Objectives of Firms

8 Key excerpts on "Objectives of Firms"

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  eBook - PDF

  Managerial Economics

  The Analysis of Business Decisions

  • Stephen Hill(Author)
  • 2016(Publication Date)
  • Red Globe Press

    (Publisher)

  In particular, the equalisation of marginal cost and marginal revenue calls for precise measurements that are unlikely to be available. The business world is one of considerable uncertainty, characterised by discarded plans and unfulfilled ex-pectations. In these circumstances, precise economic calculus be-comes operationally meaningless. As a result, economists have attempted to redefine the objectives of the firm. Such redefinition has followed three broad paths: (i) Attempts to resurrect the profit objective by placing profit in the context of an uncertain world. Profits and objectives 53 (ii) The replacement of profit with some other objectives, or group of objectives, that can be maximised in place of profit. (iii) Abandoning the principle of maximising any objective, and consider instead the organisational context of the firm, nor-mally expressed in terms of the satisfaction of some group of performance targets. The rest of this chapter will consider each of these possible avenues in turn. The descriptions that follow are not intended to be a comprehensive guide to business motivation, but rather to impart a flavour of what may be called 'managerial' approaches to the firm. Profit related objectives According to this viewpoint, the true objective of the firm is something closely related to profit. Often the objective is tied to uncertainty, such as survival , security or the maintenance of liquid assets . Each of these objectives is complementary to profit, in that the maximisation of profit may ensure the attainment of that objective. The behaviour of the firm can then be modelled as if the firm was maximising profit. Moreover, the informational problem inherent in the maximisa-tion of profit is then an error of 'misplaced concreteness'.

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  Pricing in Business

  • Douglas Hague(Author)
  • 2018(Publication Date)
  • Taylor & Francis

    (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)
  • Taylor & Francis

    (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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  Applied Corporate Finance

  • Aswath Damodaran(Author)
  • 2014(Publication Date)
  • Wiley

    (Publisher)

  Underlying the market share maximization objective is the belief (often unstated) that higher market share will mean more pricing power and higher profits in the long run. If this is in fact true, maximizing market share is entirely consistent with the objective of maximizing firm value. However, if higher market share does not yield higher pricing power, and the increase in market share is accompanied by lower or even negative earnings, firms that concentrate on increasing market share can be worse off as a consequence. In fact, many of the same Japanese firms that were used by corporate strategists as their examples for why the focus on market share was a good one discovered the harsh downside of this focus in the 1990s. II. Profit Maximization Objectives There are objectives that focus on profitability rather than value. The rationale for them is that profits can be measured more easily than value and that higher profits translate into higher value in the long run. There are at least two problems with these objectives. First, the emphasis on current profitability may result in short-term decisions that maximize profits now at the expense of long-term profits and value. Second, the notion that profits can be measured more precisely than value may be incorrect, given the judgment calls that accountants are often called on to make in assessing earnings and the leeway that they sometimes have to shift profits across periods. In its more sophisticated forms, profit maximization is restated in terms of accounting returns (such as return on equity or capital) rather than dollar profits or even as excess returns (over a cost of capital). Although these variants may remove some of the problems associated with focusing on dollar profits next period, the problems with accounting measurements carry over into them as well. III. Size/Revenue Objectives There are a whole set of objectives that have little to do with stockholder wealth but focus instead on the size of the firm.

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  Shareholder Value in Banking

  • F. Fiordelisi, P. Molyneux(Authors)
  • 2006(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  2 Economic Objectives of Banks Introduction This chapter analyses the economic objectives of banks. As explained in Chapter 1, managing to create sustained and sustainable share- holder value is currently one of the main objectives in European bank- ing. Although this view appears popular among managers and academics, it cannot be taken for granted and it may not be accepted under some circumstances. Shareholder-value maximisation implies an increase of dividends and/or of share prices: the general view that managers primarily concentrate on these targets can be subject to various criticisms. Banks are complex systems with several actors, having an own-interest, 1 such as: • Shareholders who are interested in maximising the value of their holdings by obtaining high dividends and/or increasing share prices. However, this might not be an entirely accurate depiction. For ex- ample, majority and minority shareholders may have different holding periods and, consequently, minority shareholders are interested in maximising their value over the shorter term, while majority share- holders may prefer increased dividends and share prices over the longer term (even sacrificing value maximisation in the short term). • Board members may pursue their own goals (for example, the growth of corporate size or the number of shareholders in order to reduce shareholder power and increase their own power). • Managers may pursue their own goals (for example, risk aversion and maximising their pay and other expenses – expense preferencing), that may differ from shareholders’ and CEOs’ goals. 2 • Customers, who covet high-quality services (such as brokerage, payment services etc.) at low prices. Among customers, it is necessary to distinguish between: 9 F. Fiordelisi et al., Shareholder Value in Banking © Franco Fiordelisi and Philip Molyneux 2006 (i) Funds-suppliers, such as depositors, who wish to receive high interest and good payment services.

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  U.S. Corporate Governance

  • Donald H. Chew, Stuart L. Gillan, Donald Chew, Stuart Gillan(Authors)
  • 2009(Publication Date)
  • Columbia Business School Publishing

    (Publisher)

  Value Maximization 7 there is no purposeful way to decide where to be in the area in which the firm can obtain more of one good only by giving up some of the other. Multiple Objectives Is No Objective It is logically impossible to maximize in more than one dimension at the same time unless the dimensions are what are known as “monotonic transforma-tions” of one another. Thus, telling a manager to maximize current profits, market share, future growth in profits, and anything else one pleases will leave that manager with no way to make a reasoned decision. In effect, it leaves the manager with no objective. The result will be confusion and a lack of purpose that will handicap the firm in its competition for survival. 3 A company can resolve this ambiguity by specifying the tradeoffs among the various dimensions, and doing so amounts to specifying an overall objec-tive such as V = f ( x, y, . . . ) that explicitly incorporates the effects of decisions on all the performance criteria—all the goods or bads (denoted by ( x, y, . . . )) that can affect the firm (such as cash flow, risk, and so on). At this point, the logic above does not specify what V is. It could be anything the board of directors chooses, such as employment, sales, or growth in output. But, as I argue below, social welfare and survival will severely constrain the boards’ choices. Nothing in the analysis so far has said that the objective function f must be well behaved and easy to maximize. If the function is non-monotonic, or even chaotic, it makes it more diffi cult for managers to find the overall maximum.

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  Sustainable Financial Investments

  Maximizing Corporate Profits and Long-Term Economic Value Creation

  • Brian Bolton(Author)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  So how can the firm make sure that the employees are acting in the owners’ best interests? How can the firm make sure that all relevant stakeholders have the appropriate incentives to maximize the firm’s value? The key to making sure that all suppliers of capital are satis- fied with the return on their investment is to align the interests of the different parties as much as possible. It’s all about incentives and about increasing one’s own utility through the relationship with the firm. The incentives then must maximize the value of the firm in the short term as well as the long term. The sustainability of economics Fundamental economic theory is based on the interplay between con- sumers and suppliers, over both the short-term and the long-term. Consumers are only willing to purchase goods if they believe doing so will add to their own utility or value. These decisions are based on such nebulous ideals as preferences and needs. Suppliers or producers will only be willing to sell goods if the benefits of doing so are greater than the costs—if that sale increases their own utility or value. Every economic decision we make is based on this fundamental premise: we only choose activities where the expected economic benefits are greater than the expected economic costs. Unfortunately, measuring these costs and benefits can be quite a challenge. How do we measure benefits such as happiness or fulfillment? How do we measure costs such as pollution or dissatisfied customers? What is the cost of a prod- uct recall or a negative tweet? Ideally, all costs and benefits should be included in this cost-benefit analysis—which is a near impossible task. There is incomplete information about the cash flows associated with any economic action; the art of economic analysis is in turning this incomplete information into stories and numbers. Competitive markets are ruthless. Capitalism ensures that the strongest firms are the ones that succeed—and the others go away.

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  Business Economics and Managerial Decision Making

  • Trefor Jones(Author)
  • 2004(Publication Date)
  • Wiley

    (Publisher)

  Economic Journal, 81, 547^562. Short, H (1994) Ownership, control, ¢nancial structure and the performance of ¢rms. Journal of Economic Surveys, 8(1), 205^249 Szymanski, S. and T. Kuypers (1999) Winners and Losers. Viking, Harmondsworth, UK. Yoshimori, M. (1995) Whose company is it? The concept of the corporation in Japan and the West. Long Range Planning, 28(4), 33^44. CHAPTER 1 g OWNERSHIP CONTROL AND CORPORATE GOVERNANCE 21 2 BUSINESS OBJECTIVES AND THEORIES OF THE FIRM CHAPTER OUTLINE Chapter objectives Introduction Pro¢t maximization Sales revenue maximization Williamson’s managerial utility model Behavioural models Comparison of behavioural and traditional theories Corporate social responsibility Owners, managers and performance Case Study 2.1 Objectives in company annual reports Chapter summary Review questions References and further reading CHAPTER OBJECTIVES This chapter aims to discuss the alternative objectives of the ¢rm by using models of the ¢rm developed by economists. At the end of this chapter you should be able to: t Understand the assumptions of the pro¢t-maximizing model of the ¢rm and explain the implications for price and output. t Explain the sales revenue maximization model of the ¢rm and analyse the implications for price and output. t Outline the managerial utility model of the ¢rm and explain the implica- tions for resource allocation. t Outline the main criticisms of neoclassical and managerial models. t Explain the behavioural model of the ¢rm and its advantages and disad- vantages for economic analysis of the ¢rm. t Discuss the arguments for ¢rms adopting wider social obligations. INTRODUCTION The objective of this chapter is to explore how economists have developed models of the ¢rm based on control by owners and managers. Traditionally, it has been assumed that owners set the goal of pro¢t maximization and that managers make decisions in pursuit of that goal.

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