Business Objectives

This section explains business objectives, covering the different business objectives and the reasons for them. 

Different Business Objectives and Reasons for Them

Businesses set specific objectives to guide their operations and strategies. These objectives can vary depending on the type of business, its market position, and the goals of its owners or managers. Here are the key business objectives and the reasons behind them:

Profit Maximisation:

• Definition: Profit maximisation occurs when a business seeks to achieve the highest possible profit by equating marginal cost (MC) with marginal revenue (MR). This is the point where the difference between total revenue and total costs is the greatest.
• Reason: The primary goal of many firms, particularly private sector businesses, is to maximise profits. This allows for greater returns to shareholders, reinvestment into the business, and the ability to expand and improve the firm’s competitive position.
• Formula: Profit = Total Revenue (TR) − Total Costs (TC)
• Example: A large corporation, such as Apple, may focus on profit maximisation in order to increase returns to shareholders and reinvest in research and development.

Revenue Maximisation:

• Definition: Revenue maximisation occurs when a business seeks to maximise total revenue, which is the total amount of money received from selling goods or services. The objective is to increase revenue as much as possible, even at the cost of profitability.
• Reason: Some firms may aim to maximise revenue rather than profit for reasons such as increasing market share, establishing a strong presence in the market, or creating economies of scale. For example, firms in highly competitive industries may use revenue maximisation to push out competitors or secure long-term market dominance.
• Formula: Total Revenue (TR) = Price (P) × Quantity (Q)
• Example: An airline may adopt a revenue maximisation strategy by reducing prices to increase the number of passengers, even if this results in lower profit margins in the short term.

Sales Maximisation:

• Definition: Sales maximisation occurs when a business aims to increase the volume of sales as much as possible, typically in the short term. Unlike revenue maximisation, which focuses purely on revenue, sales maximisation looks at the quantity sold, sometimes at the expense of profitability.
• Reason: Sales maximisation can be useful for firms looking to increase market share, build brand recognition, or clear excess stock. This strategy might also be employed by businesses in competitive markets where increasing sales is crucial to maintaining a market position.
• Example: A company might use sales maximisation when it launches a new product and wants to establish a strong customer base by rapidly increasing sales volume, even if it means offering discounts or lower prices.

Satisficing:

• Definition: Satisficing occurs when a business sets its objectives to achieve "good enough" results, rather than trying to maximise profit, revenue, or sales. This involves aiming for a level of performance that meets the needs of the owners, managers, and other stakeholders without pursuing aggressive or extreme growth.
• Reason: Satisficing is often adopted by smaller firms or businesses with owners who are risk-averse or do not want to pursue highly ambitious objectives. The focus is on achieving a balance between profit, employee satisfaction, and business stability. It allows for flexibility and less stress on achieving high performance targets.
• Example: A small, family-run business may be content with steady profits that provide enough income for the owners without pursuing significant expansion or intense competition.

Formulae to Illustrate the Different Business Objectives

Below are formulae used to illustrate profit maximisation, revenue maximisation, and sales maximisation.

Profit Maximisation:

Diagram: Profit maximisation occurs at the level of output where the difference between Total Revenue (TR) and Total Costs (TC) is greatest. This point is where Marginal Revenue (MR) equals Marginal Cost (MC).

Formula:

$$\text{Profit Maximisation Condition:} \quad MR = MC$$ 

Revenue Maximisation:

• Diagram: Revenue maximisation occurs when the Marginal Revenue (MR) curve hits zero. This is the point where the firm maximises total revenue, regardless of whether profit is maximised.

Formula:

$$\text{Revenue Maximisation Condition:} \quad MR = 0$$ 

Sales Maximisation:

Diagram: Sales maximisation occurs when the firm aims to sell as many units as possible. This can be illustrated by a focus on increasing the quantity of goods sold while possibly reducing prices to stimulate demand.

Formula:

$$\text{Sales Maximisation Objective:} \quad \text{Maximise quantity sold at a given price}$$ 

Summary

• Profit Maximisation occurs where marginal revenue equals marginal cost (MR = MC), and it is the primary goal of most businesses aiming for long-term sustainability.
• Revenue Maximisation is achieved when marginal revenue equals zero (MR = 0) and is pursued by firms wanting to increase revenue at the expense of profit.
• Sales Maximisation aims to sell as many units as possible, often through price reductions, which could result in lower profit margins but higher sales volumes.

Each of these objectives has different strategic implications for a business, and the choice of which objective to pursue depends on the firm’s market position, financial goals, and the preferences of its owners or managers.