3.2 - Business objectives Content Flashcards
3.2 - Business Objectives
What are the 3 possible business objectives?
- Profit maximisation. (Directors want this)
- Sales maximisation. (Organic growth)
- Revenue maximisation. (Managers want this)
3.2 - Business Objectives
Why do firms return to profit maximisation in the long run? (Keynes)
- Shareholder pressure to maximise profits - managers might be changed.
- Survival - firms might not be able to keep running with low profits. Needs to be money for reinvestment.
- A rival might have been removed
3.2 - Business Objectives
Why do firms maximise profits?
- Dividends to distribute to shareholders, CEOs and owners. - Pressure from shareholders as they vote on directors at annual general meetings (AGM)
- Bonuses to CEOs and Managers.
- Reinvestment into the firm - Research and development for future profits. - Business expansion
- Firm survival in a competitive atmosphere. - Owners do not want to fund losses, the bank may stop lending.
3.2 - Business Objectives
What happens if firms produce beyond profit maximising price?
The cost of producing one extra unit will exceed the revenue gained from one extra unit.
Results in higher costs and lower profits.
3.2 - Business Objectives
Where is revenue maximising point?
Marginal Revenue = 0. Any more than this and marginal revenue is less than 0 so revenue will start to fall.
3.2 - Business Objectives
Why might firms revenue maximise?
- To deter new entry (reduce price, increase quantity and market share) - Over time, rivals might leave the market, reducing competitive pressure and making demand more price inelastic.
- Avoid the CMA, which might investigate for anti-competitive behaviour.
- Create brand loyalty, win customers
- Amazon follows an objective of revenue maximisation to dominate the market and create brand recognition
- The Principle agent problem - Managers are rewarded bonuses and incentives based on revenue they bring to the firm.
3.2 - Business Objectives
Where is sales maximisation?
- Selling as many units as possible whilst still making normal profit.
- AC=AR
3.2 - Business Objectives
Why might firms sale maximise?
- Avoid CMA attention
- Deter new entry - charge a limit price, as there are no supernormal profits to be made
- Start up and create brand awareness - Deliveroo, Uber
- Win more market share - more agressive than revenue maximisation. E.g. Aldi, Lidl.
- Build up monopoly power, price inelastic demand to raise prices in the future.
- Or force rivals out of the market.
3.2 - Business Objectives
What is profit satisficing? Where is it?
- A compromise between revenue maximisation and profit maximisation.
- Occurs between MC=MC and MR = 0.
3.2 - Business Objectives
Why might firms profit satisfice?
- Due to the principle agent problem, managers might make enough profits to satisfy owners happy whilst increasing their own benefit.
- Enough for higher bonuses but also enough for shareholders, who won’t remove managers.
- Win market share but have enough for shareholders.
- Avoid the CMA but have enough to reinvest
3.2 - Business Objectives
Where is the profit maximising point
MC=MR
3.2 - Business Objectives
Why can a firm survive, while making a loss, in the short-run?
- Managers could be satisficing, in a temporary market downturn.
- Losses may be cross-subsidised by profits in another sector.
