Rothschild Theory of Long-Run Survival of a Firm | Business Objectives

Rothschild Theory of Long-Run Survival
Rothschild Theory of Long-Run Survival 

Rothschild's Alternative Objective- Long run survival

Economists have suggested different alternative goals and objectives that a firm thrives for apart from profit maximization, such as maximization of managerial utility function, maximization of sales revenue, risk avoidance and entry prevention, etc. 

Another alternative objective of a firm- as an alternative to profit maximization- was suggested by Rothschild, that is, the long-run survival of the firm.

K.W. Rothschild suggested another alternative goal/objective for the firm to pursue, that is, to ensure long-term survival. As per this objective, the firm seeks to maximize the probability of its survival into the future. The firm aims to survive for the longest time. 

Don't think you... succeed next year...prepare for 10 years...Alibaba didn't take...a year or two...get is today.- Jack Ma, Alibaba

Often a firm needs to be able to continue to exist in the industry in the long-run. Thus, while aiming at a secure profit level, the firm may attempt to keep its position secure in the long run. Such an objective would begin with the interests of the shareholders and the management. 

Through this objective, owners can provide security and business to the next generations, which ultimately leads to the fact that the firm would survive for the long term. 

Managers of the firm would be happy with this objective since their present and future compensation(earning) depend on the firm’s continued existence. Hence, this objective provides financial stability to managers. A short career in a bankrupt firm would hardly give a strong basis for successful job security. 

Unlike other firm objectives, the objective of the long-run survival of the firm is hard to measure and difficult to practice or achieve.

According to this theory, the primary goal of the firm is long-run survival. Some other economists have suggested that the attainment and retention of a constant market share in an additional objective of the firms. Hence managers seek to secure their market share and long-run survival. Though it is not guaranteed, the firms might attempt to maximize their profit in the long- run.

image courtesy: Pixabay

No comments:

Post a Comment