Unit 2.

4(2): Business objectives (HL)

What you should know by the end of this chapter:

The following different objectives of businesses:

• Profit maximisation
• Corporate social responsibility
• Achieving market share
• Satisficing
• Business growth

Introduction
An important influence over the allocation of resources in markets is the
supply decisions firms make. Those supply decisions are based on the
objectives 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. We know that 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. For example, profit will affect producer decision-making from a small
firm operating as a sole trader right the way up to a large multinational company that distributes its
profit in the form of dividends to its shareholders. For example, a local takeaway restaurant run by
family owners might aim to make a profit of $50,000 per year whereas fast-food multinationals like
McDonald's might aim for a profit of several billion dollars.

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.

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InThinking www.thinkib.net/Economics 1
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 to achieve 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.

Microsoft owner, Bill Gates, has set up a $50 billion foundation to

support healthcare and education in developing countries. Similarly
to environmental objectives, ethical aims often give an organisation
a positive image in the mind of the consumer which can help sales
and profits.

Market share
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

If, 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%

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InThinking www.thinkib.net/Economics 2
Increasing market share is a 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 per cent of the US soft drinks market as compared to Pepsi's 23 per
cent share. Market share is an effective measure of relative performance whatever the market
conditions. A business might have falling revenue, but its performance might be good if total market
sales are falling in a recession.

Increasing market share can also be useful to a firm looking to achieve greater market influence. A
strong market share position might allow a firm to influence the 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 per cent, of the supermarket
industry in France. This makes its presence very strong in the mind of French consumers and this
gives it a strong bargaining position with its suppliers.

In terms of market share, Samsung is a dominant business in the smartphone market. Last year, 25
per cent of all smartphones sold in the world were Samsung phones. Samsung has been among the
top 5 smartphone producers in the world since 2009. As other firms such as Nokia have declined
Apple and Samsung have become the two dominant businesses in the market. Samsung currently
has the largest market share at 25 per cent. This gives the firm huge marketing power in the minds
of consumers and buying power in the minds of its suppliers.

Satisficing
Satisficing is where a business sets an aim that 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 profit, revenue and market share is
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 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.

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InThinking www.thinkib.net/Economics 3