5 Major Goals of Business Firms

Let us make in-depth study of the following major goals of a business firm:

1. Profit Maximisation Approach:

Profit maximisation approach about the behaviour of the firm is one of the most fundamental assumptions of traditional neo-classical economic theory.

The attempt of the entrepreneur to maximise profit is regarded as the rational behaviour of the entrepreneur. Just as the rational behaviour in the case of firms is profit maximisation, profit is basic to the philosophy of the free enterprise system.

Adam Smith saw profit as the device which transforms the selfishness of mankind into channels of useful service.

2. Long Term Survival:

According to Rothschild, main objective of a firm is to obtain the stage of long-run survival. A firm having this aim is always reviewed cautiously and all of its decisions are safety-oriented. Such firms do not like to reap larger profits in short-run but prefer lower profits in the long-run.

3. Baumol’s Sale Maximisation Objective:

Prof. Baumol has put forward sales maximisation as an alternative goal to profit maximisation. He offers several justifications of sales maximisation as a goal of the firm. Here, sales maximisation means maximisation of the money value of sales. The objective of a firm is one of constrained maximisation where the firm maximises total revenue subject to a minimum profit constraints. According to Prof. Baumol it is the better evaluator of performance of the firm than the traditional profit maximisation model.

4. Marris’s Model of the Managerial Enterprise:

Marris has developed a model of managerial discretion. In Marris’ model the goal of the firm is the maximisation of the balanced rate of growth of the firm, i.e., the maximisation of the rate of growth of demand for the product of the firm and of the growth of its capital supply.

In pursuing this maximum balanced growth rate the firm has two limitations:

(i) A constraint set by the available managerial team and its skills.

(ii) Secondly, financial constraint set by the desire of the managers to achieve maximum job security.

In short, the rationale for this goal is that by jointly maximising the rate of growth of demand and capital, the managers maximise their own utility as well as of the utility of the owners. Their utility maximisation is reflected in increased salary, power and prestige. Hence, they are motivated to pursue such policies maximising these things.

5. The Behavioural Theory of the Firm:

Model of Satisfying Behaviour: Prof. Simon gave an early statement of the behavioural theory of the firm in 1955. This theory was subsequently elaborated by Cyert and March. This theory focusses on the decision ­making process of the large multi-product firm under uncertainty in imperfect market. The firm is not treated as a single goal, single decision unit, but as a multi-goal, multi-decision organisational coalition. The firm is regarded as a coalition of different groups which are connected with its activity in various ways.

The partners of this coalition are managers, workers, shareholders, customers, suppliers, bankers etc. Each group has its own set of goals. For example, the managers want higher salaries, workers want higher wages, shareholders want higher dividend etc. There is a conflict of goals among the different partners of this coalition. The different groups bargain continuously to achieve their goals.

According to Cyert and March, there are five main goals of the firm:

(i) The Production Goal,

(ii) The Inventory Goal,

(iii) The Level of Sales goal,

(iv) The Market-share goal, and

(v) The Profit goal.

The firm tries to satisfy and not to maximise anything under this theory. In other words, the firm wants to obtain a satisfactory overall performance as defined by the set of aspiration goals. In the behavioural theory, the firm is a satisfying organisation rather than a maximising organisation.

According to Cyert and March, given the uncertainty of the real world, the lack of accurate information, the limited time and limited ability of managers to process information, firms cannot work with global rationality. Given these conditions, firms do not seek maximisation of profits, sales or anything else. Instead they exhibit a satisfying behaviour. They want satisfactory profits, satisfactory sales etc.