Objectives of Business Firms

Let us learn about the objectives of business firms.

A firm is a unit engaged in the production and/or distribution of goods and services. All firms (e.g., sole proprietorship, joint stock firm, cooperative, public sector firms, etc.,) operating under perfectly competitive framework or monopoly or monopolistically competitive or oligopoly aim at profit maximization, just as all students of all countries appearing at all kinds of examinations aim only at maximizing marks.

As all firms—from perfect competition to oligopoly—aim at profit-maximization, their marginal costs become equal to marginal revenues. In other words, price-output determination of this kind of marginal approach or standard approach suggests that when marginal cost equals marginal revenue, profit is maximized. Profit-maximization may be considered as a basic objective of a business firm.

But the attainment of such goal does not take into account the complexities of the real world and, hence, involves several obstacles. It is indeed true that a firm may not be able to maximize profit because of uncertainty in business conditions.

Further, profit maximization objective may change if the firm’s behaviour changes. Our standard neoclassical approach may fit within the perfectly competitive model and monopoly model. But, modern business firms are mostly characterized by monopolistic competition and oligopoly.

In this real business world, one finds mutual interdependence among firms. Profit- maximization, then, is not accepted as the primary goal. Again, in recent times, one finds changing organizational structure of firms where we find different groups and sub-groups having different as well as conflicting goals.

In this complex world, no one aims at maximizing anything—everyone simply aims to ‘satisfy’ a range of objectives. For all these reasons, today we face supplement to the profit-maximizing goal.

Alternatives to profit maximization model are grouped into two:

Managerial theories, and behavioural theories.

Do Firms Really Maximize only Profit?

It is said that the sole objective of a firm is the maximization of profit.

This is what traditional economics believes since, apparently this objective is not only simple but also easily quantifiable. But, in today’s world, such profit-maximization goal has come in for sharp criticisms. New teachers of economics argue that all men involved in production are social animals whose aims are not only multifarious but also conflicting and complicated.

In view of this, one finds lack of unanimity among the managers-directors relating to business decision. All these cannot really be summed up in the profit-maximizing goal. Rather, disillusionment with the goal of profit-maximization has led to the emer­gence of some other competing goals that firms want to attain.

Doubts in the goal of profit-maximization arose due to the following reasons:

Firstly, managers of today’s business are quite different from their predecessors. Earlier, it was the entrepreneur who owned and managed the entire business firm, who took all the business decisions. Naturally, profit—a special category of income—must go to this gentleman. But today the style of business has undergone a sea-change.

Here we find separation between ownership and management. These two functions of a joint stock company are performed separately by two distinct classes having divergent motivations. Today’s decision-makers are interested in maximizing their salaries and other forms of job satisfaction, rather than profit. Obviously, these people aim at maximizing their own welfare.

Only shareholders—the owners of a joint stock company—are concerned with the goal of profit-maximization. These two goals seem to be in conflicting terms. In view of this, a question may be posed in this way: Who will be maximizing whose profit? It is virtually impossible to give any a priori answer to this question.

Secondly, at least perfectly competitive model suggests that even if firms do not go for profit-maximization, they would be forced to sacrifice this goal in the long run due to the pressure of free entry and free exit. In the midst of this freedom of entry, no firm can enjoy more than normal profit.

In the ultimate analysis, only the fittest will survive due to the pressure of market forces. But due to the variety of factors, entry in any industry is not an easy one in today’s world. There are various barriers to entry. If so, then the argument of market forces loses its potency.

In view of these limitations, the goal of profit-maximization is now being replaced by a wardrobe of theories. Here we won’t go into the jungle of theories which may sometimes be confusing. Here we will present, in brief, two important alternative goals to profit- maximization. First is Nobel Laureate W. J. Baumol’s ‘Sales Maximization’ goal and the second is H. A. Simon’s ‘Satisficing Theory of Profit’.

Sales Maximization Goal:

According to Baumol, managers of modern business are more interested in maximizing their sales rather than profits. Baumol has suggested that firms maximize sales revenue subject to a minimum profit constraint. This minimum profit constraint is specified at that minimum level that is just enough to keep shareholders happy.

Again, for survival, managers also consider a minimum level of profit. When this constrained maximization problem is solved by the choice of output level, Baumol has shown that output is higher under the sales maximization model than under profit- maximization model.

Some economists have suggested an alternative to maximizing the value of sales. To them, maximization of output is the most accepted goal.

Satisficing Theory of Profit:

According to Simon, business firms strive for ‘satisfactory’ rate of profit, rather than maximum profit.

He argues that often managers fail to estimate the desired volume of profit or sales due to the imperfection in information or data. In view of this, instead of maximizing the goal of profit, Simon argues that firms aspire to a satisfactory level or rate of profit. Simon quotes “Cost-plus pricing” as a form of satisficing which has empirical backing.

Despite these, the goal of profit-maxi­mization seems to be uppermost in the mind of the businessmen. Profit is the ultimate incentive to firms.

Even the public sector enterprises which often run on a no-profit-no-loss basis also want to maximize profit. It is true also those private firms are also conscious of their social responsibility. Still then, no one has shirked the goal of profit-maximization at the altar of other alternative goals to profit maximization.