Common corporate objectives.docx

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Management Information Systems
MGIS 317
Ronald Schlenker

Common corporate objectives 1. Profit maximization Profits are essential for rewarding investors in a business and for financing further growth and expansion. Profits are also necessary to persuade business owners – or entrepreneurs – to take risks. However there are serious limitations with this corporate objective: - The focus on high short-term profits may encourage competitors to enter the market and jeopardize the long-term survival of the business. - Many businesses seek to maximize sales in order to secure the greatest possible market share, rather than to maximize profits. The business would expect to make a target rate of profit from these sales. - The owners of smaller businesses may be more concerned with ensuring that leisure time is safeguarded. The issues of independence and retaining control may assume greater significance than making higher profits. - Most business analyst’s asses the performance of a business through return on capital employed rather than through total profit figures. - Other stakeholders rather than owners and shareholders will give priority to other issues. For example security for the workforce or environmental issues for the local community. - It is very difficult to assess whether the point of profit maximization has been reached, and constant changes to prices or output to attempt to achieve it may well lead to negative if the market is growing 2. Profit maximization This basically means aiming to achieve enough profit to keep the owners happy but not aiming to work flat out to earn as much as profit as possible. Just being satisfied with what you do? 3. Growth Larger firms will be less likely to be merged or taken over and should be able to benefit from economies of scale. Managers will be motivated by the desire of seeing the business achieve its full potential. However business objectives based in growth do have limitations: - Expansion which occurs to rapidly can lead to cash-flow problems - Sales growth might be achieved at the expense of lower profit margins - Larger businesses can experience diseconomies of scale - Using profit to finance growth – retained profit – can lead to lower short-term returns to shareholders. - Growth into new business areas and activities can result in a loss of focus and direction for the whole organization. 4. Increasing market share It is possible for an expanding business to suffer market share reductions if the market is growing at a faster rate than the business itself. Benefits from having a high market share are: - Retailers will be keen to stock and promote the best-selling brand. - Profit margins offered to retailers may be lower than competing brands as the shops are so keen to stock it – this leaves more profit for the producer - Effective promotional campaigns are often based on “buy our product with confidence – it is the brand leader” 5. Survival This is usually the keen objective of most businesses. The high failure rate of new businesses means that to survive for the first two years of trading is an important aim for entrepreneurs. 6. Corporate social responsibility This concept applies to those businesses that consider the interests of society by taking responsibility for the impact of their decision and activities on customers, employees, communities and the environment. There are other reasons for these trends in business objectives – increasingly, consumers and other stakeholders are reacting positively to businesses that act in green or socially responsible ways. Examples are: - Firms that promote organic and vegetarian foods. - Retailers that emphasise the proportion of their products made from recycled materials. - Businesses that refuse to stock goods that have been tested on animals, or foods based on genetically modified ingredients 7. Maximising short-term sales revenue This could benefit managers and staff when salaries and bonuses are dependent on sales revenue levels. However, if increased sales are achieved by reducing prices, the actual profits of the business might fall 8. Maximising shareholder value This could apply to public limited companies and direct management action towards taking decisions that would increase the company share price and dividends paid to shareholders. These targets might be achieved by pursuing the goal of profit maximization. Important issues relating to corporate objectives Some important issues relating to corporate objectives are: - Must be based on the corporate aim and should clearly link in with it - Should be achievable and measurable if they are to motivate employees. - Need to be communicated to employees and investors in the business. Unless staff are informed of the objectives and their own targets that result from these, then the business is most unlikely to be successful. Effective communication is vital - Will form the framework of more specific departmental or strategic objectives - Sho
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