Chapter 7: The Price System and the Microeconomy

Business Objectives

Economists would love to believe that owners and managers of businesses would
be exclusively “profit maximisers”, as this would reinforce their logic that we are
all motivated in a rational and self-centred manner. But in the real world, owners,
workers, and consumers do not always act “rationally” and they do not always
follow the laws of economics.
Firms may pursue a variety of objectives that may compliment profit
maximisation, such as revenue maximisation, and sales maximisation. The best
example of this was amazon.com. The CEO of Amazon, Jeff Bezos, spent the first
20 years of the company’s existence breaking even. Profits were not made and
revenue was maximised. Everything was done to increase the number of loyal
customers to Amazon, and if that meant being price aggressive and seeking
market domination, then that was the strategy. Even after “going public” and
issuing an IPO (going onto the stock exchange), there were never any dividends
distributed. Profits were ploughed back into the business to enable it to
maximise growth and to build up consumer loyalty in the long term. Eventually,
when Amazon had successfully destroyed the competition, they slowly increased
prices to maximise their profits and Jeff Bezos is today one of the richest persons
in the world. His strategy of short run revenue maximisation and long run profit
maximisation seems to have worked.
The question of what motivates a firm in its actions can only be answered if there
is a clear understanding of who controls the decision making process. This control
is likely to lie with one or more of the firm’s stakeholders. This may be the
owners or shareholders, the directors and managers, the workers and the trade
unions, the government, or the consumer. Each stakeholder is able to put
pressure on the company and have influence on different aspects of the business.
Some companies are satisfied with sales maximisation, particularly if the owners
are satisfied with normal profits and consider that sales volume is a measure of
the size of a firm. Managers will focus on increased sales in order to justify
increased salaries and rewards.
Other objectives include “satisficing”, survival, stability, efficiency, market share,
manager perks, and quality maximisation.

Satisficing refers to the strategy of some businesses that will promote a strategy
where the employees do just enough work not to get fired or to be criticised. This
can exist when there is poor leadership in the business and the workers have little
guidance or little motivation as to how to improve the company.
Perks refers to extra benefits that some employees receive like company cars or
paid private education for children of managers. This cynical approach to running
a business clearly exists when managers have no concern or interest in
maximising the profits for the owners. To counter this, owners often offer the
managers profit sharing or stock options as an extra bonus when the company
improves their profitability.

Questions: