Why Might A Business Pursue Other Objectives Besides The Objective Of Maximizing Profits?
“Why might a business pursue other objectives besides the objective of maximizing profits? What objectives other than profit maximization might a firm pursue? Is this possible in a competitive world? ” Business activity is usually based on aims and objectives, which indicates where business wants to go in the future. Main objectives are goals of the business which are set up by the company’s owners or managing director so the stakeholder groups such as employees, managers, customers and suppliers may understand the business preferences and basis for the action of the business.
Many economists and business representatives will argue that the main objective of any Private sector business is Profit maximization. Objectives bring to the business specific targets and managers would create and adopt a strategies and tactics to reach these targets. Usually business will apply measurable targets to follow. For example, to achieve a particular amount of sales, for a period of time or to get some percentage of market share. However, depends on the market, business operates in, it may adopt a specific objectives, related only to a business.
These are more related to a tactics, because reaching these objectives will lead to an advantage in competition. A god example might be when business wants to reach 80% capacity utilization of its premises, factory, machinery etc. First of all it means that they are aiming to sell all their output, and receive more profit, but also good capacity utilization will lead to a greater degree of efficiency, as far as business will benefit from economies of scale and bring it unit costs lower, which is the one way to be more competitive.
Sometimes, management of the business sets unachievable or not realistic objectives, such as to get to sales of 200,000 in August when there were sales of 100,000 in July. These objectives are not realistic and are likely to demotivate the workforce as far as they already know that they will not achieve business objectives. As I have already outlined, many individuals, who has any interest in business activity, will argue, that the main objective of any business is to maximize the profit.
Generally speaking, from the point of economics, Enterprise is one of four factors of production which takes risk by investing into the business activity in order to make a profit and earn from investment. However, this aim is not the case for every single business. Good examples might be charities, educational and health establishments’ voluntary organizations and public sector corporations. These are run not only to generate a profit but also to provide a service. Sometimes they also run on ethical and socially responsible objectives base on their beliefs they stand for.
For example charities provide basic needs for less well off in society. In addition, profit maximization is not only the case for companies who are interested in receiving as much cash inflow as possible. Especially for a little business, the main aim will be to survive within the market with a high degree of competition. This may be the case also for a lot of companies in a time of crisis, because it is difficult to stay in the market when consumers spending declined very rapidly. Other objective that I have already mentioned is a growth of sales or growth of output.
“This may be because the managers believe that the survival of the business depends on being large. ” Also business may benefit form economies of scale and reduce its unit cost. So, they may have a great advantage against their competitors. However, very often setting up of business objectives leads to conflicts between short term and long term aims. For example, when business wants to increase the sales, it is likely to reduce the price of its product, but in highly competitive market with very elastic demand curve, will reduce short term profit.
Or business may decide to invest heavily on new product development and machinery, so in the short run it will accept lower cash flow. In the long term, business is likely to change the main aims from time to time, because it needs to react of changes in the market. Sometimes business will reach one aim and switch to another. For example, business may survive in time of crisis and then try to maximize profit. The competitive environment might change, with the launch of new products from competitors. Technology might change product designs, so sales and production targets might need to change.
So, business will set up its aims upon their beliefs and aim of the owners of the business. However, all these such as survival and market growth are related on the profit business will bring in future. Business will not be able to survive if it does not generate a profit in the long run, and growth of sales, leads to a larger profits, when firm operates on full capacity and benefits from economies of scale. However there are also a lot of businesses which just aim to provide a service to the customers and it’s usually set up for lower class population as it usually provides them with basic needs.