Business Objectives Flashcards (4)

The Importance of Business Objectives

A business needs objectives to survive. Clear objectives:

• Create direction and purpose for employees, boosting motivation.
• Provide specific targets for business strategies.
• Offer a way to assess success by comparing performance against original objectives.

Key Term

• Business objective: A stated, measurable target a business plans to achieve.

Objectives of Private-Sector Businesses

Private sector businesses can set various objectives:

Profit Maximisation

Profits reward investors and finance growth, encouraging entrepreneurs to take risks.

• Definition: Producing at the output level where the positive difference between total revenue and total costs is greatest.

• Limitations:

  • High short-term profit focus can attract competitors.
  • Many businesses prioritize sales and market share over maximizing profits.
  • Owners of small businesses may value leisure time, independence, and work-life balance over higher earnings.
  • Business analysts often assess performance using return on capital employed instead of total profit figures.
  • Stakeholder priorities (job security, environmental protection) can lead to modified, less profitable decisions.
  • Difficult to assess when profit maximization has been reached.
  • Constant pricing changes to increase profit may lead to negative consumer reactions.

Profit Satisficing

• Aiming to achieve enough profit to keep owners satisfied, rather than maximizing profit.
• Common for small business owners who prioritize a comfortable lifestyle over working longer hours for more profit.

Growth

Business growth offers several benefits:

• Reduced risk of takeover.
• Economies of scale.
• Higher salaries and benefits for managers.
• Becoming uncompetitive if growth is not pursued.

Limitations:

• Rapid expansion can cause cash flow problems.
• Sales growth may reduce profit margins.
• Larger businesses can experience diseconomies of scale.
• Using profits for growth can lower short-term returns to shareholders.
• Growth into new areas can result in a loss of focus.

Increasing Market Share

Market share indicates the success of marketing strategies.

Benefits of being a brand leader:

• Retailers are keen to stock and promote the best-selling brand.
• Products can be supplied to retailers at a low discount rate, leading to higher profit margins.
• Effective promotional campaigns can be based on brand leadership.

Survival

• Key objective for new businesses.
• Surviving the first two years is a significant aim.
• Once established, longer-term objectives can be set.

Corporate Social Responsibility (CSR)

Businesses should consider social, environmental, and ethical issues.

• Growing belief in a wider perspective than just profit.
• Adverse publicity for damaging business activities.
• Pressure groups influencing decision-making.
• Legal changes forcing businesses to stop harmful activities.

Key Terms

• Corporate social responsibility: Businesses considering the interests of society by taking responsibility for the impact of their decisions and activities on customers, employees, communities, and the environment.
• Pressure group: Organizations formed by people with a common interest to influence business and government policies.

Continued Trends in Corporate Social Responsibility

Consumers and stakeholders react positively to green or socially responsible businesses.

Examples:

• Firms promoting organic, vegetarian, and vegan foods.
• Retailers advertising the proportion of products made from recycled materials.
• Businesses refusing to stock goods tested on animals or foods with genetically modified ingredients.

Action may be taken to protect sales and reputation or because it is increasingly profitable.

• Businesses may be responsible and environmentally aware because they believe in 'public responsibility'.

Maximising Short-Term Revenue

This benefits managers and workers when salaries and bonuses depend on sales revenue.

• However, reducing prices might decrease actual profits.

Increasing Shareholder Value

Strategies aim to increase returns to shareholders by increasing profit and paying higher dividends, leading to higher share prices.

• This objective prioritizes shareholders' interests.

Objectives of Social Enterprises

Social enterprises have three main aims (the triple bottom line):

1. Economic (financial): To make a profit to reinvest back into the business.
2. Social: To provide jobs or support for local, often disadvantaged, communities.
3. Environmental: To protect the environment and manage the business sustainably.

Key Term

• Triple bottom line: The three objectives of social enterprises: economic, social, and environmental.

CSR and the triple bottom line are linked.

• Any business committed to CSR objectives will aim for 'triple bottom line' targets.
• Businesses only considering profit will not have a triple bottom line target.

Objectives of Public-Sector Businesses

Public-sector businesses (nationalized industries or public corporations) have various objectives:

• Providing efficient, reliable service to the public.
• Encouraging economic and social development, especially in deprived areas.
• Creating employment or preventing major job losses.
• Meeting financial targets set by the government, not necessarily making a profit.
• Achieving high environmental standards.

Public-sector businesses may be less efficient due to not having a profit motive.

• Achieving social or environmental objectives can help the government's political objectives.

The Most Effective Objectives Are SMART

General objectives are almost meaningless.

The most effective business objectives meet the SMART criteria:

• S-Specific: Focuses on what the business does and applies directly to that business.
• M-Measurable: Has a quantitative value.
• A-Achievable: Setting objectives that are practically possible in the time frame given will be pointless.
• R-Realistic and relevant: Realistic compared to resources and expressed in relevant terms.
• T-Time-limited: A time limit is set.

Key Term

• SMART objectives: Aims that are specific, measurable, achievable, realistic and time-limited.

Summary: Factors That Determine Business Objectives

Factors include:

• Public sector or private sector.
• Business culture.
• Number of years in operation.
• Ethics.
• Size and legal form of the business.

Business Culture

Culture is a shared way of doing things within an organization.

• The culture of a business and its senior managers impacts greatly on the decisions made.
• If senior managers aggressively pursue only the profit objective, their decisions will be different to those of the managers of a business with a people-centred or society-centred culture.

The Size and Legal Form of the Business

Owners of small businesses may solely be concerned with a satisfactory level of profit (called satisficing).

• Larger businesses, perhaps controlled by directors rather than owners-such as most public limited companies-might be more concerned with rapid business growth in order to increase the directors' status and power.

Private Sector vs. Public Sector

Profit and shareholder value are common business objectives in the private sector.

• In the public sector, quality of service measures are often used, such as the maximum number of days a patient needs to wait for an operation.
• Even revenue-earning businesses in the public sector, for example the postal service, may have other objectives such as maintaining services in non-profitable locations.

The Number of Years The Business Has Been Operating

Newly formed businesses are likely to be driven by the desire to survive at all costs, as the failure rate of new firms in the first year of operation is very high.

• Later, once well established, the business may pursue other objectives such as growth and profit.

Relationship Between Mission Statement, Aims, Objectives, Strategy and Tactics

Links between setting aims, a mission statement, and objectives help managers develop business strategies and tactics.

A hierarchy exists from aim to mission to business objectives to divisional objectives to departmental objectives to individual targets.

Business Aims

The core central purpose of a business activity is expressed in its business aims.

• These are not expressed in SMART terms but are broad indications of what is hoped to achieve in future.
• These aims must be converted into specific and measurable objectives.

Key Term

• Business aim: A long-term goal that a business hopes to achieve.

Mission Statements

Mission statements condense the central purpose of a business existence into one statement.

• They are not concerned with specific, quantifiable goals, but attempt to sum up the business aim in a motivating and appealing way.

Key Term

• Mission statement: A brief statement of the business core aims, phrased in a way to motivate employees and to stimulate interest from outside groups.

Examples of mission statements are provided for:

• A college
• Samsung
• Huawei
• Microsoft
• Google
• Merck

Businesses communicate their mission statements in various ways, including published accounts, business plans, internal newsletters, and advertising campaigns.

Evaluation of Mission Statements

Almost any organization of any size will have established a mission statement in recent years.

Advantages of Mission Statements:

• Inform groups outside the business what the central aim and vision are.
• Motivate employees by associating them with positive qualities.
• Include moral statements or values to guide employee behavior.
• Help establish what the business is about for the benefit of other groups.

Limitations of Mission Statements:

• Too vague and general, saying little specific about the business and not usable as actual targets.
• Just a public relations exercise to make stakeholder groups feel good.
• Virtually impossible to really analyze or disagree with.
• Too general and lacking specific detail, so two completely different businesses could have very similar mission statements.

In summary, mission statements are insufficient for forming strategies.

• They do not tell managers what decisions to take or how to manage the business.
• They do provide a vision and an overall sense of purpose and they can prove very worthwhile in public relations terms.

Objectives, Strategies, and Tactics

The aims and mission statement of a business share the same problems: they lack specific detail for operational decisions and they are rarely expressed in quantitative terms.

• They need to be turned into SMART objectives.
• These can then be broken down into strategic departmental targets.
• Business objectives must, of course, be based upon the central aims or mission of the business.
• They are expressed in terms that provide a much clearer guide for business strategies and tactics.

Key Terms:

• Annual (company) report: A document that gives details of a company's activities over the year, including its financial accounts.
• Business strategy: A long-term plan of action for a business, designed to achieve a particular objective.
• Tactic: A short-term action as part of an overall strategy

Aims and objectives provide the focus for business strategies-the long-term plans of action of a business

• Without a clear objective, managers will be unable to make important strategic decisions for the business as a whole or for individual departments. For example, should a marketing manager decide to sell products in new markets or attempt to sell more in existing markets?
• Without a clear business objective translated into a marketing objective, any strategic decisions will lack focus and direction
• Once a strategy has been decided, then small-scale tactical decisions must be taken. For example, once the strategic decision to market a product in a foreign country has been taken, tactical decisions about the methods of promotion and the level of pricing must be made.

Examples of business objectives, marketing objectives, marketing strategies and marketing tactics are shown.

Objectives and Business Decisions

Setting objectives is the starting point of business decision-making.

• Without having a clear sense of direction, it is impossible to take effective business decisions.
• Business managers cannot decide on future plans of action or strategies if they are uncertain of which direction they want to take the business in.

The Role of Objectives in the Stages of Business Decision-Making

Links between decision-making, strategies and objectives

1. Set objectives to provide focus for strategic decision.
2. Assess and clarify the problem that requires strategic action.
3. Gather data about the problem and identify possible strategic solutions
4. Analyse the likely impacts of all decision options on the chance of achieving business objectives.
5. Make the strategic decision.
6. Plan and implement the decision.
7. Review its success against the original business objectives. Has the business, through its decisions achieved its objectives?

How Objectives Might Change Over Time

There are many examples of businesses changing their business objectives over time. These are some of the reasons for this:

• A newly formed business may have satisfied the survival objective by operating for several years, and now the owners wish to pursue objectives of growth or increased profit.
• The competitive and economic environment may change. The entry into the market of a powerful rival or the start of an economic recession may force a business to switch from growth to survival as its main aim.
• A short-term objective of growth in sales or market share might be adapted to a longer-term objective of maximizing profits from the higher level of sales.

Translation of Objectives Into Targets and Budgets

An important role of senior management is to convert the overall objectives of the business into targets for individual departments, groups and individuals.

• Specific and measurable short-term targets must be set for each business section, based on the overall objective of the business.
• These targets will be for limited time periods, such as the next three months. These targets must be reached if the overall objective is to be achieved.

Key Term

• Target: A short-term goal that must be reached before an overall objective can be achieved.

Communicating Objectives

Communicating objectives to shareholders and external stakeholders is vital.

• Companies communicate with shareholders and other external stakeholders through the annual published report. This contains details of the objectives the senior managers have established for the business.
• Mission statements are often widely publicized as well (although these do not contain specific details about business objectives).

Business objectives must also be explained to employees

• If employees are unaware of the business objectives, how can they contribute to achieving them?
• Communicating business objectives, and translating them into individual targets, are essential for the effective motivation of employees.

If employees are communicated with and therefore involved in the setting of individual targets, then these benefits should result:

• Employees and managers have a greater understanding of both individual and company-wide goals.
• Employees understand the overall plan and how their individual goals fit into the company's business objectives.
• Employees share responsibility for targets and objectives by interlinking their goals with those of others in the company.
• Managers stay in touch with employees' progress more easily, as regular monitoring of employees' work allows for praise or training to keep performance and deadlines on track.

If managers fail to communicate with employees on objectives or changes in objectives, fear and uncertainty might spread amongst the workforce.

• This could lead to resistance to change and potential industrial action.

Ethical Influences on Business Objectives and Activities

The growing acceptance of corporate social responsibility has led to businesses adopting an ethical code to influence the way in which decisions are taken.

Key Term

• Ethical code (code of conduct): A document detailing a company's rules and guidelines on staff behaviour that must be followed by all employees.

Most business decisions have an ethical or moral dimension. For example:

• Should a toy company advertise its products to young children so that they pester their parents into buying them?
• Is it acceptable to take bribes to place an order with another company?
• Should a bank invest in a company that manufactures weapons or tests chemicals on animals?
• Is it acceptable to feed genetically modified food to cattle?
• Do we accept lower profits in the short term by purchasing less polluting production equipment?
• Should chief executives receive substantial pay rises and bonuses when other workers in the business are being made redundant?
• Is it acceptable to close a factory to save costs and increase profits even though many jobs will be lost and workers may find it hard to get other jobs?
• If legal controls and inspections are weak, is it acceptable to pay very low wages for long hours of work in order to reduce business costs?
• If it is not illegal, should a business employ child labor to reduce costs?
• Should a business produce potentially dangerous goods as long as 'no one finds us out'?

These are all examples of ethical dilemmas.

• The way in which employees behave and take decisions in these cases should be covered and explained by a company's ethical code of conduct.

Some managers will argue that any business decision that reduces costs and increases profits is acceptable as long as it is legal, and some might argue that even illegal actions could be justified.

• However, there is now considerable evidence that more and more companies are considering the ethical dimension of their actions - not just the impact they might have on profits.
• Other managers will operate their business along strict ethical rules and will argue that, even if certain actions are not illegal, they are not morally right.
  • Such activities cannot be justified even if they might cut costs or increase sales.

Evaluating Ethical Decisions

Following a strict ethical code in decision-making can be expensive in the short term:

• Using ethical and Fairtrade suppliers can add to business costs
• Not taking bribes to secure business contracts can mean failing to secure significant sales.
• Limiting the advertising of toys to just adults, so that children do not pester them to buy, may result in lost sales
• Accepting that it is wrong to fix prices with competitors might lead to lower prices and profits
• Paying fair wages, even in very low-wage economies, raises wage costs and may reduce a firm's competitiveness against businesses that exploit workers

In the long term, there could be substantial benefits from acting ethically:

• Avoiding potentially expensive court cases can reduce the cost of fines
• Acting unethically can lead to bad publicity, lost consumer loyalty and long-term reductions in sales
• Ethical policies can lead to good publicity and increased sales.
• Ethical businesses attract ethical customers and, as world pressure grows for corporate social responsibility, this group of consumers is increasing.
• Ethical businesses are more likely to be awarded government contracts.
• Well-qualified employees may be attracted to work for the companies with the most ethical and socially responsible policies.