style="font-size:15px;"> Thus on closer inspection, the ‘natural’ principles of business studies – frugality, profit maximisation, growth and competition – seem to be constructs which have had a long-lasting impact on practice, even though they have a questionable and destructive influence on managers and their employees.
2.1 Frugality
‘Frugality is the favourite rule
of all those who are half alive.’
Henry Ford18 (1863–1947), American entrepreneur
Like its sister discipline economics, business studies also assumes that goods are scarce and therefore require ‘economical’, i.e., frugal, handling. At first glance this basic assumption seems to make sense: there is nothing objectionable about the ethical sounding requirement of wanting to avoid waste, since frugality leaves room for alternative kinds of use. But this ethical demand is actually only fulfilled when these kinds of use are actually realised or at least intended. Frugality for frugality’s sake can be interpreted as stinginess or avarice and is anything but a virtue. In the Middle Ages avarice was rightly considered one of the mortal sins.
While the classical doctrine of business studies still counts on frugality, such as ever more sophisticated methods of cost control or the Japanese concept of muda19 that targets waste, Wolf Lotter makes a convincing counter-argument in his book Verschwendung – Wirtschaft braucht Überfluss [Waste – The Economy needs Excess], one that seems plausible and at the same time makes us stop and think. ‘Waste is good – it’s productive; it’s inventive and it’s natural. Evolution has been acting wastefully for billions of years. We are the product of that natural diversity. Markets have always functioned on the basis of wasteful supply and diverse demand.’20
Excessive frugality ultimately gets in the way of an extremely successful virtue: generosity. Generosity is letting others have something without any obligation or constraint, including giving them space to create alternative kinds of use with it. Of course, generous souls should also be warned not to go overboard and not live beyond their means.
Thus, as a basic value in business studies, frugality needs to be complemented by at least two things. Firstly, it cannot be taken to an extreme; the best person is by no means the most frugal one. Secondly, in order to meet ethical demands, it needs something that corresponds to it or that is related to it. Despite the apparent contradiction, generosity seems to be quite a fitting counterpart to frugality where, for example, this relationship can be established in helping the needy or the environment. This thought can easily be transferred to everyday business: treating resources frugally creates other kinds of use, such as more generous considerations of the company’s future by expanding research and development activities or by granting staff more leisure time, or by recompensing suppliers, employees and/or owners more generously. In short, when a company aspires for frugality, the question ‘What for?’ needs to be answered in a way that is reasonable and appropriate for all involved.
Treating resources frugally creates other kinds of use.
Besides frugality three other constructs stand out that greatly characterise business studies in a questionable and destructive way: profit maximisation, focusing on competition and growth. These are categories that have become taken for granted and are hardly questioned either in academia or in practice.
Fig. 1: The implicit values of business
At first glance, these constructs, too, appear perfectly reasonable. Companies have to turn a profit in order to survive. Heeding this goal is necessary in order to offer products and/or services. Keeping an eye on actual and even potential competitors at the same time requires not over-estimating, staying innovative and constantly developing. Against this backdrop, growth can almost be interpreted as a result of profit and focusing on competition.
Nevertheless, these three constructs conceal considerable risks. Unnoticed by many, they become part of their identity through upbringing and education. These values are already subliminally implanted in children at a young age through piggy banks and World Savings Days; school increasingly appears to be a place where profits are to be made in competition with other students in the form of good marks, whilst the goal of ‘learning for life’ is now only dismissed with a wry smile; by the end of induction week at the latest business students realise that profit maximisation is the greatest goal on earth.
The effects of these constructs
The constructs of profit maximisation, focusing on competition and growth also have considerable negative aspects by hampering working together while at the same time encouraging working against one another. These values subtly contribute to an inhumane way of acting for the very reason that they are adopted without thinking. Furthermore, we can also presume that in this respect these constructs even provide a basis of justification for improper conduct by managers.
2.2 Profit maximisation
‘Making a profit is as important as the air we breathe.
It would be sad if we were only here to breathe air.
It would be just as bad
if we only ran companies to make a profit.’21
Hermann Josef Abs (1901–1994),
Chairman of the board of Deutsche Bank
In the 1970s, lecturers at St. Gallen were already drawing attention to the fact that the call for profit maximisation needed to be defined more specifically. It had been observed that some managers had been making large short-term profits at the expense of the future. Maximising short-term profits at the future’s expense puts that company at risk. Typical measures include lengthening maintenance periods, reducing the budget for research and development, and scrapping training programmes. In order to combat this, the lecturers recommended that profit targets be given a long-term and thus a sustainable perspective. Even if this view is certainly correct, it still needs more thorough consideration.
What students are taught
Business students have only one answer to the question about what a company’s main goal is: profit maximisation. Whether it be students in their first term or those taking their final exams, research assistants or PhD. students, whether early in the morning, in the afternoon, or when they are jolted slightly inebriated out of their deepest sleep at night, these budding managers and economists only have one answer: profit maximisation. From the very outset, the goal, or task, of ‘profit maximisation’ burns itself into business students’ brains in such a way that it becomes part of them and goes unquestioned. And so profit maximisation becomes an implicit guideline that characterises almost the entire world of management.
This chief goal of profit maximisation, which plants itself in their heads and moulds their psyche for the long term, is graphically explained in the very first semester using a model: profit is the difference between revenue and costs, and the goal is to find the point where revenue and costs are as far apart as possible. This point of maximum profit can be determined as a measurement in a system of coordinates.
The assumption with revenue is that initially it will increase rapidly as quantity output increases, and then flatten out to reach what is known as maximum revenue. From there, revenue will fall as the output quantity increases. If revenue is plotted on the y-axis and quantity on the x-axis, the curve resembles a bell. The actual background to this bell is the falling price-sales function, which assumes that more products will be sold when the price is reduced. Multiplying the prices given by the relevant quantities necessarily produces the revenue bell curve mentioned.
