Objective of firms
Firms pursue different objectives based on their priorities, market conditions, and the expectations of stakeholders. These objectives guide decision-making and influence pricing, production, and other strategic choices. Below is a detailed exploration of the main objectives of firms:
1. Profit Maximisation
Definition:
Profit maximisation is the primary objective for many firms. It refers to achieving the largest possible difference between total revenue (TR) and total cost (TC).
How It Works:
Firms maximise profits by producing at the level of output where Marginal Revenue (MR) = Marginal Cost (MC). At this point:
Marginal Revenue (MR) is the additional revenue earned from selling one more unit of a good.
Marginal Cost (MC) is the additional cost incurred in producing one more unit of a good.
When MR exceeds MC, the firm earns extra profit by increasing output. When MC exceeds MR, the firm incurs losses by producing additional units. Therefore, the equilibrium point where MR equals MC is the profit-maximising output.
Real-World Examples:
Apple Inc.: Apple focuses on premium pricing and efficient production to ensure high profit margins. Its flagship products like the iPhone and MacBook are priced to reflect their value, appealing to a specific segment willing to pay for quality.
Pharmaceutical companies: Many pharmaceutical firms profit from patented drugs. For example, during the COVID-19 pandemic, Pfizer's profits soared due to its vaccine, which had limited competition.
Evaluation:
Profit maximisation is often seen as the best way to provide returns to shareholders. However, it can lead to negative externalities, such as environmental harm or overpricing, as firms may prioritise profits over social responsibility or consumer welfare. In some cases, profit maximisation may also encourage short-term thinking, which can harm a firm’s long-term stability.
2. Revenue Maximisation
Definition:
Revenue maximisation occurs when a firm aims to achieve the highest possible total revenue without necessarily focusing on profits. This objective is often pursued in markets where gaining market share or increasing brand recognition is more important than immediate profitability.
How It Works:
Firms maximise revenue by producing at a level where Marginal Revenue (MR) = 0. This is the point at which total revenue is at its peak. Beyond this point, selling additional units leads to a fall in total revenue because the price reduction required to sell more units outweighs the revenue gained from additional sales.
Real-World Examples:
Amazon (early years): Amazon prioritized growing its revenue over profits by offering competitive pricing and reinvesting earnings to expand its market share.
Netflix: Netflix has prioritized growing its subscriber base, often operating at a loss to expand into new markets and produce original content.
Evaluation:
Revenue maximisation can help firms gain market dominance, attract new customers, or achieve economies of scale. It is particularly useful in highly competitive markets where building brand loyalty is critical. However, this strategy can reduce profitability, especially if costs are high or prices are reduced significantly to boost sales.
3. Market Share Dominance
Definition:
Market share dominance involves increasing a firm's proportion of total sales in a particular market. This objective is often pursued by firms aiming to establish themselves as leaders in their industry.
How It Works:
To achieve market share dominance, firms adopt strategies such as:
Penetration Pricing: Setting lower prices to attract customers and outcompete rivals.
Product Differentiation: Enhancing product quality or features to stand out.
Brand Loyalty: Using marketing campaigns and customer engagement to build loyalty.
Real-World Examples:
Coca-Cola: Coca-Cola uses global marketing campaigns and partnerships to maintain its dominance in the beverage market.
Tesla: Tesla reinvests its profits into research and development, prioritizing market leadership in the electric vehicle industry.
Evaluation:
Market share dominance helps firms achieve long-term stability and gain market power, allowing them to influence prices and entry barriers for competitors. However, it may require aggressive pricing or high marketing expenditures, leading to short-term losses. Additionally, dominant firms may face regulatory scrutiny to ensure fair competition.
4. Profit Satisficing
Definition:
Profit satisficing occurs when firms aim for a satisfactory level of profit rather than maximising it. This objective is common in firms with diverse stakeholders, such as managers, employees, and shareholders, who may have different priorities.
How It Works:
Instead of focusing solely on profit, firms may:
Pursue ethical goals, such as environmental sustainability or social responsibility.
Prioritise managerial goals, such as job security or work-life balance.
Avoid drawing regulatory scrutiny by not reporting excessively high profits.
By maintaining "good enough" profits, firms can balance the interests of various stakeholders while avoiding excessive risk.
Real-World Examples:
Family-run businesses: Many family businesses prioritize stability and work-life balance over aggressive profit-making strategies.
TOMS Shoes: As a social enterprise, TOMS focuses on profits that sustain its operations while supporting charitable causes, such as providing shoes to underprivileged children.
Evaluation:
Profit satisficing ensures long-term stability and supports ethical business practices. It also allows managers to focus on employee satisfaction or community welfare. However, it may lead to inefficiencies, as firms may not fully exploit their potential to grow or innovate.
Graph representation:
Comparison of Objectives:
2. Comparative Analysis of Firm Objectives
Firms often shift between objectives based on their lifecycle or market conditions. For example, startups may prioritize revenue growth initially, while established firms might focus on profit maximization. Firms like Google (Alphabet Inc.) balance innovation, profit, and market dominance by diversifying their strategies.
3. Case Studies on Mixed Objectives
Google: While Google focuses on innovation, it also maximizes profits from its core advertising business and maintains market dominance in search engines.
Unilever: As a consumer goods company, Unilever adopts profit satisficing to integrate sustainability into its business model, ensuring steady growth while meeting social responsibilities.