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Alternative aims of firms

Although the traditional theory of the firm assumes that all firms aim to maximise their profits, in reality firms may have a range of objectives. These alternative aims particularly arise in the case of public limited companies where there is a divorce (separation) between ownership and control; i.e. one set of people own these companies (the shareholders) and another set of people control them (the salaried managers and directors). Often there will be a difference between what the owners want (usually the maximum profit which maximises dividend payments) and what the controllers are trying to achieve (sometimes just a quiet life!).

There are thus many different aims that firms could pursue, but we shall just concentrate on the 3 specifically mentioned in the IB specification (sales revenue maximisation, sales volume maximisation and environmental aims) plus the aim of satisficing.

Figure 1 below usefully enables a comparison between profit maximisation, sales revenue maximisation and sales volume maximisation.

Figure 1

Profit maximisation.

Firms maximise their profits where MR = MC, indicated by the point Q in Figure 1. Firms will also be maximising their profits where total revenue most exceeds total cost.

Sales revenue maximisation.

In Figure 1, sales revenue is maximised at Q1 where MR = 0. This will correspond to the point where the (total revenue) is at a maximum. This is shown in Figure 2 below.

Figure 2

So long as MR is positive, even if it is falling, TR must be rising, as more is being added to TR. When MR becomes negative, TR must fall, as less is being added to TR. Thus when MR = 0, TR must be at its highest point.

It should also be noted from Figure 1 that the sales revenue maximising output is greater than the profit maximising level of output (i.e. OQ1 rather than OQ).

Managers may wish to maximise sales revenue rather than profits because

  • their salaries might be tied to sales levels
  • financial institutions may be more willing to lend to institutions with high sales levels
  • rising sales may be deemed a more important indicator of success than rising profits.

Sales volume maximisation

In Figure 1, sales volume is maximised at OQ2, subject to a profit constraint, where AR = AC. The firm might be able to sell more than this, but the diagram shows that on all units of output beyond OQ2, AC is greater than AR and, therefore, a loss would be incurred. So, OQ2 maximise sales volume without a loss being incurred.

Managers may wish to maximise sales volume rather than profit because

  • they may be seeking to maximise market share in the short run and to drive other firms out of the industry
  • it may make the firm, being larger, less vulnerable to takeover
  • again, their salaries may be related to sales / size of the firm

Environmental aims

With increasing concern nationally and globally for the environment, firms may wish to be regarded as responsible members of the community by adopting environmentally friendly policies. Firms may enhance their 'green' image by sponsoring worthwhile events, donating funds to environmentally based charities / organisations or adopting practices which show a high level of concern for the environment. For example, supermarkets may sell fairtrade products, usually at a higher price than normal products, to show support for producers in developing countries.

Satisficing

In contrast to maximising behaviour,e.g. of profits or sales revenue. Satisficing theory suggests that the people in charge of business may decide to achieve a satisfactory performance across a range of indicators and not to maximise any one of them. This approach is more likely to keep all the firms stakeholders happy and is what is known as 'satisficing'. For example a firm hell - bent on making the maximum possible level of profit may have to reduce the quality of its products, hold down the wages of its workers and pollute the environment, thus falling foul of three of its important stakeholders, i.e. its customers, its employees and the local community respectively.

Thus, if the managers can make a satisfactory profit, rather than a maximum profit, the owners of the firm and the stakeholders will be happy and the managers will keep their jobs.