A business has a variety of potential objectives from profit maximisation to cultivating good relationships with various business stakeholders. Economic theory often assumes that firms are rational profit maximisers. However, in the real world, there are many other objectives that a firm can pursue.
Profit Maximisation. The most basic model of a firm assumes firms wish to maximise their profit. They will do this by increasing revenue (price * quantity sold) and reducing costs. Higher profits enable a firm to pay higher wages, more dividends to shareholders and survive an economic downturn. Many other objectives such as corporate image an increasing market share can be a way to maximise long-term profit.
Growth Maximisation. An alternative to profit maximisation is for a firm to try and increase market share and increase the size of the firm. They can do this by cutting price and increasing sales. Growth maximisation may come at the expense of lower profits. For example, starting a price war can lead to lower profits but enable higher sales. However, increasing market share can be a way to increase profits in the long-term. A firm like Walmart and Amazon have often pursued this goal of maximising market share. It gives a strong position to dominate the market in the future.
Social / Ethical concerns. A firm may not be motivated by money but may seek to offer a service to the local community. They may voluntarily take decisions which help the environment / local community. Many big firms now place a key role in promoting their ethical policies; arguably there may also be some marketing benefits to promoting ethical and social concerns. It could have a tie-up with profit maximisation.
Corporate Image. Related to social/ethical concerns is the image/brand of a firm. It may wish to cultivate a certain image and brand. Google – ‘do no evil. BP – “Beyond Petroleum”. Body Shop ‘leader in human and animal rights.’ This corporate image may be part of a business strategy to maximise profits, but it could also be a genuine desire to promote altruistic goals.
Stakeholders Well Being. A firm may also be concerned about the welfare of its stakeholders – suppliers, workers and customers. For example, giving training and long-term job security to its workers. Co-operative businesses are founded on the goal of sharing proceeds of business with whole community – customers and workers.
Survival. For many businesses, it seems a matter of surviving – breaking even. In desperate times, firms may be forced to sell off assets to keep their creditors at bay. For many small local businesses struggling in a highly competitive market, survival may be the best they can hope for. In a way survival strategies is a form of profit maximization as survival will still involve trying to increase revenue and reduce costs.
Another issue for firms is:
Profit Satisficing. This is a situation where there is a separation of ownership and control in a firm. The owners (shareholders) wish to maximise profit, but the managers and workers don’t feel the same incentive. Therefore, they do enough to keep the owners happy but then pursue other objectives such as having a good time at work.
Behavioural theories and objectives of firms
In recent years, behavioural economics has looked at psychological influences which can explain consumer behaviour. Behavioural economics suggests economics has been too narrow in reducing owners to rational profit maximisers. In the real world, profit is only one motivating factor. Business owners and workers may value enjoying work, the prestige of a good company and make irrational decisions based on emotion, e.g. keeping the family business going in one direction because of tradition.
Functional Objectives of Firms
A functional objective of a firm is achievable goals or targets of different parts of a business structure as it tries to achieve wider business objectives.
Examples of Functional Objectives
- Minimise costs. This may involve better management of raw materials and supplies, e.g. implementing just in time management and stock control.
- Raise profile of business. A successful marketing strategy to raise brand awareness and increase sales.
- Improving Staff Loyalty and Motivation. Human resource department might find ways to promote a greater feeling of worker loyalty and willingness to work for company. For example, giving workers targets and rewards for achieving them. This can help the objectives of worker satisfaction and in the long run, contribute to the improved performance of the firm.
- Development of Products. No market is static, therefore a firm will need to find ways to improve the quality and uniqueness of its market.
- Increase Market Share. An objective may be to increase sales and take market share from other firms, e.g. it may try and do this through a selective price war.
Functional Objectives and Business Strategies
To achieve functional objectives, a firm may use different business strategies. For example, if the firm has an objective to reduce staff turnover, it may pursue a new strategy of employer feedback where the firm gives staff the opportunity to have a say in the running of the business.
- An objective to increase sales could be achieved by a marketing strategy to raise brand awareness.
Functional Objectives and Corporate Objectives.
A corporate objective is something like profit maximisation or diversification of business. These objectives are quite general. Functional objectives help these to become a reality. e.g. to achieve the maximum rate of return for shareholders, firms may need practical functional objectives such as increasing sales.