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Goals of business Essay


Introduction

In the 1970s, Milton Friedman argued that the only purpose of business was to maximise profits. This was based on the assumption that such action would benefit the society through increased employment. Friedman maintained that taking part in other activities would render a company less competitive and consequently less beneficial to the society, employees and the owners.

Since this time, the debate surrounding the degrees to which today’s organisations should be socially responsible has been the source of much research. Therefore, it is important to note that businesses have other aims other than providing profits to their members.

For example, they provide innovation which in return brings growth, employment and lifestyle to people’s lives. Many products in the market have been solving several consumer problems than before. Additionally, businesses aim at offering social amenities to the society.

As presented in this paper, these goals have their merits and demerits. The aim of this paper is to critic and analyse the claim that the main goal of businesses is profit maximisation. To achieve this different business goals are listed in separate paragraphs. Each paragraph discusses and explains particular business goals.

According to Ahlstrom, the major goal of businesses is to create new and innovative products, which bring economic growth and improved living standards of the world’s population. Therefore, businesses should aim at providing these benefits to society.

This is because failure to do so can lead to long term drop in the society’s welfare. For example, small drop in growth for a long time can reduce the benefits that firms can offer to the society (Henry 1983). One of the ways that firms can use to achieve growth while at the same time offering innovation is by, effective disruptive innovation.

An example of this disruptive innovation is technological innovation. Some of the benefits of constant economic growth are increase in per capita income, job creation, improved revenue and living standards. Failure for businesses to grow or slow growth has led the equity markets to punish the companies that made caused the drop.

On the other hand, improved growth has made companies to take on better skilled and experienced people. Additionally, the societies’ wellbeing improves and reliance on foreign aid and welfare associations has reduced. Improved living standards have also been realised in countries, such as Europe, North America and parts of Middle East.

Therefore, the average annual income of an average individual has raised by around 450% between 1820 and the end of the 20th century. This steady growth is an indication of a healthy industry. Another benefit of economic growth is improved life expectancy. For example, a person in 1000 could live for approximately 24 years while today, one can live up to 66 years and even more.

From the above analysis, it is clear that businesses should aim at bringing growth and innovative products to the consumers rather than to make profits for the shareholders and owners. This is because, through improved growth, consumer revenues increase leading to improved consumption and living standards (Ahlstrom 2010).

According to Bejou, the sole or the major purpose of businesses should be to express compassion which can bring a difference in society. This compassion should be a part of the company’s goals, mission, vision, strategy and decisions that are aimed at reducing the society’s suffering.

Some of the values of compassionate companies are integrity, responsibility towards the stakeholders, freedom, Community Social Responsibility (CSR), animal rights protection, among others (Bejou 2011).

CSR is the obligation of businesses to offer social, legal and economic support and development to the environment and society. It can also be referred to as ethical contribution towards economic development (Van Beurden & Gossling 2008). According to annual reports of research done in 2009, the following are examples of the compassionate companies:

Ford Motor Company. This is an award winning company which has created a Food Pantry project that funds food banks across the nation. Additionally, the company’s community service enables its employees to participate in charity works across the globe. For example, in 2009, the company’s employees voluntarily contributed to community service in 44 countries globally (Bejou 2011).

Pepsi Company. The company practices compassion by ensuring good governance towards its investors. Additionally, the company is committed towards providing quality and healthy products to consumers as well as educating consumers about its products and nutrition.

It is also at the forefront in protecting human rights and natural resources. The company’s employees enjoy ethical working relationships, empowerment and diversity. Pepsi is also a major contributor to the society. For example, it has contributed funds to help earthquake victims in Chile, Pakistan, China and Haiti. Additionally, it has helped the tsunami victims in Southeast Asia (Bejou 2011).

Acropostale Incorporation. The company’s value of integrity enables it to uplift the society’s living standards. For example, during holidays, it offers gifts to hospitalised children, collects and distributes clothes to earthquake victims and the homeless (Bejou 2011). The company also offers support to flood and famine victims.

Green Mountain Coffee Roasters Incorporation (GMCR). The company is known for its contribution to environmental conservation, support to the community, its sustainable products and healthy working conditions (Bejou 2011).

Target. From 1946, the company has been giving 5% of its income to the community members. Additionally, the company contributes towards environmental conservation. For example, it uses LED (light-emitting diode) displays for lighting. The company is also involved in security enhancement, disaster alleviation and renovation of school programs (Bejou 2011).

From the above analysis, it is clear that corporations should be responsible for the environment and the community. Therefore, companies should learn that even though profits are part of the organization’s goals, ethics, vision and compassion are the most important goals; profit maximization should not be their main aim.

Corporate Social Responsibility (CSR) has the following characteristics. It is an existing and old idea (it is not new) which portrays the business’s willingness to do good; and its nature and scope are uncertain. Therefore, the CSR that a company conducts depends on upcoming societal needs.

Some of the advocates of CSR are the International Business Forum (IBLF), the World Business Council for Sustainable Development (WBCSD), governmental and non-governmental organizations. Calls towards CSR have improved over the years and have become more urgent, specific and widely expressed.

The urgency comes from increased business criticism and terrorist threats and attacks. For example, the terrorist attack on the U.S. in 2001 increased the urgency to raise CSR in order to reduce the support that the terrorist groups obtained from the society (Pfeffer 1998, p. 100).

For example, in 2001, a call by Oxfam campaigners for GSK to donate drug revenues towards a global health fund suggests that companies’ priorities should be to provide health to public rather than to increase shareholders’ wealth. Wide spread CSR stems from businesses which have changed the aim of CSR from corporate philanthropy to society’s needs. This has made even the small companies to take part in CSR.

CSR has various benefits. For example, it led to improved living standards of many people during the capitalism era. Additionally, it has enabled the modern companies to avoid legal sanctions. It has also benefited companies such as the Starbucks and its employees because it brings efficiency and employee benefits.

As a result, of CSR pressure, boycotts and reputational risk on socially irresponsible companies has increased over time. This has exposed the corporate abuses on the society. For example, the European Boycott of Shell in 1995 over sea disposal of oil exposed Shell resulting to 50% fall in sales.

However, companies that have practised CSR have much to benefit. For example, consumer expenditure and CSR premiums have increased. Therefore, businesses are found to fear reputational risk and have started to pay greater attention to CSR.

This has made CSR an unavoidable but strategic approach especially among the mining industries (Smith, 2003). Businesses should aim at improving the society’s welfare while at the same time maximizing the profits.

It is also important to determine the relationship between Corporate Social performance (CSP) and Corporate Financial Performance (CFP) as well as the factors that affect their relationship. There are three principles of CSR. These are the principles of legitimacy, public responsibility and managerial discretion.

In order to make CSR to work Corporate Social Performance (CSP) is used. This is because CSR is not a measurable factor while CSP is convertible in to measurable factors or variables. Therefore, the following results are obtained by measuring the relationship between CSP and CFP (Corporate Financial Responsibility).

Studies have found that there are positive, negative and non-significant relationships between CSP and CFP. For example, two researchers investigated the role of the environment in a CSR versus firm performance relationship. The results revealed a positive relationship.

On the other hand, a study to determine if CSR has effect on a firm’s financial value also revealed a positive relationship. Some of the studies that have shown positive but non-significant relationships are studies on availability and profitability of slack resources and against corporate philanthropy (Dalai 1998, p. 210).

The study of the perception that the stock holders have on the effects that CSR has on firm value revealed a negative relationship. The studies have a common finding; 23 studies (68%) revealed a positive relationship, six studies (26%) revealed no significant relationship while two studies (6%) revealed negative relationships between CSP and CFP.

Firm size and industry are some of the factors that were investigated in order to determine the influence on the relationship between CSP and CFP. The results of this research show that firm size should determine the level of social responsibility. Therefore, it should be considered when conducting future research.

The industry also affects the relationship between CSP and CFP. Finally, CSP and CFP were found to have a positive relationship (Van Beurden and Gossling 2008). The above findings reveal that businesses should be socially responsible as they achieve their financial goals.

According to Milton Friedman, the sole purpose of businesses is to maximize profits in addition to observing the social and legal rights of the society. Therefore, researchers feel that Friedman had set very high standards for business responsibility.

He also wrote that the corporate executives have roles or responsibilities towards the company owners. The company owners ate the shareholders. Some of these responsibilities would be to maximise profits or shareholder’s investments and to act according to the society’s rules and customs.

Therefore, the executives should respect the rights and the desires of the shareholders. They should not only aim at increasing profits, but they should also consider non-monetary issues during decision making. For example, Friedman was a champion of charitable contributions towards the community.

This is despite the financial effect that such contributions would have on the company’s profitability. Friedman was also aware of the social responsibility of businesses. Therefore, he asserted that even though businesses should aim at making profits they should do so while conforming to the society’s rules.

This means that businesses should weigh the social and legal impact of a profit making activity before engaging in it. Additionally, Friedman stated that a free society should make decisions based on political and market mechanisms. The political mechanism is a shared responsibility between the politicians who make laws and the voters that offer feedback through elections.

On the other hand, the market mechanism offers desirable goods to the consumers while the stockholders reinvest their earnings and savings back in to the business. Therefore, through the market mechanism, resources are allocated in order to complement the provisions of the political mechanism.

Friedman has shown that businesses should make profits in order to obtain enough funds to engage in community development activities and projects. Although some writers viewed Friedman’s studies to be entirely based on profit making, there are some underlying social and legal responsibilities that he pointed out in his book (Cosans 2008).

Businesses also aim at providing social investment while at the same time offering profit maximization. This is as a result of altruistic and egoistic motivations. According to the rational behaviour theory, the altruistic motivation is realised by consumption of other people’s products as well one’s own consumption (Craig 2003).

On the other hand, egoistic motivation is realised through one’s own consumption. Studies have shown that altruists and self- interested parties are consistent with utility maximization. For example, if presented with equal incomes, altruistic persons may be more resourceful and may get greater utility than their egoistic counterparts. The theory of the firm altruism is seen in social and corporate responsibility.

Therefore, business managers should aim at striking a balance between altruistic and egoistic ambitions. For instance, according to Friedman, corporations should maximize the shareholders’ wealth while at the same time observing legal requirements. Firms that practice altruism are said to face competitive threats as they aim at attaining the society’s expectations.

This can lead to reduced market share as a result of engaging in the so called ‘wasteful’ activities. Additionally, businesses risk being rendered less competitive resulting to bankruptcy or receivership. Studies have shown that there is a challenge of achieving profit maximization while at the same time providing social responsibility to the society. Therefore, there must be a trade-off between the two goals.

Companies that concurrently undertake both goals can undertake less expensive projects. It is important to note that there are benefits that businesses realise by engaging in social responsibility. For example, businesses can benefit from improved sales, reduced costs of production and improved employee commitment.

The main aim of the egoist companies is profit maximization. In order to attain this goal these firms obtain resources and capital from the society. As a result, these companies cause environmental pollution among other negative effects to the society. Therefore, they face various challenges.

For example, they face sanctions and heavy taxes from the government and other environmental activists. Additionally, they face fines or shut down. As a result, these firms incur heavy financial costs and reduced profits.

Businesses should realise that profit maximization and social responsibility have their advantages and disadvantages. Therefore, they should determine which goals are much beneficial to the business as well as the society (Husted & Salazar 2006).

Businesses should also aim at achieving ethical practice. Ethics refers to established code of conducts and expected behaviour. It involves values, morals and cultural practices. A business is said to be ethical if it adheres to the recognized standards of business practice.

Some of these ethical practices are social responsibility, environmental conservation and employee welfare (Viscusi 1995, p. 75). Ethical behaviour faces challenges from the critics of capitalism and the Marxists who disagree with the ethical business responsibilities.

On the other hand, a business is said to be unethical if it violates the set business standards. Examples of unethical business practices include failure to pay the suppliers and provision of poor quality consumer goods and services.

Critics of capitalism and the Marxists dismiss these responsibilities and argue that the capitalistic businesses are greedy and unethical (Shaw 2008). In order to achieve ethical behaviour, firms can use a free-market model (Wilcke 2004).

Conclusion

In this essay, I have argued that businesses have more than one goal. For example, they aim at maximizing profits, offering social responsibility to the society, providing growth and development and ethical responsibility. These goals have merits and demerits to the business.

Therefore, businesses should strike a balance and decide the goals that they want to achieve. Businesses that are socially irresponsible, unethical, unlawful and disrespectful to the society’s needs face various challenges. Some of them are economic sanctions and law suits.

Additionally, these companies face reduced sales as the society shy away from their products. Eventually, these businesses lose public trust and, which affects their profitability. However, these businesses take pride in reduced costs that relate to social responsibility.

This is because they engage in little social responsibility activities and projects. On the contrary, ethical, lawful and socially responsible businesses receive improved reputation which leads to improved sales and growth. This is because the society trusts these firms’ products and services. However, socially responsible businesses face challenges such as increased operating and financial costs.

These costs can affect the profitability of the socially responsible firms. Businesses should learn that even though achieving both profit maximization and social responsibility is costly, it results in a wide range of benefits to both the business and society. Given the many benefits associated with social responsibility, the main goal of businesses should not be to increase the wealth of the shareholders and owners.

References

Ahlstrom, D 2010, ‘Innovation and Growth: How Business Contributes to Society’, Academy of Management Perspectives, vol. 24, no. 3, pp. 10-23.

Bejou, D 2011, ‘Compassion as the New Philosophy of Business’, Journal of Relationship Marketing, vol. 10, pp. 1-6.

Cosans, C 2009, ‘Does Milton Friedman Support a Vigorous Business Ethics?’, Journal of Business Ethics, vol. 87, no. 3, pp. 391-399.

Craig Smith, N 2003, ‘Corporate Social Responsibility: Whether or How?’, California Management Review, vol. 45 no. 4, pp. 52-76.

Dalai, L 1998, The art of happiness, Riverhead Books, New York.

Henry, M 1983, ‘The Case for Corporate Social Responsibility’, The Journal of Business Strategy, vol. 4 no. 2, pp. 3-15.

Husted, BW & Salazar, J 2006, ‘Taking Friedman Seriously: Maximising Profits and Social Performance’, Journal of Management Studies, vol. 43 no. 1, pp. 75-91.

Pfeffer, J 1998, The human equation: Building profits by putting people first, Harvard Business School Press, Boston.

Shaw, W 2009, ‘Marxism, Business Ethics and Corporate Social Responsibility’, Journal of Business Ethics, vol. 84, no. 4, pp. 565-576.

Van Beurden, P & Gossling, T 2008, ‘The Worth of Values – A Literature Review on the Relation Between Corporate Social and Financial Performance’, Journal of Business Ethics, vol. 82, no. 2, pp. 407-424.

Viscusi, WK 1995, Fatal tradeoffs: Public and private responsibilities for risk, Oxford University Press, New York.

Wilcke, RW 2004, ‘An Appropriate Ethical Model for Business and a Critique of Milton Friedman’s Thesis’, The Independent Review, vol. 9 no. 2, pp. 187-209. Customer Inserts His/Her Name Customer Inserts ID

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