Objectives of a Firm

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GROWTH MAXIMISATION

Prof. Penrose and Marris consider this to be one of the primary goals of the managers. Business organisations face many new challenges and opportunities as they groe become more complex as they grow.It is a common factor to observe that each firm aims at maximizing its growth rate as this goal would answer many of the objectives of a firm. A growth rate is a better yardstick to measure the success of a firm. Growth depends on the volume of investment. Investment depends on capital availability. Capital may come from either internal or external source. External source of capital is costly where as internal generation of funds is economical. Generation of internal capital depends on profit making capacity of a firm. Hence, profit maximization would automatically lead to growth maximization. It is for this reason, Marris points out that a firm has to maximize its balanced growth rate over a period of time. According to Marris, managers maximize firm’s balanced growth rate subject to managerial and financial constraints.

Managerial constraint:

The capacity of a firm to carry out its functions effectively depends upon the size and skills of its managers.This capacity can be increased by recruiting managers. However proper co-ordination, cooperation and good team work are essential for effective decision making and planning skills on which the efficiency of the management depends. A New recruit requires time to learn and adjust to the company's environment before he is able to perform fully as a team member. Similarly, research and development sets a limit to the rate of growth of the firm.

Financial Constraint:

A manager always suffers from the fear of being dismissed if he is not up to the mark in taking decisions as far as the financial policies of the firm are concerned. Marris suggests that job security is attained by adopting prudent financial policy. The financial fear may arise, if the firm's policies are such that it may cause the firm bankruptcy. In that case, shareholders may decide to replace the old with the new management in the hope to run the firm more successfully. Managers also face the risk if their policies make the firm attractive for takeover and mergers. This will also result in replacement of the old by the new management. Managers who are geneally risk averters,will think of avoiding these risks by not undertaking even highly profitable but risky investments. Managers choose a prudent financial policy consisting of three financial ratios (Debt Equity Ratio, Liquidity ratio & Retention Ratio). These three financial ratios set a limit to the growth of the firm.

1. The management has to maintain a low liquidity ratio, ie, liquid asset / total assets. A high liquidity ratio may affect the profits of the firm but a low ratio should not create any financial embarrassment to meet the required payments to all the concerned parties.
2. The management has to maintain a high debt / asset so ratio so that it will have enough money to invest in order to stimulate growth.
3. The management has to keep a high level of retained profits for further expansion and development but it should not displease the share holder by giving low dividends.

Marris defines firm’s balanced growth rate (G) as

G = GD = GC

Where GD = growth rate of demand for firms product and GC = growth rate of capital supply to the firm.

The Marris model states that in order to maximize balanced growth rate or reach equilibrium position, there should be equality between the growth rate in demand for the products and growth rate in supply of capital.
The two growth rates are according to Marris, translated into two utility functions: (i) manager’s utility function, and (ii) owner’s utility function. The manager’s utility function (Um) and owner’s utility function (Uo) may be specified as follows.

Um = f (salaries, power, status, prestige, job security, etc)

Uo = f (size of output, capital, market share, volume of profit,public esteem,etc).

Owner’s utility function (Uo) implies growth of demand for firms product and supply of capital.

Therefore, maximization of Uo means maximization of ‘demand for firm’s product’ or growth of capital supply’.

According to Marris by maximizing these variables, managers maximise both their own utility function and that of the owners. The managers can do so because most of the variables (e.g., salaries, status, job security, power, etc.) appearing in their own utility function and those appearing in the utility function of the owners (e.g., profit, capital market, share, etc) are positively and strongly correlated with a single variable i.e., size of the firm. Maximization of these variables depends on the maximization of the growth rate of the firms. The managers, therefore, seek to maximize a steady growth rate.

Limitations:

Marris’s theory, though more rigorous and sophisticated than Baumol’s sales revenue maximization, has its own weaknesses.

1. It fails to deal with oligopolistic interdependence.
2. It ignores price determination which is the main concern of profit maximization hypothesis.
3. It is doubtful whether both managers and owners would maximize their utility functions simultaneously always.
4. The assumption of constant price and production costs are not correct.
5. It is difficult to achieve both growth maximization and profit maximization together.

Indian Global Companies and their Objectives:

One of the most significant business and economic trends of the late twentieth century is the rise of ‘global’ or ‘stateless’ corporation. The trends towards global companies are unmistakable and are accelerating. The sharpest weapon that a corporation can develop to survive and thrive, in the globalised market place is competitiveness. Its corner stone as articulated by strategy guru Michael Porter is its ability to create more value on a sustainable basis, for the customer than its rivals can.
For the first time, many Indian corporations such as Reliance Industries, Ranbaxy, Sundaram Fasteners, Arvind Mills and Bajaj Auto among others are competing on the world stage. Whatever product or service a company offers it must meet the customers wants in the most satisfactory manner. This should be the aim of the company. The competitiveness of Reliance in the global market place comes from both quality and scale. The challenge is to remain at the top. That challenge is linked with productivity. Ranbaxy’s greatest strength lies in the fact that it is strongly backward integrated. It helps them manage cost across the entire value chain making them extremely cost competitive. Cost leadership is a function of scale and technology. By upgrading technology, Ranbaxy could continue to be a cost leader. A company has to continuously upgrade itself on several parameters: production efficiency, product development, quality management and marketing skills. Sundaram has programmes to address all these parameters.
This competitiveness - defined by Michael Porter as the sustained ability to generate more value for customers than the cost of creating value - is what will keep Indian Companies alive in the bitter battle for survival that they are waging even on their home turf with rivals pouring in from all corners of the globe.

Self Assessment Questions :

1. According to ____ modern firms are managed by both the manager and the shareholders. (owners).
2. In_______, the objective of the firm is balanced growth

References:

• Managerial Economics by D N Dwivedi.
• Managerial Economics by Keat.