3.1 Business objectives

DEFINITIONS:

Maximisation Objectives

• Profit Maximisation: The process by which a firm determines the price and output level that returns the greatest profit.
• Sales Revenue Maximisation: The strategy aimed at increasing the total revenue from sales without necessarily maximizing profits.
• Sales Volume Maximisation: The objective of increasing the number of units sold to boost market share, often at the expense of short-term profits.
• Growth Maximisation: The aim to expand the firm's size, market share, or product range over time.
• Utility Maximisation: The concept in economics that consumers allocate their resources to maximise their total satisfaction or happiness.

Non-maximising Objectives

• Profit Satisficing: The practice of aiming for a satisfactory level of profit rather than the maximum possible, often to balance other interests or objectives.
• Social Welfare: The objective of improving the well-being of society, often through policies and actions that benefit the community and environment.
• Corporate Social Responsibility (CSR): A business approach that contributes to sustainable development by delivering economic, social, and environmental benefits for all stakeholders.

Principal-Agent Problem

• Principal-Agent Problem: A situation where there is a conflict of interest between the principal (owner) and the agent (manager) due to differing goals and asymmetry of information.

Explain:

3.1.1 Maximisation objectives: profit, sales revenue, sales volume, growth and utility

1. Profit Maximisation: Firms aim to maximise their profit, which is the difference between total revenue and total costs. This occurs where the difference between marginal revenue (MR) and marginal cost (MC) is the greatest. The profit maximisation point is achieved when MR = MC.
2. Sales Revenue Maximisation: Firms focus on maximising their total revenue, which is the total amount of money received from sales. This occurs where marginal revenue (MR) is zero. The firm aims to increase sales as much as possible, even if it means sacrificing some profit.
3. Sales Volume Maximisation: This objective involves maximising the quantity of goods sold, irrespective of the price at which they are sold. Firms pursuing this objective often focus on increasing market share and may accept lower profit margins to boost sales volume.
4. Growth Maximisation: Firms aim to achieve the fastest possible growth in size, revenue, or market share. This can involve expanding into new markets, increasing production capacity, or acquiring other businesses. The focus is on long-term expansion rather than immediate profit.
5. Utility Maximisation: This is primarily relevant to individuals or households rather than firms. It involves maximising satisfaction or happiness from consumption within the constraints of their budget. Utility maximisation is achieved when the marginal utility per unit of currency spent is equal across all goods and services consumed. These objectives represent different goals firms or individuals might prioritize depending on their circumstances and strategic focus.

3.1.2 Non-maximising objectives: profit satisficing, social welfare, corporate social responsibility (CSR)

1. Profit Satisficing:

• Definition: Profit satisficing is a strategy where a firm aims to achieve a satisfactory level of profit rather than the maximum possible profit.
• Explanation: Firms may set a target profit level that is 'good enough' to satisfy stakeholders or meet other business needs, rather than pursuing the highest profit. This approach often arises when firms face constraints or when managers have other priorities.

2. Social Welfare:

• Definition: Social welfare refers to the well-being of society as a whole, which firms may consider in their decision-making processes.
• Explanation: Firms may prioritize actions that enhance the overall welfare of society, such as reducing pollution or providing community support, even if these actions do not lead to maximum profit. This focus on social welfare can be motivated by ethical considerations or to build a positive public image.

3. Corporate Social Responsibility (CSR):

• Definition: Corporate Social Responsibility is the commitment of a firm to conduct its business in an ethical manner, considering the impact on various stakeholders, including employees, customers, and the community.
• Explanation: CSR involves firms taking actions that go beyond legal requirements to contribute positively to society. This can include environmental sustainability, fair trade practices, and charitable activities. Firms may engage in CSR to build goodwill, enhance their brand reputation, and align with ethical standards, even if it does not maximize profit in the short term. These non-maximising objectives reflect a broader perspective on business goals, encompassing ethical and social considerations alongside traditional profit-oriented objectives.

3.1.3 The principal-agent problem

The principal-agent problem occurs when there is a conflict of interest between two parties in a relationship: the principal (who delegates tasks) and the agent (who performs the tasks). In economics, this issue typically arises in situations where the principal hires an agent to act on their behalf, but the agent has different incentives and objectives than the principal.

Key points:

• Asymmetric Information: The agent often has more information about their own actions and effort levels than the principal. This can lead to moral hazard, where the agent might not act in the principal's best interest because they are not fully monitored.
• Incentive Alignment: To address the principal-agent problem, principals use various mechanisms to align the agent's incentives with their own. These include performance-based pay, monitoring, and contracts that specify expected outcomes and rewards.
• Example: In a company, shareholders (principals) hire managers (agents). The shareholders want the company to be profitable, but managers might prioritize personal benefits or less effort, leading to a misalignment of interests. Effective management of the principal-agent problem is crucial for ensuring that agents act in the best interests of the principals, ultimately leading to more efficient and fair outcomes.