BUSINESS OBJECTIVES Flashcards
Profit Maximisation
- “Traditional Theory” - Assumes this is to be main objective of all firms
- MC = MR
- Because any point below MC = MR would see any additional output made for higher revenue than cost
- Because any point above MC = MR would see any additional output made at a higher cost than revenue
What is the Managerial Theory?
- Firms may wish to maximise managerial objectives rather than profit
- Examples: Status/Power, Survival
Other Main Objectives
- Revenue Max - MR = 0
- Sales Max - AC = AR (Normal Profit)
- Share Price Max - Policies aimed at increasing prices of share
- Growth Max - Growth > Profit; mainly for small/newer firms in established industries
- “Satisficing”
What is Profit Satisficing?
When a firm makes enough profit to then shift focus to other objectives that benefit stakeholders
Point of Profit Satisficing?
Any point between Profit Max and Normal Profit
What is the Divorce of Ownership and Control?
- The byproduct of a company’s growth which sees founders who initially had full ownership & control sell shares to raise money to help fund growth
- Over time, founders can lose ownership if majority stake is sold to investors meaning they
no longer own; only control
What problem arises as a result of the Divorce of Ownership and Control?
The Principal - Agent Problem
Who is who in the Principal - Agent Problem?
Principal - Shareholders
Agent - CEOs and Managers
What is the Principal - Agent Problem?
Where asymmetric information between Principal and Agent on decisions could see Agents move towards objectives that benefit them over the Principal
Example of Principal - Agent Problem
Anthony Jenkins at Barclays
- Was made manager and increased bonuses for himself and senior managers rather than focusing on profit max and Principal objectives
