Business Objectives
What a Business Objective Is
Business objective: a target a business sets itself, which guides its decisions and gives it a way to judge how well it is doing.
Economic theory usually assumes firms want the most profit they can make. Real businesses vary: a new café may simply want to get through its first year.
Profit Maximisation
Profit maximisation: producing the output and charging the price that make the gap between total revenue and total costs as large as possible.
Reasons a business might aim for it:
- Profit is the reward to the owners. In a company it pays shareholders their dividends and pushes up the share price.
- Profit kept in the business, called retained profit, is the cheapest way to pay for new equipment or expansion.
- A profitable firm finds it easier to borrow and to attract new investors.
Sales Maximisation
Sales maximisation: selling as many units as possible without making a loss, so the business at least breaks even.
To sell more, a firm usually has to charge less, so it gives up some profit per unit. Reasons it might accept that trade-off:
- A bigger share of the market makes the firm harder to ignore, for customers and for suppliers.
- Higher output can bring economies of scale, lowering the cost of each unit over time.
- Low prices can put off new firms thinking about entering the market.
- Managers' pay and status often rise with the size of the business they run, not with its profit.
Satisficing
Satisficing: aiming for a satisfactory level of profit that keeps the owners happy, instead of the most profit possible.
The main reason is the divorce of ownership and control: shareholders own a large company, but salaried managers run it. As long as profit keeps shareholders happy, managers can chase their own goals, such as a higher salary. This is the principal-agent problem, with the owners as principals and the managers as their agents.
Small businesses satisfice too. An owner may be happy with a comfortable income and decide an extra few thousand pounds of profit is not worth working every weekend.
Other Objectives
The spec lists seven more objectives. A business can hold several at once, and one usually matters most at any given time.
| Objective | What it means | Why a business might choose it |
|---|---|---|
| Survival | Staying in business: covering costs and having the cash to pay bills when they fall due. | Most important for start-ups, which often fail in their first few years, and for any firm in a recession or facing a new competitor. |
| Market share | Increasing the firm's sales as a percentage of the total sales in its market. | A bigger share can mean more influence over price, more power when bargaining with suppliers, and a brand that customers choose first. |
| Cost efficiency | Producing the same output with fewer resources, so the cost of each unit falls. | Lower costs allow lower prices or wider profit margins. This matters most where customers shop on price, as they do with budget airlines. |
| Return on investment | The profit an investment earns as a percentage of what it cost. £1,500 profit from £10,000 invested is a 15% return. | Owners and lenders compare returns when deciding where to put their money. A project earning less than a savings account is hard to justify. |
| Employee welfare | Looking after staff through fair pay, training, safe conditions and job security. | Well-treated staff tend to stay longer and work harder, which cuts the cost of recruiting and training replacements. |
| Customer satisfaction | Meeting or beating what customers expect on quality, service and value. | Satisfied customers come back and recommend the business. Online reviews make a reputation quick to build and quick to lose. |
| Social objectives | Aims that benefit society or the environment, such as cutting emissions or employing people who struggle to find work. | Some businesses exist for a social purpose. Others find a good reputation attracts customers and staff. |
How Objectives Change
Objectives shift as a business grows: a start-up focuses on survival, an established firm may chase market share, and a mature firm is more likely to target profit. A recession can push even a large firm back to survival.
Objectives can also clash: cutting prices to win market share lowers profit per unit.
Tie the objective to the business in front of you. A question about a two-month-old start-up and one about a large public company rarely have the same answer. Use the firm's age, size, ownership and market from the extract to explain why one objective fits it better than another.
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