Objectives of a firm

In the traditional theory of the firm, profit maximization has been assumed to be the sole (only) objective of the firm; whether the market is perfectly competitive or otherwise the firm will conduct its business activities by applying the marginal rule i.e. the size of the firm is to be determined by equalizing marginal cost with marginal revenue. In 1939, in England, R C Hall and C J Hitch on the basis of their empirical studies refuted (objected) this objective of any firm. With the managerial revolution that has taken place in the world the ownership of the firm is divorced from management. It is the manager who now enjoys considerable decision making power. So according to W J Baumol, sales revenue maximization is the goal of a modern corporate enterprise. According to R Marris, the objective of the firm is the maximization of the balanced rate of growth for the firm. According to Williamson, managers today pursue policies which maximize their own utility rather than profit that is to be distributed among the share holders. According to some others, the objective of a modern firm is satisfactory profit and not maximum profit. There are multiple objectives of a firm like: a. b. c. d. e. f. g. Maximizing profits Sales/revenue maximization Increasing market shares Building a business of reputation Financial stability and liquidity Maintaining good labour relations Leisure and long term survival etc.

Profit maximization objective: In the neo classical theory of the firm, a single owner entrepreneur is assumed. Such firms existed before the rise of the corporate enterprise. This firm had a thorough knowledge about the past performance, present conditions and future changes in the environment of the firm. It also knew its own demand and cost functions. Such a firm conducted its own business with a view to maximize its profits. However the modern business firm is highly complex organization in which management is separated from ownership. So the mangers set before themselves objectives other than profit maximization also. The managers do not always have all the necessary information. Mostly the information that reaches them is incomplete or distorted. Due to their inability to evaluate all the possible strategies open to them maximization of profit objectives is not pursued earnestly. According to Hill and Hitch firms have a multitude of goals and maximization of profit is one of them. Though profit is given high priority, firms rarely wish to maximize profits due to: Fear of rivals Fear of government To maintain good relations with public.

Maximization of long run profits: according to some economists, short run profit maximization does not necessarily result in profit maximization in the long run. A firm attempting to equate MC and MR in each period may not succeed in maximizing the profit in the long period. Thought they may not maximize their profits in each period, every firm may try to maximize profits at least in the long run. This objective is attained by equating the price to average cost. Sales revenue maximization: W J Baumol is of the view that a modern business firm aims at sales revenue maximization rather than profit maximization. 1. 2. 3. Top managers are interested in maximizing their own earning which they have learnt through their experience is possible by maximizing sales rather than profits. When a firm enhances the prestige of the managers while large profits are shared by the share holders Banks and other financial institutions are far more impressed by the turn over of the firms and are willing to provide finance to firms whose sales record is impressive in terms of the size of the sales. In a competitive world, firms with large and growing sales have an edge over (better than) firms with low sales turn over. Such firms with huge sales can tackle their personal problems satisfactorily. Managers now-a-days are not interested in showing results in terms of spectacular profits because if in the future they fail to maintain the high level of profit they will find themselves in trouble. TR/TC R R1 TC TR

4.

5.

N T

M1 TP

output

TM1 is minimum profit less than profit ON. At OM, TR is maximum at RM. OM is the maximum sales output which is higher than the profit maximizing output OQ> Therefore sales maximization output is larger than profit maximization output. The firms behavior is rational as it aims at minimum profit with maximum sales

Maximization of balanced rate of growth: This refers to maximization of the rate of growth of demand for the products of the firm and the growth of its capital supply once this is realized managers maximize their own utility as well as the utility of the shareholders. Mangers are interested in high salaries status power, job security etc. They hope to realize them as the firm grows in size. Thus there are several objectives which are even more important than profit maximization objective today. Growth maximization: Prof Marris considers growth maximization as the primary goal of a manager when the firm grows, employment of managerial staff increases. Hence their salaries, perks etc will increase. These are all linked with the growth of the firm. There are two basic relations explained here: a. Supply growth relationship i.e. G f (P) b. Demand growth relationship i.e. P = f(G) The utility of the entrepreneur depends upon the rate of growth, assets, profitability etc. Higher growth up to a point is associated with higher rate of profit through economies of scale. Growth maximization refers to the maximization of the rate of growth of demand for the product of the firm and the growth of its capital supply. Morris feels that the top managers are not interested in maximizing the size of the firm but the rate of growth of the firm.