Unit 2.

4(2): Business objectives (HL only)

What you should know by the end of this chapter

• The following different objectives of businesses:
• Profit maximisation
• Corporate social responsibility
• Achieving market shar
• Satisficing
• Business growth

Resource allocation and business supply decisions

An important influence over the allocation of resources in markets is the supply decisions firms
make. Those supply decisions are based on the objective’s businesses set when they are producing
in different markets. There are a variety of different business objectives firms are influenced by
when they are making a supply decision and the importance of these different objectives will vary
between producers and markets.

Profit maximisation

Profit maximisation is a central theme of classical economic theory.

Classical economists believe that business decision making is guided
primarily by an entrepreneur’s desire to achieve the highest possible
profit their firm can make from producing its goods and services.
Profit is important to entrepreneurs because it is the reward they earn
from the risk of setting up and starting their business.

Profit maximisation as a business objective is crucial in guiding the

allocation of resources in free markets through the incentive function
of price. Profit as an aim influences business decision making across
different markets and between businesses of different sizes.

The aim of profit maximisation has important implications for business decision making. Producers
in a market will set price and output that achieves the revenue and costs which give them the
highest level of profit. This might mean, for example, a bicycle manufacturer using advertising and
promotion to achieve the highest level of demand possible and negotiating the lowest price possible
for the raw materials and components it uses in production.

© Alex Smith
InThinking www.thinkib.net/Economics
 Corporate social responsibility aims

Corporate social responsibility (CSR) is a set of business

objectives based on environmental, ethical and social factors.
Many firms set environmental objectives because they have to
follow government regulations. This is particularly the case in
industries such as energy and agriculture where production can
have a significant impact on the environment.

Large numbers of firms also adopt environmental objectives

because it is important to their stakeholders such as
employees, customers and shareholders. The oil companies
Shell and BP have, for example, set the objective of achieving
carbon neutral production by 2050.

Many businesses often target the environment with one eye on sales and profits because having
an environmental outlook gives them a positive image in the mind of the consumer. Airlines, for
example, have a negative reputation for carbon emissions and might take action to offset carbon
emissions and promote their environmental aims as a selling point to consumers.

An ethical objective is where a business makes decisions with the aim of achieving positive moral
outcomes. Starbucks, for example, buys Fair Trade coffee from suppliers in developing countries
where low-income farmers are paid a premium for their output to give them a better quality of life.
Some firms have an ethical outlook because of the philanthropic outlook of their owners.

Market share

Definition
Market share is the percentage of total market revenue an individual firm's revenue accounts for.
It is calculated as:

• individual firm’s total revenue / market’s total revenue x 100 = individual firm’s market
share
• For example, a firm's total revenue is $25 million and total market revenue is $200 million
then the market share would be:
• $25m / $200m x 100 = 12.5%

Market share as a measure of performance

Increasing market share is useful objective for businesses to judge their relative performance
compared to other firms in the same industry. If a business' market share rises then it suggests its
performance is better than its competitors. Coca Cola, for example, might judge its performance
based on its market share of 43 percent of the US soft drinks market as compared to Pepsi's 23
percent share.

© Alex Smith
InThinking www.thinkib.net/Economics
Benefits of increasing market share
Increasing market share can also be useful to a firm looking to achieve
greater market influence. A strong market share might give a firm the
opportunity to influence market price, have promotional power over
consumers and give it greater bargaining power when dealing with
suppliers. The French supermarket retailer Leclerc, for example, has the
largest share at 21 percent, of the supermarket industry in France. This
makes its presence very strong the mind of French consumers and this
gives it a strong bargaining position with its suppliers.

Satisficing

Satisficing is where a business sets an aim which is satisfactory rather than optimal. Instead of
trying to maximise profits a firm might set an acceptable profit objective. The firm can then meet the
needs of its shareholders as well as its other stakeholders such as its employees and the local
community.

The owner of a small business that makes computer games may, for example, aim for a comfortable
living for themselves and their small team of game designers ahead of maximising profits. Satisficing
might give them time to enjoy a good quality of life, although there will be an opportunity cost in
terms of lower profits and wages.

Business Growth

For many firms, the growth of their profits, revenue and market share are a key objective because it
represents progress. A business that is reaching more customers, operating in more countries and
has a higher asset value is often seen as the successful in terms of growth. This is closely linked to
profit maximisation, but it is not quite the same. A firm, for example, may look to discount its
products to achieve sales growth at the expense of short-term profitability.

© Alex Smith
InThinking www.thinkib.net/Economics