Business goals and price and output decisions

Suppose we wish to use the general considerations noted above to construct a model of organizational decision making by a business firm determining price, output, and general sales strategy. As we have already noted, we are not yet in a good position to develop a theory that focuses intensively on the formation of objectives through bargaining and coalition formation (rather than on the revision of such objectives and selective attention to them). As a result, when we look at price and output determination in business firms, we do three things:

  1. We assume a small set of operational goals. In making such an assumption we suggest that the demands of many parts of the coalition are not operative for this class of decisions most of the time or are substantially satisfied when the set of goals assumed is satisfied.
  2. We assume that this set of goals is fixed in the sense that no other classes of goals will arise within the coalition. Such an assumption does not exclude changes in the levels of the goals nor in the attention directed at specific goals within the set.
  3. We attempt to determine by empirical investigation what specific goals ordinarily enter into the price and output decisions. In general, we have observed that we can represent organizational goals reasonably well by using about five different goals. In any organization, other considerations sometimes arise. For example, governmental demands occasionally become of prime importance. In a few organizations other considerations are as important as those we have identified. For example, in some organizations considerations of prestige or tradition are major goal factors. However, for most price, output, and general sales strategy decisions in most organizations, we think we can limit our primary attention to five goals.

We list the five goals here in an arbitrary order without attempting to establish any necessary order of importance; most of the time no order of importance is required. All goals must be satisfied. However, it should be clear in the models we will present in later chapters that there is an implicit order in the models reflected in the way in which search activity takes place and in the speed and circumstances of goal-level change. These latent priorities appear to vary from organization to organization in a way that is not clear. It seems most probable that their variation should be explained in terms of differences in the bargaining position of the several participants in the coalition either current or historical, but at present we treat the implicit priorities simply as organizational parameters.

1. Production goal

We assume that an organization has a complex of goals surrounding the production operation. These can be summarized in terms of a production goal. Such a goal has two major components. The first is a smoothing goal: we do not want production to vary more than a certain amount from one time period to another. The second is a level-of-production goal: we want to equal or exceed a certain production level. These two components can be summarized in terms of a production range: we want production to fall within a range of possible production.

The production goal represents in large part the demands of those coalition members connected with production. It reflects pressures toward such things as stable employment, ease of scheduling, development of acceptable cost performance, and growth. Thus, the goal is most frequently evoked in the production part of the organization and is most relevant to decisions (e.g., output) made in that part.

2. Inventory goal

We assume certain aspirations with respect to finished-goods inventory levels. As in the case of the production goal, the inventory goal summarizes a number of pressures, most conspicuously the demands of some participants to avoid runouts in inventory and to provide a complete, convenient source of inventoried materials. We summarize these demands in terms of either an absolute level of inventory goal or an inventory range (in which case we also attend to demands to avoid excessive inventory costs).

The inventory goal reflects the demands of those coalition members connected with inventory. Primarily, thus, it builds on the pressures of the inventory department itself, salesmen, and customers. Since the inventory serves essentially as a buffer between production and sales, the goal is evoked most frequently and is most relevant to decisions in the output and sales areas.

3. Sales goal

We assume that most participants in business firms believe the firm must sell produced goods in order to survive. Thus, various members of the coalition make demands that the organization meet some general criteria of sales effectiveness. The sales goal and the market share goal (below) summarize these demands.  In addition, the sales department itself (and the personnel in it) link subunit goals with sales. The sales goal is simply an aspiration with respect to the level of sales. It may be in terms of dollars, units, or both.

The sales goal represents primarily the demands of those members of the coalition closely connected with sales and secondarily those members of the coalition  who view sales as necessary for the stability of the organization. The goal is most frequently evoked and is most relevant to decisions with respect to sales strategy.

4. Market share goal

The market share goal is an alternative to the sales goal insofar as the concern is for a measure of sales effectiveness. Either or both may be used, depending on the past experience of the firm and the traditions of the industry. In addition, the market share goal is linked to the demands of those parts of the organization that are primarily interested in comparative success (e.g., top management, especially top sales management) and to the demands for growth.

Like the sales goal, the market share goal is most frequently evoked and most relevant to sales strategy decisions.

5. Profit goal

We assume that the business firm has a profit goal. This goal is linked to standard accounting procedures for determining profit and loss. It summarizes the demands for two things: (1) demands for accumulating resources in order to distribute them in the form of capital investments, dividends to stockholders, payments to creditors, or increased budgets to subunits; (2) demands on the part of top management for favorable performance measures. In general, we assume that the profit goal is in terms of an aspiration level with respect to the dollar amount of profit. In principle, of course, this goal might also take the form of profit share or return on investment.

The profit goal reflects the pressure of those parts of the coalition that share in the distribution of profits and in the distribution of credit for profitability. Thus, in general, this pressure comes from top-level managers throughout the firm, from stockholders, creditors, and from those parts of the organization seeking capital investment. The goal is usually most closely linked to pricing and resource allocation decisions.

Although such a specification of goals deviates substantially from the conventional theory of the firm, it will not necessarily satisfy anyone who would like to reflect all of the goals that might conceivably be of relevance to price, output, and sales strategy decisions. Without insisting on the necessary efficacy of five goals, we think a strong case can be made for expanding the set of goals beyond that represented by the conventional theory, and even beyond the elaboration suggested by Baumol. We also think that expanding the list of assumed goals much beyond the present list rapidly meets a point of diminishing returns. In the models presented in later chapters we restrict attention to this list of goals; in some cases a subset of goals seems satisfactory.

Source: Skyttner Lars (2006), General Systems Theory: Problems, Perspectives, Practice, Wspc, 2nd Edition.

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