Business objectives guide a firm’s decisions and strategies, shaping how it operates, competes, and interacts with stakeholders in various market environments.
Understanding business objectives
Business objectives are the targets or aims that firms strive to achieve. These objectives shape corporate strategy and decision-making, influencing everything from pricing to investment and staffing. While generating profit is a universal concern for businesses, the exact objective a firm pursues can differ significantly depending on its size, structure, stage in the business lifecycle, market environment, and stakeholder interests.
The most common objectives explored at A-Level include profit maximisation, revenue maximisation, sales maximisation, and satisficing. Each of these has distinct characteristics, advantages, and implications for both firms and the wider economy.
Profit maximisation
Definition and explanation
Profit maximisation occurs when a firm seeks to achieve the highest possible difference between total revenue (TR) and total cost (TC). In marginal terms, profit is maximised at the point where:
Marginal Cost (MC) = Marginal Revenue (MR)
This condition means that the firm is producing at the optimal output level: if it were to produce one more unit beyond this point, the cost of producing that unit would exceed the revenue it generates, thereby reducing overall profit.
Firms use marginal analysis to determine the precise point at which profits are maximised. This often involves plotting cost and revenue curves and identifying the point where the MC curve intersects the MR curve from below.
Rationale for pursuing profit maximisation
Returns to shareholders: For public companies, maximising profit ensures higher dividend payments and potentially higher share prices, both of which attract investors.
Capacity for reinvestment: Profit provides the internal funding required for innovation, product development, marketing campaigns, and capital investment.
Survival and stability: During economic downturns or periods of rising costs, high profits can provide a buffer to help the firm survive.
Measurement of efficiency: A profit-maximising firm is generally assumed to be efficiently allocating its resources, thus contributing to productive efficiency in the wider economy.
Revenue maximisation
Definition and explanation
Revenue maximisation is when a firm seeks to maximise its total revenue, rather than its profit. This occurs when:
Marginal Revenue (MR) = 0
At this point, any additional units sold do not add to total revenue, since the decrease in price needed to sell an extra unit is exactly offset by the additional quantity sold. The MR curve crosses the x-axis when MR = 0, and this corresponds to the peak of the Total Revenue (TR) curve.
Although this objective does not focus on profit, it can be strategically useful in particular market conditions.
Rationale for pursuing revenue maximisation
Increasing market share: Lower prices and higher output can attract new customers and help the firm dominate the market, especially important for firms aiming for long-term expansion.
Deter entry: By lowering prices and boosting output, established firms may limit the profitability of the market for potential new entrants (a form of predatory pricing strategy).
Performance-based pay: In some firms, management compensation is linked to revenue rather than profit, incentivising revenue-focused behaviour.
Access to credit: Higher revenue figures can make firms appear financially stronger to banks and investors, even if profit margins are slim.
Sales maximisation
Definition and explanation
Sales maximisation refers to the objective of selling as many units of a product as possible while still covering all costs. The condition for this is:
Average Revenue (AR) = Average Cost (AC)
At this point, the firm is earning normal profit – that is, it is covering all explicit and implicit costs, including the opportunity cost of capital. No economic (supernormal) profit is being made, but the business remains financially viable.
Sales maximisation focuses more on volume sold than on profitability and is often a strategy used in competitive markets or early stages of a firm’s development.
Rationale for pursuing sales maximisation
Boosting market dominance: A high volume of sales helps establish a brand and can lead to economies of scale, reducing long-term average costs.
Management motives: Managers might be more concerned with growing the business's scale, prestige, or influence, even if profits are not maximised.
Consumer lock-in: High sales can help create customer loyalty or establish network effects that discourage switching to competitors.
Maintaining employment: In firms where job security is valued, sales maximisation can help ensure full utilisation of the workforce.
Satisficing
Definition and explanation
Satisficing is a behavioural objective where firms aim for an acceptable or “satisfactory” level of profit rather than the maximum possible. This concept was introduced by economist Herbert Simon and reflects the idea that firms may settle for satisfactory outcomes rather than optimising, due to limitations in time, information, or decision-making capacity.
This behaviour is especially likely to occur in firms where ownership and control are separated, such as in large corporations where shareholders (principals) own the firm but managers (agents) run it. This situation gives rise to the principal-agent problem, where managers might pursue their own interests, such as reducing stress or increasing job security, rather than strictly focusing on maximising shareholder value.
Rationale for satisficing
Avoiding risk: By not pushing for maximum profits, firms may avoid riskier strategies that could jeopardise the company.
Multiple stakeholders: Firms must often balance the interests of shareholders, employees, customers, suppliers, and regulators. A satisficing approach allows them to maintain harmony among these groups.
Pragmatism: In real-world conditions, firms may lack the perfect information or computational power to determine the exact profit-maximising output level, making satisficing a more realistic goal.
Long-term stability: Satisficing may help firms maintain steady growth and minimise the impact of fluctuations in demand, costs, or market trends.
Why firms pursue different objectives
Market structure
Different types of markets create varying incentives for firms:
Perfect competition: Firms are price takers and have no control over market price. The objective here is typically survival and efficiency.
Monopolistic competition: Firms may focus on sales or revenue maximisation to build brand loyalty and stand out.
Oligopoly: In markets with a few dominant firms, objectives may shift toward strategic positioning and non-price competition. Firms might prioritise growth or reputation over short-term profit.
Monopoly: Firms with market power may focus on profit maximisation due to limited competition.
Time horizon
Firms often change objectives depending on their short-term or long-term priorities.
Short-term goals might include:
Revenue maximisation to impress investors or meet sales targets.
Sales maximisation to clear inventory or dominate seasonal markets.
Long-term goals often involve:
Sustainable profit maximisation for future investment and development.
Building consumer trust and brand loyalty, which may require satisficing or ethical objectives in the short run.
Competition
High competition can force firms to lower prices and focus on growing market share through sales or revenue maximisation.
Low competition allows greater pricing power, making profit maximisation more feasible.
Business lifecycle stage
The lifecycle stage of a firm strongly influences its primary objective:
Start-up stage: Focus is typically on survival, gaining customers, and building brand awareness – often linked with sales or revenue maximisation.
Growth stage: Objectives shift toward expansion and capturing market share.
Maturity: Firms stabilise and tend to prioritise long-term profit and efficiency.
Decline: Some firms may return to satisficing to maintain operations or consider demerging or exiting the market.
Stakeholder pressure
Shareholders want dividends and rising share prices, pushing for profit maximisation.
Employees value job security, fair wages, and working conditions, which may be prioritised under satisficing or ethical objectives.
Consumers influence objectives through their preferences for price, quality, and corporate responsibility.
Government and regulators may encourage firms to consider social and environmental goals over pure profit motives.
Firm size and ownership structure
Role of firm size
Small firms tend to have more limited objectives focused on:
Survival
Consistent income
Customer loyalty
Large firms may have more resources and a broader strategic focus, allowing for:
Long-term profit strategies
Market expansion
Corporate social responsibility (CSR) initiatives
Large firms may also face more scrutiny from regulators, consumers, and investors, which influences their objective-setting processes.
Separation of ownership and control
In many large firms, ownership is held by shareholders, while control lies with executives and managers. This separation can lead to conflicting interests:
Principals (owners) want maximum return on investment.
Agents (managers) may value job security, lower workloads, or perks like bonuses, offices, and prestige.
This misalignment is known as the principal-agent problem. To mitigate it, companies may use:
Performance-based bonuses
Share options for managers
Regular performance reviews
These mechanisms aim to align managerial objectives with those of the shareholders.
Shifting objectives over time
Firms are dynamic entities, and their objectives can shift in response to both internal and external changes.
External changes
Economic cycles: During a recession, a firm might abandon profit maximisation in favour of cost-cutting or sales boosting.
Technological disruption: New technology may force a firm to prioritise innovation and long-term growth over short-term profits.
Regulatory changes: New laws may push firms toward ethical or environmental goals, requiring satisficing or even rebranding.
Internal developments
Leadership change: A new CEO or board may bring in different values and strategic goals.
Mergers or acquisitions: These often result in shifts toward synergy realisation, efficiency gains, or market share goals.
Cultural evolution: Over time, a firm may shift from a profit-driven to a purpose-driven culture, particularly in response to stakeholder expectations or public scrutiny.
Differences by firm type
Family-run firms: May prioritise legacy, employee welfare, and community over short-term profits.
Publicly listed firms: Often under pressure from investors to deliver quarterly results, pushing them toward profit maximisation.
Social enterprises: Frequently use satisficing to balance income generation with social impact.
FAQ
Business objectives significantly affect pricing strategies, particularly depending on whether the firm is in perfect competition, monopolistic competition, oligopoly, or monopoly. A profit-maximising firm in a monopoly might set a high price above marginal cost to extract consumer surplus, whereas a revenue-maximising firm might lower price to increase total revenue until marginal revenue reaches zero. In oligopolistic markets, pricing may be strategic; for example, firms might set lower prices to deter entry if pursuing sales maximisation. Alternatively, firms seeking long-term brand reputation or aiming for customer loyalty may keep prices relatively stable, even if this limits profit, as seen in satisficing firms. In monopolistic competition, businesses might use pricing to differentiate themselves and attract niche customer segments. Objectives like growth or survival may push prices below the average cost in the short term, while firms with limited market power—especially in highly competitive markets—have to take market price as given and may use non-price competition instead. Pricing is, therefore, a key operational decision shaped by both market context and internal business aims.
Firms may avoid profit maximisation in the short run for strategic, operational, or ethical reasons. A common reason is to avoid drawing attention from regulators or new entrants—maximising profits could signal high profitability and attract competition, particularly in contestable markets. Firms may also want to prioritise customer loyalty or employee satisfaction, both of which could be undermined by aggressive profit-seeking behaviour such as high prices or cost-cutting. In early growth phases, firms might reinvest potential profits into product development, brand awareness, or expanding capacity. Satisficing is also common where the principal-agent problem exists; managers may pursue stability or gradual growth over maximising short-term profits to reduce workload or avoid risk. Moreover, profit maximisation strategies may require price increases or staff cuts that could damage long-term reputation. In some industries, such as tech start-ups, firms intentionally operate at a loss to build user bases and gain market power, choosing to delay profitability until dominance is achieved.
The choice of business objective can significantly influence both productive and allocative efficiency. In the short term, a shift away from profit maximisation might reduce productive efficiency if resources are not allocated in the most cost-effective way—for instance, a sales-maximising firm may produce beyond the optimal output level, increasing average costs. Similarly, a satisficing firm might tolerate underperformance in some departments if minimum targets are met. However, in the long run, changing objectives could improve dynamic efficiency. For example, if a firm focuses on growth, reinvestment into R&D and innovation could lead to better products and cost reductions over time. Alternatively, if ethical or environmental targets are pursued, firms may innovate to meet regulatory standards, indirectly enhancing long-term competitiveness. However, repeated shifts in objectives can cause managerial confusion, misaligned incentives, and resource misallocation, undermining consistency and strategic direction. Therefore, while short-term efficiency may suffer under non-profit objectives, long-term gains may arise depending on execution and industry context.
Satisficing is most likely in firms where ownership and control are separated, such as large corporations with a board of directors and shareholders, but where day-to-day decisions are made by salaried managers. In these cases, managers may not have direct incentives to maximise profit and instead pursue objectives that meet minimum shareholder expectations while aligning with personal interests like job security or work-life balance. Satisficing is also common in businesses facing uncertainty, where exact optimisation is impractical due to lack of information, time constraints, or rapidly changing market conditions. Another scenario involves firms with strong social or environmental commitments—such as social enterprises or B-Corps—where the aim is to balance multiple stakeholder interests rather than focus solely on financial returns. Family-owned businesses may also satisfice to prioritise long-term survival, family employment, or community engagement. In highly regulated industries, such as utilities, firms may satisfice by maintaining acceptable standards and returns rather than pushing boundaries.
Stakeholder pressures often result in firms adopting hybrid or evolving objectives to accommodate varying and sometimes conflicting interests. For instance, shareholders may demand high returns, pushing firms towards profit maximisation, while employees may prioritise job security and fair wages, which may require higher operating costs and reduced profit margins. Consumer preferences may drive ethical or sustainability-focused objectives, especially in sectors like fashion or food retail, where transparency and corporate responsibility affect brand loyalty. Government regulations and public opinion may influence firms to comply with environmental standards, even if it lowers short-term profitability. Moreover, financial institutions might pressure firms to maintain strong cash flow and creditworthiness, leading to a temporary focus on liquidity rather than expansion. These competing demands can cause firms to shift from one objective to another over time, especially during major events like leadership change, economic shocks, or industry disruption. The result is a dynamic objective-setting process shaped by the continuous negotiation of stakeholder expectations.
Practice Questions
Explain why a firm might choose to pursue sales maximisation rather than profit maximisation.
A firm may choose sales maximisation to increase its market share, deter potential entrants, or benefit from economies of scale. By maximising the quantity sold while still earning normal profit (where average revenue equals average cost), the firm can expand its customer base and potentially reduce per-unit costs over time. In cases where managerial objectives differ from shareholders’ profit goals, managers may favour sales growth to boost their influence or job security. This is especially common in large firms where ownership and control are separated, contributing to satisficing behaviour and the principal-agent problem.
Assess the potential impact on stakeholders when a firm switches its objective from profit maximisation to satisficing.
Switching from profit maximisation to satisficing can impact stakeholders in varied ways. Shareholders may be dissatisfied due to lower returns, while employees may benefit from improved working conditions if managerial focus shifts towards staff welfare. Consumers might enjoy better service or ethical practices, especially if environmental or social objectives are prioritised. However, the firm’s long-term investment capacity could reduce if profits fall significantly, potentially harming growth. The impact depends on stakeholder priorities and the extent of the trade-off. In firms with significant stakeholder influence, satisficing can improve balance and long-term sustainability, though possibly at the cost of efficiency.
