Introduction

An important influence over the allocation of resources in markets is the supply decisions firms make. Those supply decisions are based on the objectives businesses set when they are producing in different markets. There are a variety of different business objectives firms are influenced by when they are making a supply decision and the importance of these different objectives will vary between producers and markets.   

Profit maximisation

Profit maximisation is a central theme of classical economic theory. Classical economists believe that business decision-making is guided primarily by an entrepreneur’s desire to achieve the highest possible profit their firm can make from producing its goods and services. Profit is important to entrepreneurs because it is the reward they earn from the risk of setting up and starting their business. We know that profit maximisation as a business objective is crucial in guiding the allocation of resources in free markets through the incentive function of price.

Profit as an aim influences business decision-making across different markets and between businesses of different sizes. For example, profit will affect producer decision-making from a small firm operating as a sole trader right the way up to a large multinational company that distributes its profit in the form of dividends to its shareholders.  For example, a local takeaway restaurant run by family owners might aim to make a profit of $50,000 per year whereas fast-food multinationals like McDonald's might aim for a profit of several billion dollars.

The aim of profit maximisation has important implications for business decision-making. Producers in a market will set price and output that achieves the revenue and costs which give them the highest level of profit. This might mean, for example, a bicycle manufacturer using advertising and promotion to achieve the highest level of demand possible and negotiating the lowest price possible for the raw materials and components it uses in production.

Corporate social responsibility aims

Corporate social responsibility (CSR) is a set of business objectives based on environmental, ethical and social factors. Many firms set environmental objectives because they have to follow government regulations. This is particularly the case in industries such as energy and agriculture where production can have a significant impact on the environment. Large numbers of firms also adopt environmental objectives because it is important to their stakeholders such as employees, customers and shareholders. The oil companies Shell and BP have, for example, set the objective of achieving carbon-neutral production by 2050.

Many businesses often target the environment with one eye on sales and profits because having an environmental outlook gives them a positive image in the mind of the consumer. Airlines, for example, have a negative reputation for carbon emissions and might take action to offset carbon emissions and promote their environmental aims as a selling point to consumers.

An ethical objective is where a business makes decisions to achieve positive moral outcomes. Starbucks, for example, buys Fair Trade coffee from suppliers in developing countries where low-income farmers are paid a premium for their output to give them a better quality of life. Some firms have an ethical outlook because of the philanthropic outlook of their owners.

Microsoft owner, Bill Gates, has set up a $50 billion foundation to support healthcare and education in developing countries. In a similar way to environmental objectives, ethical aims often give an organisation a positive image in the mind of the consumer which can help sales and profits.

Market share

Market share is the percentage of total market revenue an individual firm's revenue accounts for. It is calculated as:

individual firm’s total revenue/market’s total revenue x 100 = individual firm’s market share

If, for example, a firm's total revenue is $25 million and total market revenue is $200 million then the market share would be:

$25m / $200m x 100 = 12.5%

Increasing market share is a useful objective for businesses to judge their relative performance compared to other firms in the same industry. If a business' market share rises then it suggests its performance is better than its competitors. Coca-Cola, for example, might judge its performance based on its market share of 43 per cent of the US soft drinks market as compared to Pepsi's 23 per cent share. Market share is an effective measure of relative performance whatever the market conditions. A business might have falling revenue, but its performance might be good if total market sales are falling in a recession.

Increasing market share can also be useful to a firm looking to achieve greater market influence. A strong market share position might allow a firm to influence the market price, have promotional power over consumers and give it greater bargaining power when dealing with suppliers. The French supermarket retailer Leclerc, for example, has the largest share at 21 per cent, of the supermarket industry in France. This makes its presence very strong in the mind of French consumers and this gives it a strong bargaining position with its suppliers.

Satisficing

Satisficing is where a business sets an aim that is satisfactory rather than optimal. Instead of trying to maximise profits, a firm might set an acceptable profit objective. The firm can then meet the needs of its shareholders as well as its other stakeholders such as its employees and the local community.

The owner of a small business that makes computer games may, for example, aim for a comfortable living for themselves and their small team of game designers ahead of maximising profits. Satisficing might give them time to enjoy a good quality of life, although there will be an opportunity cost in terms of lower profits and wages.

Business Growth

For many firms, the growth of their profit, revenue and market share is a key objective because it represents progress. A business that is reaching more customers, operating in more countries and has a higher asset value is often seen as successful in terms of growth. This is closely linked to profit maximisation but it is not quite the same. A firm, for example, may look to discount its products to achieve sales growth at the expense of short-term profitability.