Sales, Growth Rate, and

Maximization of Utility
function as business
objectives
Ali Raza Malik
 Baumol’s Hypothesis of sales revenue
Maximization
• According to this theory, once profits reach acceptable levels, the goal of the firms
become maximization of sales revenue rather than maximization of profits.
• i. More Realistic
• ii. More Practical
• iii. More Availability of Loans
• iv. Strong Position in the Market
• v. More Advantageous to the Managers
 Marris’s

• Robin Marris in his book The Economic Theory of ‘Managerial’ Capitalism (1964) has developed a dynamic balanced
growth maximising model of the firm. He concentrates on the proposition that modem big firms are managed by managers
and the shareholders are the owners who decide about the management of the firms.
• Assumptions:
• 1. It assumes a given price structure.
• 2. Production costs are given.
• 3. There is no oligopolistic interdependence.
• 4. Factor prices are constant.
• 5. Finns are assumed to grow through diversification.
• 6. All major variables such as profits, sales and costs are assumed to increase at the same rate.
 Williamson’s Hypothesis of Maximizing
Managerial utility function
• Williamson argues that managers have discretion in pursuing policies which maximize their own utility rather than
attempting the maximization of profits which maximizes the utility of owner-shareholders.
• The managerial utility function includes such variables as
• Salary
• Security
• Power
• Status
• Prestige
• Professional excellence.
Of these variables only the first (salary) is measurable.
 Rothchild’s Hypothesis of Long Run Survival
and Market Share Goal

• According to the Rothchild, the primary goal of the firm is long-run survival.

Some others have suggested that attainment and retention of a constant

market share is the objective of the firms.

 Entry-prevention and Risk-avoidance

• Yet another alternative objective of the firms suggested by some economists is

to prevent entry of new firms into the industry.
• The motive behind entry-prevention may be:
• (a) Profit maximization in the long run,
• (b) Securing a constant market share, and
• (c) Avoidance of risk caused by the unpredictable behaviour of the new firms.
Cyert-March Hypothesis of Satisfying Behavior

• Cyert and March argue that satisficing behavior is rational given the
limitations, internal and external, within which the operation of the firm is
confined.
• It should be obvious that the behaviorists redefine rationality. Traditional
theory defined the rational firm as the firm that maximizes profit (short-run
and long-run). The behaviorist school is the only theory that postulates a
satisficing behavior of the firm, which is rationed given the limited
information and limited computational abilities of the managers.