A

Presentation
On
Corporate Growth Maximization

Presented By:
Group(D) MBA 1st
1
 Objective of firm
• A firm is an entity that combines and processes
resources (inputs or factors of production) in
order to produce output (goods or services)
that will directly or indirectly satisfy consumer
demand.
• A firm always wants to maximize their market
share with the objective of maximize the
satisfaction level of potential customer.

2
 Objective of firm
 The traditional economic theory explains the only
objective of the firm as profit maximization, which
is attained by the application of marginal
principle.
 But many modern economists have criticized the
traditional theory and put forward their views on
alternative goals. The goal deviates from profit
maximization because

3
 Firms
• The managers of firms have to make
decisions on:
what to produce;
how to produce;
what price to charge for the output produced
by the firm; and,
how to promote its product.

4
4
 Profit Maximization Objective of firm
 According to the traditional economic theories, the
objective of a firm is to maximize economic profit.

 Economic profit (p) is defined as the total revenue

(TR) less total economic cost (TC),
i.e., p = TR – TC

 Here, total revenue is the sum of money received by

the firm from the sale of the output produced by the
firm.
5
 Profit Maximization
TR, TC TC
B TR
M

A N

O Q1 Q2 Q3 Q

6
 Profit Maximization
• Economists use the marginal cost and marginal
revenue to find the level of output for which, the
profit is maximum.
• The profit for a firm is maximum when its
marginal cost curve intersect the marginal
revenue curve from below.
• In other words, the profit maximizing condition
requires
1. MC = MR
2. Slope of MR < Slope of MC

7
 Corporate growth Maximization
(Marris)
Maximization of Balance growth rate of firm
Owner and manager have own utility function
to maximize:

 Um =f (salary, power, job security, prestige, status)

 Uo=f (output,capital, market share, profit, public
image)

8
 Marris’s Theory of
The Managerial Enterprise(contd.)
 The owners want to maximize their utility while the
managers attempt maximization of their own utility.

 Both utilities do not necessarily clash, because the

most of the variables of both the utilities, have a strong
relationship with a single variable
i.e., size of the firm.
 It is reasonable to assume that maximizing the long-run
growth of any indicator is equivalent to maximizing the
long-run growth rate of the others.

9
 Marris’s Theory of
The Managerial Enterprise(contd.)

 Owners being interested in the growth of the firm want

maximization of the growth of the supply of capital,
which is assumed to maximize the owner’s utility.

 Managers wanting to maximize rate of growth of the

firm rather than absolute size of the firm, believe that
growth of demand for the products is an appropriate
indicator of the growth of the firm.

10
• There are two constrains in the Marris’s Model:
• 1. The Managerial Team Constraint.
Since Management is a teamwork, hiring new managers
does not expand managerial capacity immediately. New
managers take time to get integrated in the team.
Managerial team constraint sets limits to both the rate of
growth of demand and rate of growth of capital.
• 2. The Job Security Constraint. Managers want job
security. Job security attained by pursuing a prudent
financial policy which requires the three crucial financial
ratios to be maintained at optimum levels.

11
 Critically examine Marris’s Theory:

R. Marris has made a significant contribution in the form of

incorporation of the financial policies into the decision making
process of the corporate firm. His theory suggests that
although the managers and the owners have different goals, it
is possible to find a solution which maximizes utility of both.

Nonetheless Marris shows that growth and profits are

competing goals. His model implies that both managers and
owners are conscious of the fact that the firm cannot
simultaneously achieve maximum growth and maximum
profits. Marris seems to be correct in arguing that owners of
the corporate firms do prefer the maximization of the rate of
growth and for this they do not mind sacrificing some profits.
12
Thank You for your
consideration
13