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Objectives Of Business Firm

 Objectives of Business Firm

Profit Maximization

            In the conservative thesis of the firm, the foremost intention of a business firm is profit optimisation. Under the hypothesis of given likings and expertise, price and productivity of a specified produce under perfect rivalry are ascertained with the exclusive goal of maximising profits. The firm is believed to act as one of a huge number of manufacturers which cannot persuade the market price of the article of trade. It is the price taker and volume adjuster. Thus the demand and cost conditions for the product of the firm are ascertained by factors external to the firm. In this theory maximum profits denote to untainted profits which are excess above the average cost of manufacturing.

The rules for profit maximisation are (i) MC = MR and (ii) MC must cut MR from below.

Multiple Objectives

            The foundation of the disparity amid the intentions of the neo-classical firm and the modern conglomerate occurs from the truth that the profit maximisation object relate to the industrialist conduct while modern conglomerates are stimulated by diverse goals for the reason that of the separate roles of shareholders and managers. In the latter, shareholders have virtually no authority over the performance of the supervisors.

  1. Simon Satisfying Objective
  2. According to Simon, “We must expect the firm’s goal to be not maximising profits but attaining a certain level or rate of profit holding a certain share of the market or a certain level of sales.” Under circumstances of conviction a firm cannot know whether profits are being optimised or not.

    In study of performance of the firm, Simon evaluates the organisational with individual performance. As per him a firm like a personage has its ambition level in keeping with its needs, drives and accomplishment of goals. The firm desires to accomplish a convinced minimum or target level of profits. Its ambition level is based on its diverse goals such as production, price, sales, profits etc. and on its past practice. This also takes into consideration qualms in the prospect. The ambition levels characterize the frontier amid agreeable and substandard conclusions.

    In this framework the firm may face three unconventional states of affairs (a) the authentic accomplishment is fewer than the ambition level, (b) the authentic accomplishment is superior to the objective level and the authentic accomplishment contemporaries the ambition level.

  3. Behavioural Theory of Organisational Goals
  4. Cyert and March regard the modern business firm as a complex organisation in which the decision making process should be analysed in variables that affect organisational goals, expectations and choices. They look at the firm as an organisational condition of managers, workers, shareholders, suppliers, customers and so on. Looked it from this angle, the firm can be supposed to give five different goals: production, inventory, sales, market share and profit goals.

    Implications to the Cyert March Model For Price Behaviour

    They illustrate the key processes at work in an oligopolistic firm when it makes its decisions on price, production and sales and three basic decisions to make on price, output and sales effort in each time period. It takes into consideration the firm’s environment at the beginning of each period which reflects its past experience. Its aspiration levels are modified in the light of this experience. The organisational slack is the difference between total available resources and total necessary payments to members of the coalition. Price is sensitive to factors influencing increases and decreases in the amount of organisational slack to feasible reductions in expenditure on sales promotion and to changes in profits goals.

    Each firm is assumed to estimate its demand and production costs and choose its output level. If this output level does not yield the aspired level of profits, it searches for ways to reduce costs, re-estimate demand and if required to lower its profit goal.  If the firm is prepared to lower its profit goal, it will readily reduce its price. Thus the price is found to be sensitive to factors affecting costs due to the close relationship between prices, costs and profits.

Criticisms

  1. Economists have asked: ‘Whether it is a theory at all? It deals with particular cases whereas a theory is expected to be general approximation of the behaviour of firms. Its empirical base is too limited to provide the details of theorising. Hence its falls as a theory of the firm.
  1. The behavioural theory relates to duopoly firm and fails as the theory of market structures.
  1. The theory does not consider either the conditions of entry or the effects on the behaviour of existing firms of a threat of potential entry by firms.
  1. The behaviour theory explains the short-run behaviour of firms and ignores their long run behaviour.

Conclusion

Despite these criticisms the behavioural theory of Cyert and March is an important contribution to the theory of the firm which brings into focus multiple, changing and acceptable goals in managerial decision making.

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