Question

Managers should focus on strategies to increase profits primarily to generate more revenue or on strategies to cut costs to increase profits. What are your thoughts about this statement.

Answer 1

For a business, ultimate goal is profit maximization. Different strategies are used by different managers/entrepreneurs or by same manager at different stages. Some tend to maximize revenue by scaling up and increasing profits through economies of scale (average cost reduction on scale-up). While some tend to maximize the profits through cost reductions, thereby increasing profit margin.

In the question however, the two options are 1) strategies to increase profits primarily to increase revenue; 2) strategies to cut costs to increase profits. According to how it's put in the question the second option comes up to be the suited strategy for the manager. Increasing revenue generation is in itself aimed at profit maximization. However, aiming profit maximization through cost cut is better in ways that it checks the price level too. Price-cost=profit! So if cost is cut, there is lesser need to raise prices for profit maximization. That also provides the advantage in price competition and the demand is positively affected hence further contributing to economies of scale too.