firm objectives

firm objectives

an element of MARKET CONDUCT that denotes the goals of the firm in supplying GOODS and SERVICES. In the traditional THEORY OF THE FIRM and the THEORY OF MARKETS, in order to facilitate intermarket comparisons of performance, all firms, whether operating under conditions of PERFECT COMPETITION, MONOPOLISTIC COMPETITION, OLIGOPOLY or MONOPOLY, are assumed to be seeking PROFIT MAXIMIZATION. More recent contributions to this body of theory have postulated a number of alternative firm objectives, including SALES-REVENUE MAXIMIZATION and ASSET-GROWTH MAXIMIZATION In these formulations, profits are seen as contributing to the attainment of some other objective rather than as an end in themselves.

Other economists have drawn attention to the fact that the presence of uncertainty and incomplete information in most market situations means that profit maximization, in the way depicted in the theoretical models, is unattainable and that in practice ‘real world’ firms use more pragmatic performance targets to guide their actions.

For example, Philips, the electrical products company (2004), aims to achieve a 20% return on capital employed, while other companies are concerned to enhance shareholder value. In the case of the food and drinks group Cadbury Schweppes (1998–2003): ‘Our primary objective is to grow the value of the business for our shareholders. “Managing for Value" is the business philosophy which unites all our activities in pursuit of this objective. The objective is quantified. We have set three financial targets to measure our progress: 1. To increase our earnings per share by at least 10% every year; 2. To generate £150 million of free cash flow every year; and 3. To double the value of our shareholders’ investment within four years.’

Other companies express their objectives in more general terms, citing the creation of shareholder value as their main aim but also a concern for other STAKEHOLDER interests (employees, customers, the ‘community’ at large (see SOCIAL RESPONSIBILITY)). For example, Prudential, the insurance group (2003): ‘Our commitment to the shareholders who own Prudential is to maximize the value over time of their investment. We do this by investing for the long term to develop and bring out the best in our people and our business to produce superior products and services, and hence superior financial returns. Our aim is to deliver top quartile performance among our international peer groups in terms of total shareholder returns. At Prudential our aim is lasting relationships with our customers and policyholders, through products and services that offer value for money and security. We also seek to enhance our company's reputation, built over 150 years, for integrity and for acting responsibly within society.’ BG, the gas exploration and production company, state (2003): ‘We aim to achieve good returns for our shareholders whilst providing a good service to our customers and contributing to the economies of the countries in which we operate.’

Also instructive are the objectives that are set to trigger awards to company executive directors (i.e. those persons responsible for determining company objectives and policies) under EXECUTIVE STOCK OPTION SCHEMES. For example, Whitbread, the leisure company (2003), requires that the company's earnings per share growth is greater than the increase in the RETAIL PRICE INDEX by at least 12% over three years. See MANAGERIAL THEORIES OF THE FIRM, DIVORCE OF OWNERSHIP FROM CONTROL, BEHAVIOURAL THEORY OF THE FIRM, SATISFICING THEORY, MANAGEMENT UTILITY MAXIMIZATION, MISSION STATEMENT, CORPORATE GOVERNANCE, LONG-TERM INCENTIVE PLAN, PRINCIPAL-AGENT THEORY.

Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005
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