business objectives

business objectives

The firm may pursue a single objective or multiple objectives; objectives may be operationalized in ‘maximization’ or ‘satisfactory’ target level terms; the time frame in which objectives are pursued may be short term or long term. Thus, it can be seen that objective-setting can be a complex matter, Critical factors affecting the setting of objectives include who controls decisionmaking in the firm, and the various constraints – institutional, financial and environmental, etc. – impinging upon this process.

Economic theories of the firm emphasize that firms which are owner -controlled will tend to pursue single period or multi-period profit maximization; likewise, theories of finance suggest that the operational goal of the firm will be to maximize the value of the firm (shareholders' wealth) over the long term. Firms which are management-controlled will tend to pursue objectives such as multi-period sales revenue maximization and asset growth maximization. In this latter case, although shareholders are the owners of the firm, there is a de facto ‘divorce of ownership from control’ enabling the appointed representatives of the shareholders, namely members of the Board of Directors, to make the key decisions affecting the firm's business. In general, shareholdings are too fragmented and shareholders, as ‘outsiders’, are too remote from the seat of power to be able to exercise control over the business, thus leaving the incumbent managers relatively free to run the company as they see fit. Obviously shareholders' interests cannot be ignored (i.e. directors can be removed at the ANNUAL GENERAL MEETING (AGM) if the firm is badly managed and dividends are not paid). However, within this constraint managers will be able to set objectives which enhance their own interests; sales revenue maximization and asset growth maximization objectives, it is argued, result in ‘bigger’ firms – big firms pay higher salaries to managers and accord them power and status.

An alternative framework to the largely normative maximization view of objective setting is provided by the ‘organizational’ or ‘behavioural’ schools, which argue that the decision-making process at work in most firms tends to produce objectives couched in ‘satisfactory’ terms – objectives tend to reflect organizational bargaining between the various divisions of the firm (marketing, production, finance, etc.), resulting in the specification of objectives generally ‘acceptable’ (i.e. satisfactory) to all participants rather than optimal for one group alone. 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, aims to achieve a 24% return on capital employed, while other companies are concerned to enhance shareholder value:

Our aim is to “substantially outperform the support services sector as measured by shareholder return over a five year period” (Rentokil Initial, Annual Report and Accounts 2000).

In the case of food and drinks group Cadbury Schweppes: “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 shareholder's investment within four years".

   (Annual Report and Accounts, 2000). Also instructive are the objectives which 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, Wolseley, a leading distributor of heating, plumbing and building materials, requires that the company's earnings per share growth is greater than the increase in the RETAIL PRICE INDEX by at least 9% over three years and the achievement also of a rate of return on capital of at least 17.5% over three years. (Annual Report and Accounts 2000). See BUSINESS STRATEGY, STRATEGY, MISSION STATEMENT, PRINCIPAL-AGENT THEORY, CORPORATE GOVERNANCE.