Optimization

Economic thinking holds that an equilibrium state is the optimum position for a given economic unit (i.e., a firm), in which that unit is striving for attainment of that equilibrium. Because no firm has unlimited resources, it is critical for firms to identify the optimal positions for which they are striving and to allocate resources accordingly.

Economics and business strategy share much in common – both are ultimately concerned with choice. When a goal is to be chosen or selected, that is a choice to be made. So, also, is the means whereby an economic unit will seek to accomplish that goal. Goals and the means for achieving them are many and varied and it is the purpose of optimization that, given certain defined criteria, to identify the best of the alternatives available.

Among the most common choices of goals confronting firms is the need to maximize something (the firm’s revenue, its profit, its rate of growth, etc.), or to minimize something ( the firm’s costs, for example). These types of problems are what are called optimization problems, or “the quest for the best.”

Unfortunately, firms sometimes fail to identify the optimal positions towards which they are striving. In many cases, conflicts exist in which the resources of a firm work at cross-purposes to each other. For example, salespersons may be compensated and rewarded on maximizing revenue, but this may be done at the expense of profit if these same salespersons have little regard for costs.

The major purpose of strategy is to clarify direction and goals. This, in turn, surfaces constraints and makes optimization manageable. Without the clarity afforded by strategy, optimization becomes well-nigh impossible.

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