A theory of firm behavior is argued as that, a firm seeks a certain level of profit and within that constraint aims at maximum sales. The ‘certain level of profit’ presumably means the level of profit considered satisfactory by the shareholders. The constrained variable for maximization viz., sales, is in terms of revenue (rupees) and not in terms of physical units of goods and services. This is because many firms are engaged in multiple products, and these products may not be additive in physical terms or/and may have different values per unit. For example, Godrej manufactures refrigerators and cupboards of different sizes, among other things, and it is impossible to add all these products in physical units. Also, just as in the short term profit maximization and long run profit (or value) maximization theories, one could postulate the constrained short run sales or constrained long run sales maximization theories, and choose the long run alternatives only.
The constrained sales revenue maximization theory rests on the premise that a dichotomy exists between owners and the management. In the corporate world a firm is owned by numerous small share holders, who hardly have any say in the day to day management of the firm. They might attend annual general body meetings and are content if the decisions on dividend are fair in relation to dividends declared by similar enterprises. On the other hand, the firm is managed by salary earnings professional managers who take decisions which serve their interests best while ensuring ‘no serious objection’ from the owners at the annual meeting. In general paid managers’ interests rest in their salary packages and perquisites which they enjoy. Quite often the salary and perquisites of decision makers are linked directly with sales volume or market shares which their respective organizations enjoy and there are cases where manager get some small percentages of sales in the form of commissions as well. Further, promotions to higher positions within an organization or in some other firms also depend on the turnover a manager is handling. For all these reasons, the hypothesis is that firms seek maximum sales subject to a profit constraint, which is satisfactory to the share holders.
Some experts have suggested growth or size maximization as an alternative goal for firms. By growth they mean an increase in sales assets and/or the number of employees. Managers have a vital interest in growth because individuals gain prestige, personal satisfaction in the successful growth of the firm with which they are connected, more responsible and better paid positions, and wider scope for their ambitious and abilities.
Long Run Survival:
Another alternative for the firm is to pursue a goal of long run survival for the firm. Under this objective, the firm seeks to maximize the probability of its survival into the future. Such objective would commensurate with the interests of the share holders and the management. Through this objective, the owners of today would be able to provide security and business to their next generations. Likewise, management would be happy with this objective, for their present and future compensation depends on the firm’s continued existence. A short career in a bankrupt firm would hardly provide a strong basis for a successful job mobility or job security.
Unlike other objectives of the firm, the objective of long run survival is hard to measure and difficult to practice or achieve.