Business pressures Issues for evaluation on merger / takeover & business behaviour Monopoly & Oligopoly…

Who controls the business?

Satisficing Satisfy + Suffice = satisfice… Satisfy + Suffice = satisfice… Managers often face uncertain future Managers often face uncertain future Asymmetric information Asymmetric information Therefore do not maximise but satisfice.. Therefore do not maximise but satisfice..

Traditional goal Profit maximising… Diagram…

Senior managers & CeO’s would be happy with this

What’s the alternatives?

Revenue maximising Revenue maximising Sales maximising Sales maximising Normal profits Normal profits Diagrams ?

Mid managers would be happy with this

What’s the other revenue maximising diagram?

Can use this in Multi choice… for MR = MC Q

Constraints on not profit maximising? Shareholder pressure for dividends – interim & end of year Shareholder pressure for dividends – interim & end of year Shareholder pressure for share value Shareholder pressure for share value Stock market valuation Stock market valuation

What pricing strategies can you think of? Sales Revenue Maximisation Sales Revenue Maximisation This objective was initially developed by the work of Baumol (1959). Baumol's research focused on the behaviour of manager-controlled businesses - where the day-to-day decisions taken by managers are divorced from the shareholders (the owners of the business). Baumol argued that annual salaries and other perks might be more closely correlated with total sales revenue rather than bottom line profits. An alternative view was put forward by Williamson (1963), who built a model based on the concept of managerial satisfaction (utility). This can be enhanced by success in raising sales revenue. This objective was initially developed by the work of Baumol (1959). Baumol's research focused on the behaviour of manager-controlled businesses - where the day-to-day decisions taken by managers are divorced from the shareholders (the owners of the business). Baumol argued that annual salaries and other perks might be more closely correlated with total sales revenue rather than bottom line profits. An alternative view was put forward by Williamson (1963), who built a model based on the concept of managerial satisfaction (utility). This can be enhanced by success in raising sales revenue. Total revenue is maximised when marginal revenue = zero. The shareholders of a business may introduce a constraint on the price and output decisions of managers - this is known as constrained sales revenue maximisation. They may introduce a minimum profit constraint designed to underpin the market valuation of their shares and maintain a dividend (a share of the company's profits). Total revenue is maximised when marginal revenue = zero. The shareholders of a business may introduce a constraint on the price and output decisions of managers - this is known as constrained sales revenue maximisation. They may introduce a minimum profit constraint designed to underpin the market valuation of their shares and maintain a dividend (a share of the company's profits).

Limit Pricing Limit Pricing Firms may adopt predatory pricing policies by lowering prices to a level that would force any new firms entering the industry to operate at a loss. This would allow firms to sustain a monopoly position in a market. Firms may adopt predatory pricing policies by lowering prices to a level that would force any new firms entering the industry to operate at a loss. This would allow firms to sustain a monopoly position in a market.

Satisficing issues Maximising behaviour may be replaced by satisficing - I.e. setting minimum acceptable levels of achievement. Maximising behaviour may be replaced by satisficing - I.e. setting minimum acceptable levels of achievement. The domestic and international Equity and Bond markets may play an important role in monitoring the performance of managers in a company - when companies are under-performing set against the performance of other businesses in a market, there may be downward pressure on the share price, raising the threat of a contested takeover bid by a rival firm. The domestic and international Equity and Bond markets may play an important role in monitoring the performance of managers in a company - when companies are under-performing set against the performance of other businesses in a market, there may be downward pressure on the share price, raising the threat of a contested takeover bid by a rival firm. A firm may be under pressure to reduce prices to consumers if it has made large profits and may choose to do this in order to stop an investigation by the Competition Commission or to improve its image with customers. A firm may be under pressure to reduce prices to consumers if it has made large profits and may choose to do this in order to stop an investigation by the Competition Commission or to improve its image with customers. Alternatively, the firm may reward workers with higher wages in order to stop industrial action. Alternatively, the firm may reward workers with higher wages in order to stop industrial action.

Tomorrow – an exam paper review With examiner feedback & sample answers…