Alternative Goals of Firms

Alternative Goals of Firms
Why not MR = MC
In theory this goal is fine but not practical in reality.
1) MR is very difficult to identify in reality. The AR and MR are based on consumer preferences,
and these are difficult if not impossible to map.
2) MC also constantly shifts so to actually stick to MR = MC requires constant minute adjustments.
This may cost more than it gains.
3) Firms need to plan ahead for budgeting purposes.
a) Therefore, output plans are not short term in nature and targets for profits / revenues
tend to be adjusted either monthly or per production run > E.g. per semester.
4) For oligopolies, sticking to MR = MC requires constant price adjustment which they tend to
avoid.
Revenue Maximization
Definition: Firm produces the qty at which TR is highest.

Rationale:
a) A firm’s targets for management could be revenue based.

Eg: The management must achieve a 20% revenue growth.
b) A firm’s ranking is based on annual earnings (revenue). E.g.: Fortune 500 rankings are based on
revenue.
Evaluation
a) Profits do matter. High revenue firms could earn relatively low profits which may share prices.
Profit ‘satisficing’
a) Profits are high enough to keep shareholders from selling their shares.
Sales Maximization
Def: Where the firm produces the highest possible quantity without making a loss.
At AR = AC, the firm only earns normal profits
Rationale:
1. In retail, the earnings of management are usually based on sales targets. E.g.: Bonuses
- Also, sales staff earn most of their income via commissions. Therefore, more sales =
more rewards.
2. The product may have a short retail life. E.g.: health supplements, miracle water filters, Life
enhancing magnetic bracelets. The salespeople must sell as fast as possible before people
realize the product does not work.
3. Products sold using multi-level marketing (MLM) methods.
- More sellers, more earnings for higher level sellers.
- Often the product itself is secondary to the recruitment of sellers.
Problem
1. Zero economic profits mean no funds for investment. This means dynamic efficiency is low and
the firm may lose touch with market trends.
2. High sales mean a high rate of production. This in turn leads to a fall in efficiency due to
equipment and worker fatigue.
Growth Maximization
Few ways of measuring growth:

- Sales volume & market share.
- Product & market diversity.
> Who do you sell to?
> How many brands are under 1 parent company?
> How many different types of goods or services?
- Number of employees.
> E.g. real estate, insurance, MLM.
- Number of franchisers.
> F&B
> Personal Care
> Pubs
- Geographical Growth. Entry into foreign markets.
Types of Growth
1. Internal (organic) growth. The company grows from within.
How?
a) Effective advertising & branding. Successful companies are those that either become household
names or those that are identified with top-of-the-line products in that industry. E.g.: Microsoft,
Meta, Alphabet, Amazon.
Household names: Pampers, MCD, KFC, Coca Cola
b) Investment in:
i) Machinery upgrades
ii) Product R&D > Dynamic efficiency
iii) Market research > Identify changing trends.
iv) Human capital > To have the most skilled workers in that industry
c) Creating a strong community presence.
This is to generate ‘goodwill.’ E.g.: Community projects > creation of libraries, parks.
Contribution to local education or healthcare. Shelters for orphans, sick kids etc.
Advantages of internal growth
- The founders of the company retain full control over the direction of the company.
- Internal growth may be more permanent because the changes are gradual so the organization
can adapt.
Disadvantages
1. Slow > may take decades for internal growth to occur.

2. There may be a limit to how big a company can grow on its own.
Exceptions: Microsoft, Walmart
External Growth
This is achieved by merging 2 or more companies. Sometimes the merger takes the form of a hostile
takeover > the target company is unwilling to merge but their shareholders are persuaded to sell.
3 Types of Ext. Growth
1) Horizontal Integration
- This is where two companies at the same steps of production in the same industry
merge. E.g.: HELP merges with Taylors. Maybank merger with RHB.
Advantages
a) To take advantage of economies of scale.

E.g. > Rationalization of workers
> Messaging distribution networks.
b) Fastest way to grow.
- Ready production facilities.
- Ready workforce.
- Existing customers.
c) Good method for overseas expansion.
- Existing management is familiar to local business culture.
- You are buying a brand that the locals already are familiar with.
Problems with Horizontal Mergers
1) Can be a complicated and expensive exercise.

- You have to pay existing shareholders a premium to entice them to sell. This is
especially so once the word gets out of the takeover.
- The legal requirements are many - register and get approval from the competition
authorities, you must hire an investment bank & lawyers to process the merger, you
have to print out prospectuses.
- Because it costs money to acquire another company, the next few years after the
merger will see lower profits because the cost must be recovered.
2) If a merger results in a combined market share of >25%. The Competition Commission may
block the merger because it creates a legal monopoly. Even if the merger is allowed, the bigger
firm will now come under scrutiny by the Competition Commission.
3) There may be industrial relations problems if there is a clash of management cultures. This in
turn may lead to lower worker morale or internal politicking which lowers efficiency.
2) Vertical integration
- Backward Vert Inter > Merging toward sources of raw materials.

- Forward Vert Inter > Merging towards consumers.
- This is when 2 companies at different stages of production in the same industry merge.
E.g.:
- Backwards - HELP merges with a private secondary school.
- Backwards - Goodyear Tyres buys a rubber plantation.
Advantages
a) Elimination of middlemen lowers the cost of production. Eg: Goodyear gets rubber at farm gate
prices; or Goodyear can sell tyres at ‘Factory Gate’ levels.
b) Steady source of inputs and/or a ‘captured market.’ Eg: If a brewery buys a pub, the customers
of that pub must consume the brewer’s products.
c) The manufacturer can ensure the product sold to the consumer is of a certain quality. This
increases the value of the brand. Eg: Tied pubs tend to serve better quality beer that is not
recycled or watered down.
Disadvantages
a) The firm is buying into different types of business expertise. They may not run the acquired
company efficiently. (This applies to conglomerate mergers as well.)
3) Conglomerate Merger
a) When 2 companies in different industries merge. Eg: HELP buys a restaurant chain.
Rationale:
a) Diversification of business. Lessen the risk of over dependence on 1 industry.

b) Economies of scope. The knowledge or products of 1 company can enhance that of the other.
Problem:
a) No expertise in the acquired company’s industry increases the risk of failure.

b) Over diversification causes the brand to lose its focus

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Alternative Goals of Firms

Definition: Firm produces the qty at which TR is highest.

a) A firm’s targets for management could be revenue based.

Few ways of measuring growth:

1. Internal (organic) growth. The company grows from within.

1. Slow > may take decades for internal growth to occur.

a) To take advantage of economies of scale.

1) Can be a complicated and expensive exercise.

- Backward Vert Inter > Merging toward sources of raw materials.

a) Diversification of business. Lessen the risk of over dependence on 1 industry.

a) No expertise in the acquired company’s industry increases the risk of failure.

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