Objectives of Firms

6 Key excerpts on "Objectives of Firms"

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  eBook - ePub

  Business Economics

  • Rob Dransfield(Author)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  The board of directors will help to shape the objectives of a business organization. Traditionally management texts focused on a single business objective: profit maximization. This is based on a view that shareholders (the owners of a business) are primarily interested in making a profit.

  Although profits are still seen as important to business it is recognized by economists and business analysts that other objectives are also important, particularly in the short and medium term. This is particularly the case in companies with a range of powerful stakeholder interest groups – for example, environmental pressure groups, consumer lobby groups, community groups, trade unions, etc.

  The board of directors and executive managers have to balance a range of stakeholder interests in decision making. So it is possible to recognize a range of different business objectives including:

  • Providing shareholder value. This includes enhancing the returns which shareholders value (e.g. earnings per share, dividends, increase in share price, reputation of a company).
  • Maximizing sales revenue over time – particularly at the expense of rival companies.
  • Meeting company growth targets – the scale of output, scope of operations (e.g. in terms of products and markets), growth of physical capacity of the company, etc.
  • Objectives that meet personal goals of managers (e.g. pay and bonuses, status, power and personal security).
  • Maximizing value for other stakeholders – for example, winning government support through paying taxes and contributing to public projects, winning loyalty of customers through high-quality service, building an environmental reputation etc.

  6.3  The ingredients of strategy Strategy involves:

  • Long-term planning (often 3–5 years and longer);
  • Major resource decisions (e.g. to build a new plant);
  • Deciding on the scope of an organization (i.e. the range of products and services it produces and in which markets);

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  Pricing in Business

  • Douglas Hague(Author)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  CHAPTER 4

  The Firm’s Objectives

  4.1 INTRODUCTION

  Business objectives are a vast subject, not least because they are important for every conceivable kind of business activity. No manager, at any level in any firm, can do his job without having some sort of objective. But discussion of objectives can, and often does, create a tremendous amount of confusion. Most people in business are reasonably clear what an objective is, but one is less sure how far firms define objectives precisely and pursue them consistently. In this book, we shall see examples of the problems that arise. Moreover, the confusion of terminology is undeniable. Words like aims, aspiration levels, goals, objectives, plans and targets are sometimes used as synonymous with each other and sometimes not.

  The word ‘objectives’ is a good one because it covers the whole field and is widely accepted. There is no point in adding further confusion by trying to introduce a new term. We shall therefore use the word ‘objectives’ to describe the whole range of firms’ plans, intentions and wishes. In this chapter, we discuss some of the general characteristics of business objectives in the firms we studied. In Chapter 5 , we shall look at the objectives which these firms pursued in pricing. In Chapter 6 , we shall draw some conclusions about objectives.

  4.2 NON-OPERATIONAL OBJECTIVES

  An important distinction must be made at the beginning of any study of objectives. This is between operational and non-operational objectives. The simplest and most traditional of all statements of objectives is probably that: ‘We are in business to make money’. Alternatively, a firm may say: ‘We are in business to make motor cars’, or ‘to sell transport’. Similarly, a firm may set itself the objective of striving for product or process innovation, of serving the community, or merely of perpetuating itself. Statements like this are very vague indeed. They describe objectives which are ‘non-operational.’ They do not say, or even imply, exactly what action the firm should take to achieve them. At any moment, a number of different courses of action will often be perfectly compatible with each non-operational objective. Indeed, the reason why firms set themselves non-operational objectives is often precisely this. No specific action is prescribed for the manager responsible for day-to-day activities. This vagueness enables individual managers in the firm to work together with a sense of unity and of common purpose, while none of them is committed to any precise action in any particular set of circumstances. Disputes over whether specific objectives are realistic or acceptable are avoided.

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  Business Decision Making

  • Alan J. Baker(Author)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  A student of the theory of the firm and a student of business finance might each be forgiven for expressing astonishment, on first encountering the literature of the other’s field of study, at the assumptions they would find relating to the firm’s objective. In contrast to managerial theories, the objective prescribed by the great majority of business finance theorists, and apparently accepted as a guiding principle by firms (see Mao, 1970), is the maximisation of the market value of the owners’ wealth (generally, the ex dividend stock exchange value of equity capital plus whatever dividend is to be paid in the near future).

  The breadth of theoretical support for this interpretation of the firm’s objective must be due to its almost unarguable appropriateness, as well as to its overriding simplicity. What could be more fitting than that managers should direct their efforts to making shareholders as wealthy as possible, within the prevailing moral code and the existing legal framework? An added attraction, at least to economists, is the suggestion that in maximising the wealth of investors, managers are also tending to promote the general good of society (e.g. Solomon, 1963, pp. 23-4).

  The inevitability of a multi-period interpretation of the firm’s financial objective is obvious. Profit maximisation as a view of the firm’s objective suffers from three kinds of difficulty: profits accrue at different points in time; profit prospects in later years may be affected by the firm’s price and output policies in earlier years; and profit is generally subject to risk. These factors all suggest the need for a valuation model to enable a decision maker, whatever his motivation, to compare policy options with uncertain consequences extending beyond the current period.

  1.4 (ii) The Instruments of Financial Policy

  No prescriptive criterion, however obvious as a general principle, can hope to carry conviction unless it can be made operational. Nor can we hope to bypass the issue of the firm’s short-period objective and behaviour simply by shifting our focus to the level of the firm’s overall objective. There is obviously a need to achieve an integrated view of long-term objectives and short-term policy in the firm, and we shall return to this issue after further discussion of the implications of value maximising as an overall financial objective.

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  Wealth, Welfare and the Global Free Market

  A Social Audit of Capitalist Economics

  • Ibrahim Ozer Ertuna(Author)
  • 2016(Publication Date)
  • Gower

    (Publisher)

  9 What is the Objective: Profit or Income? DOI: 10.4324/9781315547572-10

  O mankind! I bind you together towards one objective – the welfare of man. Toil together with mutual love and goodwill. May you share the comforts of life equally! May you accomplish your work with mutual accord and finally may you, in the pursuit of your ambition at all times; engage in working together with goodwill!

  (Atharrva Veda 3.30.7 s: 224)

  The most important question humanity is now facing is what is the purpose of our economic activities? Is it making profit or generating income? Of course, the main objective of economic activities is to serve people. But the question is, is it serving people by generating income, or is it making a profit by serving people? Serving people, is it the end or a means to reaching the end of making profit? The answer to this question is very important, since economic systems are built to reach the objectives set for them.

  In the capitalist system, the objective of companies is the maximization of their profit. That is, when capitalist companies decide how much to produce, how much labor will be employed, how much they will borrow, how much capital they will raise and the prices they will set for their products – in other words, in all their decisions – their criterion is maximizing their profits. However, maximization of profit may not, and usually does not, correspond to the maximization of the income generated by the operations.

  Economic theory has a dilemma here. In macroeconomic theory, the economic objective of nations is believed to be the maximization of national income. A country’s national income is the sum of the factor incomes created by the operating units in the economy. The sum of profits is only a part of it. Of course, from the macroeconomic point of view, maximization of national income is not the only objective. More equitable income distribution and the elimination of unemployment and poverty are the most often mentioned economic objectives. Besides these economic objectives, countries have educational, health care and many other social objectives. Still, from the economic point of view, the objective of increasing income is the most important objective, and one which also serves the other objectives set for the country.

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  The Essential MBA

  • Susan Miller(Author)
  • 2011(Publication Date)
  • SAGE Publications Ltd

    (Publisher)

  This part of the chapter brings together the organization’s revenues and costs and relates them to its objectives. The objectives are affected by conditions in the market, which in turn will affect the shaping and pursuit of strategy.

  The profit-maximizing firm

  The starting point of conventional (‘neoclassical’) microeconomics is that firms will seek to maximize their expected short-run profits. Figure 6.3 shows the conventional revenue and costs representation for the profit-maximizing firm. The firm sets its output (qm ) at the level at which the last unit produced and sold will generate exactly the same additional (marginal) amount to total revenue as its production adds to total cost. Price (pm ) is then determined by the point on the demand curve corresponding to an output of qm . Total profit is the area pm abc. Together with the analysis of Figure 6.4 , this gives the well-known (but often not well-understood) rule that the firm’s expected profits are maximized when the marginal revenue is set equal to the marginal cost.

  Assuming that organizations are interested solely in single-period profit maximization is, of course, a gross abstraction from reality – but still a helpful one at the initial stage of analysis. It focusses our attention on the marginal conditions (MR = MC) which is one of the most important concepts in Economics.

  The analysis can be extended to include more realistic objectives than short-period profit maximization. Most organizations will take a longer view. Strategies will be shaped not only by the owners (including the shareholders in an incorporated business) but also by managers, employees, customers, and other stakeholders. Some part of short-period profits may be foregone now in order to stimulate future demand and to grow the business.

  If managers are recompensed wholly or in part on the basis of sales value or volume they may aim to maximize sales, or sales growth rather than profits, at the expense of profits to shareholders. Moreover, since managers will have an immediate and detailed knowledge of the business that will not be available to shareholders and others with stakes in it, they may avoid maximizing anything, choosing instead to enjoy a steady income and a comfortable lifestyle, and subject only to keeping the shareholders satisfied – a situation that has been termed ‘satisficing’. If the firm has a degree of monopoly power in its market that protects it from competition, this condition can be sustained for some time. As the economist John Hicks (1904–1989) commented, ‘the best of all monopoly profits is a quiet life’ (Hicks, 1935).

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  Strategic Marketing Planning

  • Richard M.S. Wilson(Author)
  • 2010(Publication Date)
  • Routledge

    (Publisher)

  This process of moving from the general to the specific should lead to a set of objectives that are not just attainable within any budgetary or other constraints that exist, but that are also compatible with environmental conditions as well as organizational strengths and weaknesses. It follows from this that the process of setting objectives should form what is often referred to as an internally consistent and mutually reinforcing hierarchy. As an illustration of this, if we assume that corporate management is concerned first and foremost with, say, long-term profits and growth, it is these objectives that provide the framework within which the more detailed subset of operational objectives, including market expansion and product-specific increases in sales and share, are developed. Taken together, these then contribute to the achievement of the overall corporate objectives.

  It is these operational objectives that are the principal concern of those in the level below corporate management. Below this, managers are concerned with objectives that are defined even more specifically, such as creating awareness of a new product, increasing levels of distribution, and so on. This hierarchy points in turn to the interrelationship, and in some cases the confusion, that exists between corporate objectives and marketing objectives. The distinction between the two is an important one and is discussed at a later stage in this chapter. However, as a prelude to this, and indeed to the process of objectives setting, there is a need for the strategist to decide upon the business mission. We therefore begin this chapter with a discussion of the role and purpose of planning as the background against which we can more realistically examine approaches to the development of the mission statement and, subsequently, corporate and marketing objectives.

  8.3 The Purpose Of Planning

  In discussing the nature and role of the planning process, Jackson (1975 ) comments that:

  Planning attempts to control the factors which affect the outcome of decisions; actions are guided so that success is more likely to be achieved. To plan is to decide what to do before doing it. Like methods, plans can be specially made to fit circumstances or they can be ready made for regular use in recurrent and familiar situations. In other words, a methodical approach can be custom built or ready made according to the nature of the problems involved.

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