Wednesday, September 16, 2009

Lego's Return to Profits

A recent article in the New York Times discusses how Lego has turned around the company by focusing more on performance than other things - like feeling good about making toys. One of the interesting things - for me - from the article is how a change in focus towards profits has lead to innovation and new product lines. Of course, there is a down side to this as some feel that Lego has had to compromise on the types of toys it sells.

Ultimately, whether firms focus solely on profits or some other variable or more likely a combination of the two is a decision for management is competitively positioning itself in the market. While economists are prone to start with firms behaving as only profits as the strategic goal, that does not mean it is the only way to make strategic decisions. As economists, I use the profit only hypothesis to make clearer analysis of firm decision making within a market. Adding other goals - such as ethical standards - can be added to the profit-maximizing calculus. I view these other options as additional constraints to profit maximization, just like the typical current constraints of customers, costs and competition. Thus ethical standards - from an economic perspective of firm behavior - act as an additional constraint to maximizing profits.

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