2.10 OBJECTIVES OF A FIRM
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Conventional economic theory states that firms will always aim to maximise the level of profit that they can obtain. But in reality, firms, no matter what size, have a wide range of objectives. Examples of other objectives are:
· Revenue maximizing
· Long run profit - willing to give up short run profit in return for larger profits in the long run
· Growth maximizing – growing as large as they can. This may involve mergers and takeovers.
· Surviving – especially when there is a recession or if the firm has just started trading
· Ethical business objective – reducing their carbon footprint, paying suppliers more through fair trade, donating to charity; anything to do with corporate social responsibility.
Firms with different objectives will behave differently. Firms who want to maximise growth won’t care about the environment as much as a firm who wants a zero carbon footprint or something similar.
Firms will always try to compete with each other to gain more sales thus increasing their profit. Price is a key way that firms compete. Competition can cause companies to innovate their production process in order to reduce their average costs, which can then be passed onto consumers through lower prices. However, price is not the only way firms can compete. They can compete through:
· Quality – or guarantees for products
· Innovation – new ideas to improve their product, which makes them slightly better than their competitors. These are slight product differences that mean consumers will prefer one good to another.
· Promotions – special offers or money off for other products such as Kellogg’s buy one get one free for days out
· Advertising
· Branding and getting it endorsed by celebrities
· Building brand loyalty
· The social responsibility of a firm – some people choose to shop at places because they are more ‘socially responsible’
· Revenue maximizing
· Long run profit - willing to give up short run profit in return for larger profits in the long run
· Growth maximizing – growing as large as they can. This may involve mergers and takeovers.
· Surviving – especially when there is a recession or if the firm has just started trading
· Ethical business objective – reducing their carbon footprint, paying suppliers more through fair trade, donating to charity; anything to do with corporate social responsibility.
Firms with different objectives will behave differently. Firms who want to maximise growth won’t care about the environment as much as a firm who wants a zero carbon footprint or something similar.
Firms will always try to compete with each other to gain more sales thus increasing their profit. Price is a key way that firms compete. Competition can cause companies to innovate their production process in order to reduce their average costs, which can then be passed onto consumers through lower prices. However, price is not the only way firms can compete. They can compete through:
· Quality – or guarantees for products
· Innovation – new ideas to improve their product, which makes them slightly better than their competitors. These are slight product differences that mean consumers will prefer one good to another.
· Promotions – special offers or money off for other products such as Kellogg’s buy one get one free for days out
· Advertising
· Branding and getting it endorsed by celebrities
· Building brand loyalty
· The social responsibility of a firm – some people choose to shop at places because they are more ‘socially responsible’