3.14 Operational Strategies: location Objectives

Candidates should be able to: Syllabus Candidates should be able to: Define different legal structures (sole trader, partnership, Ltd and Plc) Define objectives Describe a range of different objectives such as profit maximisation, revenue maximisation, sales maximisation and satisficing Analyse why firms may have different objectives Use diagrams and formulae to illustrate the different business objectives: profit maximisation, revenue maximisation and sales maximisation

Legal structures – research You have five minutes to complete the following research: What are the advantages and disadvantages of the following legal structures for a business: Sole trader Partnership Private limited company Public limited company

Sole trader (unincorporated): advantages and drawbacks

Partnership (unincorporated): advantages and drawbacks

Private limited company (Ltd): advantages and drawbacks 3.14 Operational Strategies: location Private limited company (Ltd): advantages and drawbacks

Public limited company (plc): advantages and drawbacks 3.14 Operational Strategies: location Public limited company (plc): advantages and drawbacks

Objectives should be SMART, what does this mean? What is an objective? Objectives should be SMART, what does this mean?

Examples of objectives Firms may have different objectives such as profit, revenue or sales maximisation or even satisficing. What do these mean? Profit maximisation: Revenue maximisation: Sales maximisation:

E.g. why might a firm aiming to maximise profit upset stakeholders? Satisficing Satisficing is when the managers of a business try to achieve a satisfactory performance across a range of indicators and not to maximise any. This is more likely to keep _______ the firm’s stakeholders happy. E.g. why might a firm aiming to maximise profit upset stakeholders? If they can make a satisfactory profit, rather than a ______________ profit, the owners of the firm and the stakeholders will be happy and the managers will keep their jobs.

Other objectives Apart from profit, revenue or sales objectives businesses can also aim for:

Objectives may be short-term as well as long-term. Short term objectives Objectives may be short-term as well as long-term. Short-term objectives, which are more tactical than strategic, might include: Penetrating a market Eliminating a competitor Dumping unwanted products State owned companies are often thought to be ‘good’ because they are not profit maximisers. It is argued that they act 'in the public interest', avoid externalities, and minimise wasteful activities. However, this may not actually be true in real life!

Examples of objectives: profit maximisation Firms may have different objectives such as profit, revenue or sales maximisation or even satisficing. What does profit maximisation mean? When does it occur? Profit maximisation: aim for Profit = __________ so try to maximise this. It occurs when marginal _______ = marginal _____

Profit maximising diagrams: constant price and falling price Under the diagrams draw a new graph showing MC & MR

Examples of objectives again: revenue maximisation Firms may have different objectives such as revenue maximisation. What does revenue maximisation mean? Revenue maximisation: highest turnover (income) in total, so the firm is LESS concerned about profits Revenue maximisation will occur when MR = Revenue maximisation can be encouraged by raising ______ and ___________ the price

Revenue maximisation diagram: falling price Plot a diagram showing revenue maximisation What type of profit does your diagram show?

Revenue maximisation diagram: constant price Why can’t a firm revenue maximise with a constant price?

Reasons for revenue maximisation

Examples of objectives again: sales maximisation Firms may have different objectives such as sales maximisation. What does sales maximisation mean? Sales maximisation: This occurs when firms lower the price until AR = Why do you know this formula already? Which type of organisations may choose to operate at this level of output? Profit making firms may use sales maximisation e.g. with predatory pricing where, so long as costs are covered, a firm may reduce price to ______ rivals out of the market.

Sales maximising diagram (AR = AC): constant price and falling price 3.14 Operational Strategies: location Sales maximising diagram (AR = AC): constant price and falling price Plot a diagram showing sales maximisation What type of profit does your diagram show?

Sales and profit maximising: falling prices 3.14 Operational Strategies: location Sales and profit maximising: falling prices Plot a diagram showing sales maximisation occurring at the same quantity as profit maximising

Sales maximising explanation 3.14 Operational Strategies: location Sales maximising explanation Why might managers wish to maximise sales volume rather than profit?

Profit, revenue and sales maximising diagram Plot a diagram showing a downward sloping linear demand curve (remember D = AR). Add MC, AC and MR (remember MR is twice as steep as AR) Mark on three distinct quantities showing: profit maximisation (MR = MC), revenue maximisation (MR = 0) and sales maximisation AR = AC Note what happens to the price and quantity.

Who decides the objectives for a firm? Three main participants in setting objectives: