, gives outright grants to producers and sellers but they can provide subsidies which reduce the per unit cost of production. These subsidies can be in the inputs purchased by the producer. They are easy to dispense if the services come from the governments themselves like subsidised irrigation facilities or power… etc.
Subsidies are crutches; they keep the producers and sellers indolent. Subsidies can be given to the exporters if they sell at international prices which are lower than the domestic cost of production. This can be done if there is adverse balance of payment and the country requires the vital foreign exchange.
In the USA, the governments give subsidies to farmers for not growing certain crops in a year, so that there is no over-production and no sharp fall in international prices. A person who received subsidies for not growing alfa alfa, purchased land with the subsidy amount. Soon he was not growing alfa alfa on more land!
He received higher subsidies and kept on increasing the size of his agricultural land holding! Such subsidies are resented by the entire world. The EU (Economic Union of Europe) gives subsidies to farmers so that they do not rush to urban areas for jobs and remain in the countryside.
Less developed countries cannot provide high subsidies. Indian farmers can, however, get subsidised HYV seeds, fertilisers, power, water, credit or even farm machinery because total subsidies do not exceed 20 per cent of the costs, which are permitted by the WTO.
Sales maximisation by availing advantages of tax concessions and subsidies are short period palliatives only. Production function should be efficient.
Profit Maximisation Way # 10. Productivity Route & HRD Management:
The very first of these 10 points related to cost-minimisation which cannot take place unless there is increase in the yields/productivity. Both can facilitate increase in value-productivity.
In the regime of liberalisation, privatisation and globalisation competition is intense not only within the producers of the country but with the producers of any other country. Hence the producers cannot ask the governments to provide them with protection. They also cannot depend upon tax concessions/remissions and subsidies. Productivity should rise per person, per machine, per lump of investment, per unit of time etc.
Producers keep their machines well-oiled; but not their workers well satisfied. At present, there is trend in down-sizing the labour force which the industrialists call “right-sizing”. The governments introduce labour laws that facilitate dismissals or lay-offs; they also permit to the employers to break the services of the labourers so that obligations about various types of leaves (including maternity leave), compensations (even in the case of death and permanent injury which is even more serious than death), and obligations about pensions and/or provident fund.
The world is back to 18th century paradigm which is against labour. There is, however, highly paid management and engineering cadres but flouting all labour norms the industrial/business houses take work for not less than 12 to 14 hours-a-day. (An employee getting 1 lakh rupees per month can hardly afford to lose job; he sacrifices leisure to be present to put in labour. The fear of sack is ommi- present for all.)
These policies are harmful from macro point of view. Of course no nation can afford the suckers in the name of labourers/workers and trade union leaders but employment protection and more importantly employment generation should be the corner-stones of economic development policies. Employment creates supply and creates demand via acquisition of entitlements/ purchasing power. Hence the management issue is more macro than micro.
Well looked after human resources will have low severance (not joining other companies) less “waste” (in manpower planning economics, “waste” means transfer from one job of specialisation to another job where specialisation is to be acquired). Motivation and hard work increase productivity and reduce costs.
There should be good analysis of the job profiles; then competent persons should be recruited; should be provided with pre-service training and then in-service training; their productivities should be linked with their pay, perks, position, promotion, power and pelf. Then only there can be production and selling efficiencies.