There is a fundamental difference between maximisation and optimisation – and business is not about maximisation, but about optimisation. Dividend and Asset Growth, for example, are competing objectives.  If we wish to maximise dividend, then we have less to apply to asset growth and vice versa. Maximisation is about “the most” while optimisation is about trade-off, or “the best in the circumstance”.

No organisation that I have ever encountered has been focussed on only one objective. Most corporate objectives have the following dimension:

1.        A benefit dimension: dividend, capital gain, shareholder discount, etc.

2.       A value dimension: share price, market capitalisation, net assets, etc.

3.       A growth dimension: sales growth, profit growth, market penetration, market share, all within certain timeframes.

4.      A risk dimension: how much risk the organisation is prepared to endure to satisfy its objectives, with risk often considered to be debt, gearing, diversification, etc.

Management frequently speaks in terms of maximisation: sales, profit, dividend, ROI, etc. yet all these have implications and contexts.

If I wish to maximise profit, I will restrain expenditure thus possibly constraining growth.  If I maximise sales, I may compromise profit. If I maximise dividend, then I may compromise future growth.

This is not rocket science, yet management frequently thinks in simplistic maximisation-terms and fails to recognise the real trade-offs involved in management. That’s why good management is difficult because its about getting the best outcome in a dynamic and multivariable environment.

The common faults of management fall into these categories:

1.          Chasing maximisation at the expense of optimisation.

2.         Not understanding the trade-offs involved in every decision.

3.         Ignoring the dynamic and imprecise: just because and influence is difficult to measure doesn’t mean it doesn’t exist .

4.        Failure to analyse the trade-offs.

5.        Focusing on management-determined objectives instead of shareholder-based objectives. It is easier to manage if you have clear metrics against which to assess options.  Since management-made objectives are coloured by subjectivity, shareholder objectives are more robust.