Sustainable Economies

(Corporate Strategy)

Igor Bagayev
igor.bagayev@u-pec.fr

AEI International School

2021/22
Business Goals and
Behaviour
The Goals of Firms
• Depend in part on what is produced and who is producing it

• What?
• Type of goods

• Who?
• Private vs. Public sector
Types of Goods
• Excludable: A person can be
prevented from using it
when they do not pay for it.
• Rival: The property of a
good whereby one person’s
use diminishes other
people’s use.
Types of Goods
• Private goods: both
excludable and rival.
• Public goods: neither
excludable nor rival.
• Common resources: rival
but not excludable.
• Natural monopoly goods
(club goods): excludable but
not rival.
Public Sector Versus Private Sector
• Public sector: Where business activity is owned, financed and controlled by
the government.
• Street lighting, justice, police.
• Private sector: Where business is owned, financed and run by private
individuals.
• Merit goods: Goods provided by the public sector because market
provision would not lead to an optimal production (related to >0
externalities)
• Health care, education.
• Goals of public sector organizations providing merit goods maybe different than those of
private sector firms. Increasingly though, private sector firms are delivering public goods.
Financial Objectives
• Models of financial objectives can help to explain how firms operate. They are
concepts, helping us to understand how businesses make decisions.
• ‘Making a profit’: costs need to be lower than revenue. But why and how firms
can engage in price wars? Or keep operating even when making losses? Should a
firm always try to increase sales when its profit is positive?
Profit Maximisation
• Profit = total revenue – total cost

• In a competitive market model, basic assumption: firms try to maximise

their profit.
• A firm will maximize profits at an output where MR = MC.

• Marginal revenue: The change in total revenue from the sale of each
additional unit of output.
• In competitive markets, firms’ MR also equals the price of the good.

• Marginal cost: The change in total costs from the production of each
additional unit.
Profit Maximisation
Break-Even Analysis
• Break-even: The output level at which the total costs of production
are equal to the total revenue generated from selling that output.
• Margin of safety: The distance between the break-even output and
current production where total revenue is greater than total cost.

• To find the break-even point (quantity): we need to know selling

price, fixed costs, variable costs, total costs and total revenue.
Break-Even Analysis
• Contribution = selling price – variable cost

It tells us how much each sale contributes to covering fixed costs.

• Break-even = fixed costs divided by the contribution.

Break-Even Analysis
• Break-even point can
be shown graphically:

TR=Total Revenue
TC=Total Cost
VC=Variable Cost
FC=Fixed Cost
Break-Even
• What it tells: under given conditions, how much/many should we
plan to sell before total revenue covers total costs? (before making
‘profits’)

• Break-even is a planning tool.

• What would happen to the break-even point if we:
• Raised prices?
• Bought a new machine that increased fixed costs and reduced variable costs?
• Ex: Netflix
Revenue Maximisation
• Another type of financial objective: try to get the highest amount of
sales.

• Revenue = Price x Quantity sold (PxQ). Can be influenced by:

• Price.
• Promotion, product and place (factors influencing sales).
• A combination of the above.
Revenue Maximisation
• Price elasticity of demand is important in calculating the maximum revenue:
• Changes along the demand curve

Panel (a): firm in competitive market Panel (b): firm with downward sloping
demand curve
Cost Minimisation
Product life cycle from launch through to growth, maturity and decline.

• At maturity sales slow down or stabilise.

• Firms can look at making other costs savings.

• Productivity = Total output divided by units of a factor
• Look at reducing costs in the supply chain.
• Focusing on improving the supply chain might result in a more efficient distribution.
Shareholder Value
• Firms can also aim at increasing the shareholder value

• Measures how shareholders receive reward for their “risk”:

• Increase in the share price of the business.
• Increase in the value of dividends paid to shareholders.
Summary of Financial Goals
1. Profit maximisation
2. Revenue maximisation
3. Cost minimisation
4. Shareholder value
Non-Financial Objectives
• Satisficing:
• Firms may not operate at maximum profits but rather operate at a sub-
optimal position. (agency theory)
• Market Power:
• Market power is about growth and market share: can give a firm some
control over price or quantity.
• Acquisitions
• Diversification
• Cutting prices
• Not sustainable in the long run
• New product development
Non-Financial Objectives
• Social, Ethical and Environmental Objectives:
• Might by a concern for a range of stakeholders (e.g. social enterprises) or a
concern over brand reputation and image.
• Brand recognition:
• A brand does not have to be associated with high value, high price or quality.
• The goal of brand recognition is designed to influence consumer behaviour.
• Reputation and Image:
• A good reputation can help a business gain a competitive advantage.
• A bad reputation can harm all the investment that has gone into creating a
brand.