Theme 3.2: Business Objectives Flashcards
What is the most common assumption of a firm’s business objective?
To maximise profit
List all potential business objectives
- Profit maximisation
- Sales maximisation
- Revenue maximisation
- Satisficing
- (Survival)
- (Social Objectives)
Describe profit maximisation
MR=MC
Maximising profit in the short run
This is the assumes objective in the majority of market structures
Firms may pursue other short run objectives in order to maximise profit in the long run (e.g. market share)
When is profit maximisation more likely?
As a way to increase their ability to pay shareholder dividends and increase share value
Profit maximisation also creates larger funds for investment and R&D - this helps improve LR profitability
Why might firms not profit maximise?
Imperfect information (not knowing where MR=MC)
Avoidance of regulating authorities
Price might exceed competitors (important in oligopolies and perfect competition)
Describe sales maximisation
AR = AC
Maximising the volume of sales, not the value of sales
AR = AC is the largest level of output that a firm can produce without making a loss (normal profits)
When is sales maximisation more likely?
When trying to increase market share
Could be used as part of a price limiting strategy
Why might firms not sales maximise?
Requires forgoing significant supernormal profits in the short run
Describe revenue maximisation
MR = 0
The firm produces up to the point where producing extra units stops adding to the firm’s revenue
When is revenue maximisation more likely?
Managers may receive performance related pay based on revenue targets
When trying to increase market share and retain some profit
Why might firms not revenue maximise?
Revenue based rewards structures require measurable success criteria
Describe revenue maximisation
Making enough profit for shareholders to be satisfied
Once this is achieved, managers may pursue other managerical objectives
When is satisficing more likely?
Principal-agent problem, satisfying both owners and directors
Why might firms not satisfice?
Difficult to estimate the level of profit that shareholders deem to be enough
Managers may not feel their job is secure if they return less than maximum profits
(Satisficing is not relevant to smaller companies where there is no principal-agent problem)
Summarise survival
Remaining in business in the future
Risk averse behaviour
More likely as a short-run objective during recession
Smaller businesses have this as their default objective
But LR, short run risk taking might lead to a greater chance of survival
Summarise social objectives
Pursuing social and charitable goals rather than profit-based goals
Not-for-profit organisations
Price and output may be determine by need & circumstance
But, might outwardly be presenting themselves as being socially responsible while pursuing other objectives
Reasons why small firms might be more profit-orientated
Entrepreneurial attitudes
Need profits to grow (fewer finance sources than large firms)
Reasons why small firms might be less profit-orientated
Very small firms may need to prioritise survival
Small number of owners creates a large range of objective options
Reasons why large firms might be more profit-orientated
Greater potential to price discriminate when operations are larger, so incentive to profit maximise
Profit required for dividends
Reasons why large firms might be less profit-orientated
Inertia / lack of competition
Wanting to avoid attention from CMA
Divorce between ownership and constrol
