4.1.5.2 What are alternative objectives of firms?

Satisficing, survival, growth, quality, revenue maximising, increase market share

What are the alternative objectives of firms?

satisficing

alternative objectives of firms: aiming for a level of profit that is “good enough” rather than the maximum possible

• Often linked to Principal-Agent Problem

principal-agent problem

managers may seek to achieve other objectives

A CEO may choose stable profits and a quiet life over aggressive cost-cutting and expansion

Application for Satisficing

allows firms to meet basic shareholder expectations while pursuing other goals(reputation/work life balance), help firms stay stable and flexible in complex or uncertain market environments

Advantages of satisficing

can lead to innefficiency

Disadvantages of satisficing

survival

alternative objectives of firms: in highly competitive or uncertain markets, a firm may focus on simply staying in business rather than making profits

• Short term objective

many small businesses prioritised survival during the COVID-19 pandemic by adapting operations, e.g. switching to online sales

Application for suvival

vital for new/struggling firms(short-term), allows firms to stay in market but once conditions improve the firm may shift its objectives to expansion

Advantages of survival

inefficient in short-term but necessary for long-term success

Disadvantages of survival

economic downturn, customer loyalty, cut prices, costs, investment, cash flow

Survival is common during ________ ________(fall in demand and revenue) or when a new firm hasn’t yet built _______ ______. To survive, firms may ___ _____, decreasing ____, or delay _________ to maintain ____ ____.

growth

alternative objectives of firms: increasing the size or scale of a firm(measured by sales, output, market share, assets)

benefit from EofS, market power, principal-agent problem(managers aim for growth out of their own self-interest)

Why may firms pursue growth?

internal(expanding operations or product lines) or external(mergers/takeovers)

Growth can either be:

Amazon has grown rapidly by reinvesting profits into new markets and tech

Application for growth

more attractive to investors and makes firms more likely to survive market changes

Advantages of growth

reduce short-term profits(if growth is costly/risky), more of a long-term strategy(build brand strength and customer loyalty)

Disadvantages of growth

quality

alternative objectives of firms: some firms focus on providing high quality goods/services as their main objective

Apple is known for making high-quality products which justifies its high prices

Application for quality

raise customer satisfaction and loyalty, allows firms to charge premium prices, vital in niche markets or for firms trying to differentiate their products in monopolistic competition

Advantages of quality

higher costs but leads to a competitive advantage over time, may not max profit in short-term but leads to longer-term success

Disadvantage of quality

revenue maximising 

producing the output that gives the highest TR, rather than the highest profit

MR = 0, where revenue stops increasimg

Where does revenue maximising occur?

tech firms may reduce prices to boost sales volume and dominate the market, even if profits fall in the short-term

Application for revenue maximising

increases market share, help build customer base or weaken rivals, used as stepping stone to long-term profit by first increasing market presence

Advantages of Revenue Maximising

raises pay/status

Why may managers chose revenue maximising?

doesn’t consider costs so profit may be lower, may be unsustainable if firm ignores costs for too long

Disadvantages of revenue maximising

increase market share

gaining a larger percentage(%) of sales in a particular market

• price of firm falls and marketing increases to attract customers away from competitors

Supermarket chains like Aldi and Lidl focus on gaining market share in the UK by offering lower prices and expanding rapidly

Application for increase market share

EofS, market power, brand recognition, vital in oligopolistic markets, helps firms protect future profits, build customer loyalty, and improve negotiating power with suppliers

Advantages of increase market share

may reduce short-term profit but can strengthen a firm’s long-term position, can act as a barrier to entry

Disadvantages of increase market share