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Many Economists and managerial Scientists in our days question that the sole aim of a firm is the maximisation of profits.

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Introduction

"The increased rate of merger activity both nationally and internationally suggests that many enterprises will adopt a multi-divisional internal structure. The implication of this divisionalisation must be that modern business firms are more likely to adopt goal pursuits and least cost behaviour associated with the neo-classical profit maximisation hypothesis." Many would make the basic assumption that firms are in business for a simple reason: To make money. Traditional economic theory suggests that firms make their decisions on supply and output on the basis of profit maximisation. However many Economists and managerial Scientists in our days question that the sole aim of a firm is the maximisation of profits. These economists suggest that there are a number of other objectives that are important to a business. Personal motives may be important, especially where the manager is also the owner of the firm. In this case emphasis may be placed on good employee relations and the welfare of the workers. Divorce of ownership from control in modern day businesses has challenged the traditional theory of economists that profit maximisation is the main objective. Many businesses, especially those involved in merger activity are beginning to move away from the traditional U (unitary) ...read more.

Middle

There are many alternative to the neo-classical profit maximisation theory that challenges their ideas. Sales Revenue Maximisation is one of these alternatives. This objective was initially developed by the work of Baumol (1959). Baumol's research focused on the behaviour of manager-controlled businesses - where the day-to-day decisions taken by managers are divorced from the shareholders (the owners of the business). Baumol argued that annual salaries and other perks might be more closely correlated with total sales revenue rather than profits. It could be argued that if your sales are maximised then your revenue is likely to rise at a faster rate than your costs (as you can exploit economies of scale more) and the end result of this is likely to be an increase in profits. Another alternative view was put forward by Williamson (1963), who built a model based on the concept of managerial satisfaction (utility). This model is similar to Baumol's sales revenue maximisation in the sense that managers try to maximise their own utility subject to some profit constraint. Managerial utility includes high salaries, perks, status, and power and job security. These factors provide the basis for managers to spend money on staff. ...read more.

Conclusion

As we have seen most of the short-term objectives such as sales revenue maximisation, are very important short-term objectives but tend to inevitably lead to higher profits in the long term. With multi divisional organisations it is easier for the executives to aim for profit maximisation as they entrust the day to day running to the separate departments who are responsible for the main decisions whilst being advised by the top level management. To conclude I would accept that although business have shorter term objectives and are working within constraints which may threaten maximisation theories, it is clear that very few business would continue to operate with no profits. Firms can enjoy the incentive of higher profits if they can attract sufficient consumers to buy their products, and so I would accept that as short-term objectives those such as sales maximisation cannot be ignored. However the traditional neo-classical approach of profit maximisation seems to be the underpinning of almost every organisation regardless of size or status. Having said that I feel that it would be unwise of businesses to completely disregard the behavioural model as its foundations are built on achieving realistic results in a firm, as so it should be seen as a useful complement to the maximisation theories rather than as a substitute for them. ...read more.

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