4.1.5.2 Business Objectives (AQA Economics)

This AQA Economics Study Note covers Business Objectives.

Topic: Business Objectives

Definition:

• Business objectives refer to the specific, measurable, and time-bound goals that a company aims to achieve in order to fulfill its mission and purpose.

Types of Business Objectives:

1. Profit Maximization:
   • Explanation: Profit maximization is a primary objective where a firm seeks to earn the highest possible profit. This is often achieved by equating Marginal Cost (MC) with Marginal Revenue (MR).
   • Example: A smartphone manufacturer determines the optimal price point that maximizes revenue by considering production costs and consumer demand.
2. Sales Revenue Maximization:
   • Explanation: Some firms focus on maximizing sales revenue rather than profit, aiming to capture a larger market share. Revenue is maximised when marginal revenue = zero.
   • Example: A startup might prioritize revenue growth to establish a strong market presence, even if it means operating at a temporary loss.
3. Market Share Leadership:
   • Explanation: Firms may aim to become market leaders by capturing the largest share of the market.
   • Example: Coca-Cola's objective to maintain a dominant position in the global beverage market through aggressive marketing and distribution.
4. Corporate Social Responsibility (CSR):
   • Explanation: CSR objectives involve addressing social and environmental concerns, demonstrating a commitment to ethical business practices.
   • Example: Patagonia's commitment to sustainability and environmental responsibility as part of its business objectives.

Real-world Contextual Example:

• Tesla's business objectives include not only maximizing profit but also advancing sustainable energy. Their mission emphasizes a shift to electric vehicles and renewable energy sources, aligning business success with environmental responsibility.

Topic: The Profit-Maximizing Rule (MC=MR)

Explanation:

• The profit-maximizing rule states that a firm maximizes profit by producing at a level where Marginal Cost (MC) equals Marginal Revenue (MR).

Application:

1. Setting Output Levels:
   • Explanation: A firm determines the quantity of output that maximizes the difference between total revenue and total cost.
   • Example: If a bakery finds that the revenue from selling an additional loaf of bread (MR) equals the cost of producing that loaf (MC), it is operating at the profit-maximizing level.
2. Price Determination:
   • Explanation: In competitive markets, the profit-maximizing rule helps firms set optimal prices.
   • Example: Airlines adjust ticket prices based on the cost of providing an additional seat (MC) and the revenue generated from selling that seat (MR).

Real-world Contextual Example:

• Netflix determines its subscription prices by analyzing the cost of adding one more subscriber (MC) and the revenue generated from that subscriber (MR), applying the profit-maximizing rule to optimize pricing strategies.

Topic: Reasons for and Consequences of the Divorce of Ownership from Control

Definition:

• The divorce of ownership from control occurs when shareholders (owners) are separate from the management controlling day-to-day operations.

Reasons:

1. Widening Scope of Business:
   • Explanation: As businesses grow, the demands of management become more complex, leading to a separation of ownership and day-to-day control.
   • Example: A small family-owned restaurant expanding into a franchise may hire professional managers to oversee operations.
2. Access to Specialized Skills:
   • Explanation: Companies may need specialized skills not possessed by the original owners, leading to the hiring of professional managers.
   • Example: A technology startup founded by programmers may hire a CEO with business expertise to lead the company.

Consequences:

1. Principal-Agent Problem:
   • Explanation: The separation of ownership and control can result in conflicts of interest, where managers (agents) may not always act in the best interest of shareholders (principals).
   • Example: Managers might prioritize short-term gains to boost stock prices, even if it does not align with the long-term interests of shareholders.
2. Information Asymmetry:
   • Explanation: Shareholders may lack complete information about the daily operations, leading to potential agency issues.
   • Example: Enron's collapse was partly due to managers manipulating financial information, revealing the consequences of information asymmetry.

Real-world Contextual Example:

• Google's founders, Larry Page and Sergey Brin, hired Eric Schmidt as CEO in 2001 to provide professional management and leadership expertise, showcasing the divorce of ownership from control for organizational growth.

Topic: Firms Have a Variety of Other Possible Objectives

Alternative Objectives:

1. Stakeholder Value Maximization:
   • Explanation: Firms may prioritize creating value for various stakeholders, including customers, employees, and suppliers.
   • Example: Johnson & Johnson's commitment to stakeholder value by ensuring product safety and employee well-being.
2. Innovation and Research Development:
   • Explanation: Some firms prioritize innovation and research as a core objective to stay competitive.
   • Example: Apple's emphasis on continuous innovation, driving product development such as the iPhone and iPad.

Real-world Contextual Example:

• Amazon's objective extends beyond profit maximization to customer satisfaction and market leadership through innovations like Amazon Prime, showcasing a multi-faceted approach to business objectives.

Topic: The Satisficing Principle

Definition:

• The satisficing principle suggests that firms may seek satisfactory or "good enough" outcomes rather than maximizing objectives.

Application:

1. Decision Making:
   • Explanation: Firms may make decisions that meet a minimum acceptable standard rather than seeking the absolute best outcome.
   • Example: When selecting suppliers, a firm might choose one that meets quality standards rather than spending extensive time searching for the absolute best supplier.
2. Resource Allocation:
   • Explanation: Satisficing is often seen in resource allocation, where firms allocate resources to achieve satisfactory results without exhaustive optimization.
   • Example: A company may invest in marketing efforts until reaching a satisfactory level of brand recognition rather than pursuing an endless quest for the perfect marketing strategy.

Real-world Contextual Example:

• In the automotive industry, Tesla's approach to electric vehicle battery technology reflects the satisficing principle. While continuously innovating, they focus on achieving a satisfactory balance between cost, performance, and sustainability.

Glossary of Key Terms:

1. Marginal Cost (MC):
   • The additional cost incurred by producing one more unit of a good or service.
2. Marginal Revenue (MR):
   • The additional revenue generated by selling one more unit of a good or service.
3. Principal-Agent Problem:
   • Conflicts of interest that arise when the goals of managers (agents) differ from the goals of shareholders (principals).
4. Information Asymmetry:
   • A situation where one party in a transaction has more or better information than the other party.
5. Stakeholder Value Maximization:
   • Prioritizing the creation of value for various stakeholders, including customers, employees, and suppliers.
6. Satisficing Principle:
   • The concept of accepting satisfactory outcomes rather than aiming for the absolute best outcomes.