Business pressuresBusiness pressures

Issues for evaluation on merger / Issues for evaluation on merger / takeover & business behaviour takeover & business behaviour

Monopoly & Oligopoly…Monopoly & Oligopoly…

Who controls the business?Who controls the business?

SatisficingSatisficing

Satisfy + Suffice = satisfice…Satisfy + Suffice = satisfice…

Managers often face uncertain futureManagers often face uncertain future

Asymmetric informationAsymmetric information

Therefore do not maximise but satisfice..Therefore do not maximise but satisfice..

Traditional goalTraditional goal

Profit maximising…Profit maximising…

Diagram…Diagram…

Senior managers & CeO’s would be happy with this

What’s the alternatives?What’s the alternatives?

Revenue maximisingRevenue maximising

Sales maximisingSales maximising

Normal profitsNormal profits

Diagram

s?

Mid managers would be happy with this

What’s the other revenue What’s the other revenue maximising diagram?maximising diagram?

Can use Can use this in Multi this in Multi choice… choice…

for MR = for MR = MC Q MC Q

Constraints on not profit Constraints on not profit maximising?maximising?

Shareholder pressure for dividends – Shareholder pressure for dividends – interim & end of yearinterim & end of year

Shareholder pressure for share value Shareholder pressure for share value

Stock market valuationStock market valuation

What pricing strategies can you What pricing strategies can you think of?think of?

Sales Revenue Maximisation Sales Revenue Maximisation

This objective was initially developed by the work of Baumol (1959). This objective was initially developed by the work of Baumol (1959). Baumol's research focused on the behaviour of manager-controlled Baumol's research focused on the behaviour of manager-controlled businesses - where the day-to-day decisions taken by managers businesses - where the day-to-day decisions taken by managers are divorced from the shareholders (the owners of the business). are divorced from the shareholders (the owners of the business). Baumol argued that annual salaries and other perks might be more Baumol argued that annual salaries and other perks might be more closely correlated with total sales revenue rather than bottom line closely correlated with total sales revenue rather than bottom line profits. An alternative view was put forward by Williamson (1963), profits. An alternative view was put forward by Williamson (1963), who built a model based on the concept of managerial satisfaction who built a model based on the concept of managerial satisfaction (utility). This can be enhanced by success in raising sales revenue. (utility). This can be enhanced by success in raising sales revenue.

Total revenue is maximised when marginal revenue = zero. The Total revenue is maximised when marginal revenue = zero. The shareholders of a business may introduce a constraint on the price shareholders of a business may introduce a constraint on the price and output decisions of managers - this is known as constrained and output decisions of managers - this is known as constrained sales revenue maximisation. They may introduce a minimum profit sales revenue maximisation. They may introduce a minimum profit constraint designed to underpin the market valuation of their shares constraint designed to underpin the market valuation of their shares and maintain a dividend (a share of the company's profits). and maintain a dividend (a share of the company's profits).

Limit Pricing Limit Pricing

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

Satisficing issuesSatisficing issues Maximising behaviour may be replaced by satisficing - I.e. setting Maximising behaviour may be replaced by satisficing - I.e. setting

minimum acceptable levels of achievement. minimum acceptable levels of achievement.

The domestic and international Equity and Bond markets may play The domestic and international Equity and Bond markets may play an important role in monitoring the performance of managers in a an important role in monitoring the performance of managers in a company - when companies are under-performing set against the company - when companies are under-performing set against the performance of other businesses in a market, there may be performance of other businesses in a market, there may be downward pressure on the share price, raising the threat of a downward pressure on the share price, raising the threat of a contested takeover bid by a rival firm. contested takeover bid by a rival firm.

A firm may be under pressure to reduce prices to consumers if it 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 has made large profits and may choose to do this in order to stop an investigation by the Competition Commission or to improve its investigation by the Competition Commission or to improve its image with customers. image with customers.

Alternatively, the firm may reward workers with higher wages in Alternatively, the firm may reward workers with higher wages in order to stop industrial action.order to stop industrial action.

Tomorrow – an exam paper Tomorrow – an exam paper reviewreview

With examiner feedback & sample With examiner feedback & sample answers…answers…