Basic motives of business enterprise

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THE existence of business enterprises suggests that there are external and internal factors that govern their existence.

THE existence of business enterprises suggests that there are external and internal factors that govern their existence.

The internal dynamics that affect the existence of firms are called motives of business enterprise in economic and business literature. Without a sufficiently strong desire or motive to exist, a firm cannot survive the vicissitudes of time.

There must be a compelling reason or reasons which justify the existence of a firm. It is possible from an empirically angle to map more than one overriding motive which explain the existence of any firm.

There are basically seven motives that justify the existence of firms. These motives of firms are also called objectives of firms. The article this week explores four objectives of firms.

The profit motive The most important objective associated with virtually all private sector enterprises is the desire to make profits. Profit can be defined basically as the difference between sales or total revenue and total costs. Total revenue is defined as the price of a commodity multiplied by the quantity or number of commodities sold.

Total costs refer to the total amount of output produced multiplied by the cost per unit of output also called average costs.

Profit is at a maximum if the gap between total revenue and total cost is widest or is maximised. The traditional explanation of the existence of firms posits that firms seek to maximise profits.

If a firm’s profits are at a maximum it stands to reason that the addition to profits also called marginal profit is zero. As elaborated above, the profit motive is the traditional objective of the existence of firms especially private sector enterprises.

It has to be observed that an economist’s conception of profits differs from that of an accountant. An accountant takes into account only total explicit or hsitoric costs in the computation of profits. On the other hand, economists take into account alternative benefit or use value of factors of production which they normally call opportunity costs.

To an economist, profits are maximised when total revenue is equal to total costs (which include the opportunity cost of inputs used in the production process). For instance, if a medical doctor opens a kiosk and makes a profit of $100 while she could earn an income of $1500 practising as a physician, the economist argues that the doctor has actually incurred an economic loss of $1400.

This therefore implies that zero economic profit implies a positive (greater than zero) accounting profit.

Sales maximisation objective Some scholars argue that there are firms do not seek to maximise profits per se, rather they seek to entrench themselves in an industry by maximising turnover or sales.

This is the so-called sales or turnover maximisation objective. In the empirical literature this objective or motive is usually associated with firms that sell consumer goods such as cellular phone handsets, computer accessories, cars, financial products, groceries and clothing. Fewer supermarkets seek to directly make profits compared to those whose over-arching goal is to maximise sales or turnover.

It is via sales maximisation that firms such as Econet, OK, CBZ and Delta Beverages actually make profits.

Maximisation of market share Some economists believe that there are companies whose overriding goal or aim is to entrench themselves in the market. It is argued that such firms do not entrench themselves in the market by discovering and capturing a niche in the market, instead such enterprises seek to dominate the market as a whole.

Zimbabwean examples that come to mind are Econet, Delta Corporation, CBZ Bank and Seed-Co (Pvt) Ltd to mention a few. It is noteworthy that Econet was the last telecommunications firm to enter the cellular industry, but it now leads the pack in terms of market leadership. This is the proverbial last becoming first. Econet leads in terms of both product innovation and market share as well in the telecommunications industry in Zimbabwe.

Maximisation of shareholder value The fourth main maximisation objective of firms is the so-called maximisation of shareholder value. This objective or motive of firm existence is particularly applicable to those companies that are listed on a stock exchange of some sort where shares are sold.

In Zimbabwe, publicly listed firms trade their shares on the Zimbabwe Stock Exchange. In other words, such firms raise funding for capital projects by selling shares usually ordinary shares.

This is the primary avenue through which companies such as Econet have been able to secure funding for the many projects that they have undertaken over the past 10 years. It is believed that shareholder value is increased by maximising earnings per share.

The remaining three motives of the existence of business enterprises will be examined next week.

 Ian Ndlovu is an economist based at the National University of Science and Technology skilled in data analysis using SPSS, Gretl, Stata, Eviews and Microsoft Excel software packages. His research interests cover business, development, economic and e-commerce issues. He writes in his personal capacity.