Business Objectives & Types and External Factors

Financial & Non-Financial Objectives

• Business objectives are targets that guide operations and drive growth.
• Setting and sharing clear objectives helps businesses succeed by:
  • Focusing decision-making.
  • Aligning employees towards common goals.
  • Motivating employees to achieve targets.
  • Enabling performance evaluation and adjustments.
• Objectives should be SMART:
  • Specific: Clearly states what is to be achieved.
  • Measurable: Expressed in quantitative terms.
  • Achievable: Possible with available resources and personnel.
  • Realistic: Feasible with the business's resources.
  • Time-specific: Clear deadline for achievement.
• Example of a SMART objective: Increase sales revenue by 10% by the end of the year.

Main Types of Financial Objectives

• Financial objectives are specific goals related to a business's financial performance, resources, or structure, and they are particularly important in the private sector.
• Survival:
  • Keeping a business operating for a certain amount of time, especially during challenging conditions or strong competition.
  • Example: Camping Sous les Étoiles in France focused on survival during the 2020 pandemic due to travel restrictions.
• Profit:
  • The difference between total sales revenue and total costs.
  • Can be reinvested or shared with owners.
  • Profit maximization involves making as much profit as possible.
  • Example: Brewery de Blaugies in Belgium aims to maximize profits to fund expansion.
• Sales Revenue:
  • Increasing volumes of products sold can help a business to increase its market share and increase awareness.
    *Note: average unit cost goes down for large-scale businesses.
  • Example: Le Creuset in France increased sales by opening outlets and improving its online store.
• Market Share:
  • The proportion of a market controlled by a company, brand, or product.
  • High market share allows market dominance, increased recognition and potentially higher prices and profits.
  • Example: Ediya Coffee in South Korea increased outlets and introduced delivery to gain market share from Paris Baguette.
• Financial Security:
  • Business owners may simply want to earn a living from their effort.
  • Satisficing may be enough for a business owner to pursue a desired lifestyle.
  • Example: Reema Koch runs an eco-guesthouse in Malta during summer and works with animal charities in Turkey in winter.

Main Types of Non-Financial Objectives

• Non-financial objectives are targets not directly connected to making money.
• Social:
  • Providing a reliable, high-quality service to a community, often a focus of public sector organizations.
  • Charities and cooperatives often focus on improving human well-being or the environment.
  • Businesses increasingly aim to meet stakeholder needs by providing employment, being eco-friendly, or contributing locally.
  • Example: TOMS Shoes donates one pair of shoes for every one sold.
• Personal Satisfaction:
  • Achieving success by doing something enjoyable.
  • Example: Laura Hirsch, a former teacher, established Grüne Kleinvolk as a forest activity center for preschoolers.
• Challenge:
  • Using and developing skills can present interesting challenges.
  • Some business owners love solving problems or seeing the results of hard work.
  • Example: Kristine Bonnici has achieved qualifications in accountancy, marketing, and business leadership since starting her interior design business.
    *Note: Achieving non-financial objectives is often the main focus of businesses in the public sector and the voluntary sector and many profit-making businesses also set non-financial objectives that complement their key financial objectives.
• Independence & Control:
  • Making independent decisions can be a key motivator for entrepreneurs who may want to control their own time and business direction without interference from others.
  • Example: Vinay Patel set up a talent agency in Mumbai after being made redundant.

Changes in Business Objectives

• Business objectives may change over time due to internal and external factors.
• As a business grows, its objectives may change from survival to profit or sales maximization.
• Retiring business owners may shift focus from increasing market share to maintaining financial security.
• New leadership may implement preferred social objectives or challenging targets.
• Business performance can necessitate objective changes. For example, a market leader may shift to profit maximization.

Impact of External Factors on Business Objectives

• Market Conditions:
  • Increased competition may prompt a change in objective from maximizing profit to maintaining market share.
  • In fast-growth markets, businesses are likely to pursue objectives of maximizing sales and profits.
  • If market growth is slowing, objectives may focus on growing market share rather than increasing sales.
  • Example: Maxi's Fahrschule in Lübeck reduced prices to avoid losing customers to cheaper rivals.
• Technology:
  • New production technology may support a profit maximization objective as manufacturing costs are likely to fall as output rises.
  • Improvements in e-commerce software may help increase sales.
  • Investment in robots could allow manufacturing businesses to improve working conditions for their employees.
  • Example: Vegan Junk Food chain used JustEat and UberEats services to focus on increasing profits to fund new outlets.
• Legislation:
  • Refers to laws or regulations that compel individuals or organizations to behave in a desired way and may increase business costs and force the firm to focus on increasing sales volumes.
    *The introduction of new regulations to protect the environment has increased business emphasis on social objectives such as reducing their carbon footprint.
  • New laws may increase business costs and force firms to focus on increasing sales volumes.
  • Example: SEF Packaging in France faced increased costs due to the EU ban on single-use plastics and had to research new materials and invest in new production processes whilst accepting it would achieve lower profit margins.

Sole Traders & Partnerships

• When starting a business, entrepreneurs need to consider the form of ownership.
• Main forms of ownership for start-up businesses:
  • Sole trader
  • Partnership
  • Private limited company(Ltd)

Sole Traders

• A sole trader is a business with a single owner who makes all the decisions and gets to keep all of the profit.
• Operating as a sole trader is the simplest way to start trading immediately.
• Advantages:
  • Easy and inexpensive to set up.
  • The owner has complete control over the business and can make all decisions.
  • All profit belongs to the owner.
  • Simple tax arrangements.
  • Can provide a flexible, personal service that meets customer needs
• Disadvantages:
  • The owner is personally responsible for debts the business incurs, which is known as unlimited liability.
  • Limited access to finance as lenders consider them risky.
  • Limited skill set of the owner/entrepreneur may limit business growth.
  • Long hours, hard work, and lots of responsibility for the owner.
  • No business continuity. The business often dies with the owner.
    *Note: Sole trader businesses are often very small with one owner who runs the business on their own (although they may employ people to work in the business), they are concentrated in the tertiary sector, offering services such as tutoring, home improvements or taxi driving.

Partnerships

• A partnership involves two or more people joining together to own a business.
• They are relatively easy to set up with relatively few legal formalities.
• Partners may choose to draw up a deed of partnership which states the formal rights of each partner including:
  • The amount of capital contributed by each partner
  • How profits or losses are shared amongst partners
  • The procedures for dissolving the partnership and taking on new partners
  • The level of control each partner has
• Examples of businesses that commonly operate as partnerships include lawyers, accountants, and doctors.
• Advantages:
  • Shared responsibilities and decision-making
  • Easy and inexpensive to set up and run as there are few legal formalities.
  • More skills and knowledge mean partners can specialize in their area of expertise.
  • Increased access to finance and capital
• Disadvantages:
  • Partners have unlimited liability for debts incurred by the business but in some countries, it is possible to set up as a limited liability partnership which removes this risk.
  • Partners' decisions are legally binding on all owners
  • There is potential for disputes between partners
  • Profits are often shared equally regardless of a partner's contribution

Private & Public Limited Companies

Private Limited Companies

• A private limited company is a business that is owned by one or more shareholders whose responsibility for debts is limited to the level of their initial investment (the price they paid for the shares).
• The business name is suffixed with 'Limited' or 'Ltd' in the UK and S. A.in Spain.
• Shareholders are often family members or close friends.
• Shareholders are usually also directors who run the business on a day-to-day basis.
• Private limited companies are registered with Companies House and need to submit details of financial performance and changes in ownership each year.
• Private limited companies may be more suitable than sole traders or partnerships if setting up the business involves significant capital investment or involves some risk and the owners' personal assets are protected as they have limited liability.
• Most private limited companies are owned and controlled by just one person (just like sole traders) who has made the decision to reduce their personal financial risks by forming a company that provides them with limited liability protection.
• In some countries, it is possible to form a limited liability partnership and sleeping partners invest money but take no part in decision-making.
  *Note: At least one partner must continue to accept unlimited liability
• Advantages:
  • Shareholders benefit from limited liability for debts incurred by the company.
  • Access to greater finance from investors and lenders who consider limited companies to be less risky.
  • Ownership can be easily transferred by selling shares
  • Business continuity as the business does not die with its original owner
• Disadvantages:
  • More expensive and time-consuming to set up as legal advice is often required
  • More complex operational rules than sole traders or partnerships
  • Annual financial reporting and auditing are required
  • Shareholders may have little control over the company as the founder usually imposes their own agenda

Public Limited Companies

• Public limited companies are large businesses that sell shares publicly on the stock exchange (New York Stock Exchange; London Stock Exchange etc.).
• Selling shares on the stock exchange for the first time is called flotation or going public
• Flotation is a complex legal process that allows large amounts of share capital to be raised.
• When Google floated in 2004 $23 billion$ was raised in one day.
• Advantages:
  • Significant amounts of capital can be raised
  • Risks are spread among a large group of shareholders
  • Company shares can be bought and sold easily on a public stock exchange
  • A board of directors, made up of individuals from outside of the company management and major shareholders can bring in expertise/perspectives that can promote growth
  • PLCs have high visibility with customers, suppliers, and potential investors which can help grow its customer base
  • As large businesses, PLCs may be able to dominate the market and benefit from economies of scale
• Disadvantages:
  • PLCs must comply with complex legal and financial regulations such as:
    • Completing regular financial reports
    • Maintaining accurate accounting records
    • Holding annual general meetings
  • Setting up a public limited company can be expensive:
    • Fees for legal and accounting advice
    • Costs of the flotation such as producing a prospectus
  • The management team are likely to prioritize short-term financial performance (e.g. paying staff less) over long-term strategic planning (retaining talented staff) so as to maximize profits for shareholders
  • Hostile takeovers are a risk as shares can be bought by rival businesses

Public Corporations

• Public corporations are owned and controlled by the government. They are usually funded through tax though some earn revenue from sales.
• Examples:
  • Healthcare: Brazil offers free healthcare for all its citizens though the Sistema Único de Saúde (SUS)
  • Transport: Türkiye Cumhuriyeti Devlet Demiryolları (TCDD) is Turkey’s government-owned national railway company
  • Broadcasting services: The Canadian Broadcasting Corporation (CBC) operates television and radio networks funded by advertisements and government subsidies
    *Note: They operate as incorporated entities that are separated by law from the government.
• Profits (surpluses) are reinvested in the business or returned to the government.
• They exist to provide public services such as healthcare, transport, and broadcasting services.
  *Note: Some public corporations have a majority share ownership held by the government, but may have also sold a large number of shares (but less than 50%) to the private sector
• Benefits:
  • Governments can maintain control of vital supplies such as water and services such as transportation
  • Public ownership avoids duplication where a natural monopoly exists such as power networks
  • Nationalization saves jobs threatened by private sector business failure
  • Services that are not profitable enough for private businesses to provide can be made available
• Drawbacks:
  • Public corporations that make a loss are a cost to the government
  • Some public services may operate inefficiently due to the lack of competition
  • Political interference can affect the operations of public corporations, particularly following a change in government
  • They may be difficult to control and coordinate due to their large size.

Business Size & Characteristics:

Characteristics of Small Businesses

• Small businesses employ fewer than 50 people and micro enterprises employ fewer than 10 employees and small enterprises employ between 10 and 49 employees.
• Small businesses usually provide goods and services at a local or regional level.
• They are the most common form of business in most countries.
• In 2022 5. 5 million small businesses existed in the UK, more than 99% of all businesses operating at that time.
• Italy has the highest number of small businesses in the EU.
• Germany's businesses tend to be larger, on average, than those in other EU countries.