Chapter 4: Business Objectives (AS LEVEL BUSINESS STUDIES)

Definitions to Remember:

• Mission Statement:  a statement of the business's core aims, phrased in a way to motivate employees and to stimulate interest by outside groups
• Corporate Social Responsibility: this concept applies to those businesses that consider the interests of society by taking responsibility for the impact of their decisions and activities on customers, employees, communities and the environment
• Management by Objectives: a method of coordinating and motivating all staff in an organisation by diving its overall aim into specific targets for each department, manager and employee
• Ethical Code (Code of Conduct): a document detailing a company's rules and guidelines on staff behaviour that must be followed by all employees.

Notes:

The most effective business objectives usually meet the following 'SMART' criteria:

• S - Specific: Objectives should focus on what the business does and should apply directly to that business.
• M - Measurable: Objectives that have a quantitative value are likely to prove to be more effective targets for directors and staff to work towards
• A - Achievable: Objectives should be possible in the time frame given in order for it to not become pointless
• R - Realistic and Relevant: Objectives should be realistic when compared with the resources of the company and should be expressed in terms relevant to the people who have to carry them out
• T - Time-Specific: A time limit should be set when an objective is established. Without a time limit, it will be impossible to assess whether the objective has actually been meant.

Corporate aims is expressed as the core central purpose of a business's activity, considerably the very long term goals that a business hopes to achieve. 

Benefits from establishing corporate aims:

• they become the starting point for the entire set of objectives on which effective management is based
• corporate aims can help develop a sense of purpose and direction for the whole organisation if they are clearly and unambiguously communicated to the workforce
• they allow an assessment to be made, at a later date, of how successful the business has been in attaining its goals
• aims provide the framework within which the strategies or plans of the business can be drawn up to.

Advantages of Mission Statements

• quickly inform groups outside the business what the central aim and vision are
• can prove motivating to employees, especially where an organisation is looked upon, as a result of its mission statement, as a caring and environmentally friendly body
• often include moral statements or values to be worked towards, and these can help to guide and direct individual employee behaviour at work
• are not meant to be detailed working objectives, but they help to establish in the eyes of other groups 'what the business is about'

Disadvantages of Mission Statements

• too vague and general, so that they end up saying little that is specific about the business or its future plans
• based on a public relations exercise to make stakeholder groups feel good about the organisation
• virtually impossible to really analyse or disagree with
• often rather woolly and general, so it is common for two completely different businesses to have very similar mission statements

Communication of Mission Statements

• They often feature in the published accounts and in other communications to shareholders
• They will appear in the corporate plans of the business - the detailed report on the company's aims and strategies for the future
• Internal company newsletters and magazines may draw their title from part of the mission statement
• Advertising slogans or posters are frequently based around the themes of the mission statement

Mission statements are insufficient for operational guidelines: they do not tell managers what decision to take or how to manage the business. 

Common Corporate Objectives

1. Profit Maximisation

Profit Maximisation is when a business is producing at a level of output where the greatest positive difference between total revenue and total costs is achieved.

Limitations of Profit Maximisation:

• The focus on high short-term profits may encourage competitors to enter the market and jeopardise the long term survival of the business
• Many businesses seek to maximise sales in order to secure the greatest possible market share, rather than to maximise profits.
• The issues of independence and retaining control may assume greater significance than making higher profits
• Most business analysts assess the performance of a business through return on capital employed rather than through total profit figures
• Profit maximisation may well be the preferred objective of the owners and shareholders, but other stakeholders will give priority to other issues. The growing concern over job security for the workforce or the environmental concerns of local residents may force profitable business decisions to be modified, yielding lower profit levels.
• In practice, it is very difficult to assess whether the point of profit maximisation has been reached, and constant changes to prices or outputs to attempt to achieve it may well lead to negative customer reactions.

2. Profit Satisfying

Profit Satisfying is aiming to achieve enough profit to keep the owners happy but not aiming to work flat out to earn as much profit as possible. 

• Objective is suggested to be common among owners of small businesses who wish to live comfortably but do not want to work longer to earn even more profit.
• Once a satisfactory level of profit has been achieved, the owners consider that other aims take priority - such as more leisure time.

3. Growth

Advantages:

• Larger firms will be less likely to be taken over
• Should be able to benefit from economies of scale
• Managers will be motivated by the desire to see the business achieve its full potential (gaining higher salaries and fringe benefits)
• A business that does not attempt to grow will cease to be competitive and, eventually, lose their appeal to new investors

Disadvantages:

• Expansion that is too rapid can lead to cash-flow problems
• Sales of a business may grow, but it may have low profit margins
• Larger businesses can experience diseconomies of scale
• Using profits to finance growth - retained earnings - can lead to lower short-term returns to shareholders
• Growth into new business areas and activities - away from the firm's core activities - can result in a loss of focus and direction for the whole organisation

4. Increasing Market Share

Increasing market share indicates that the marketing mix of the business is proving to be more successful than that of its competitors. Benefits of being brand leader include:

• retailers will be keen to stock and promote the best-selling brand
• profit margins offered to retailers may be lower than competing brands as the shops are so keen to stock it - this leaves more profit for the producer
• effective promotional campaigns are often based on 'buy our product with confidence - it is the brand leader'

5. Survival

• Likely to be the key objective of most new business start-ups
• Once the business has become firmly established, then other longer-term objectives can be established

6. Corporate Social Responsibility (CSR)

Firms must adopt a wider perspective when setting their objectives and not just be aiming for profits or expansion.

There are reasons for these trends in business objectives:

• Consumer and other stakeholders are reacting positively to businesses that act in 'green' or socially responsible ways
• There is a much greater harmful publicity given to business activity that is considered damaging to stakeholder groups and the wider world
• Legal changes (locally, nationally and in an EU Level) have forced businesses to refrain from certain practices
• Influential pressure groups are forcing businesses to reconsider their approach to decision making

Firms that are being ethical or environmentally conscious because they have an objective called 'public responsibility', because they want to behave in these ways.

7. Maximising Short-Term Sales Revenue

• Can benefit managers and staff when salaries and bonuses are dependant on sales revenue levels.
• If increased sales are achieved by reducing prices, the actual profits of the business might fall

8. Maximising Shareholder Value

• Applies to public limited companies and directs management action towards taking decisions that would increase the company share price and dividends paid to shareholders
• Targets can be achieved by pursuing the goal of profit maximisation
• Shareholder-value objective puts interest of shareholders above those of other stakeholders

Stages of Decision Making Framework

1. Set objectives
2. Assess the problem or situation
3. Gather data about the problem and possible solutions
4. Consider all decision options
5. Make the strategic decision
6. Plan and implement the decision
7. Review its success against the original objectives

Without setting relevant objectives at the start of this process, effective decision-making for the future of the business becomes impossible

Factors That Determine The Corporate Objectives of a Business

Corporate Culture

• Defined as: the code of behaviour and attitudes that influence the decision-making style of the managers and other employees of the business
• Culture is about people, how they perform and deal with others, how aggressive they are in the pursuit of objectives and how adaptable they are in the face of change

The Size and Legal Form of the Business

• Owners of small businesses may be concerned only with a satisfactory level of output
• Larger businesses, such as most public limited companies, might be more concerned with rapid business growth in order to increase the status and power of the managers
• This is often a result of a development known as the 'divorce between ownership and control', which nearly always exists in large companies with professional directors who do not own it. 

Public-sector or Private-sector Businesses

• State-owned organisations tend not to have profit as a major objective

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

Divisional, Departmental and Individual Objectives

• Once corporate objectives have been established they need to be broken down into specific targets for separate divisions, departments and individuals.
• These divisional objectives must be set by senior managers to ensure:
• Coordination between all divisions
• Consistency with corporate objectives
• Adequate resources are provided to allow for the successful achievement of the objectives
• Once the divisional objectives have been established, then these can be further divided into departmental objectives and budgets and targets for individual workers. This process is called Management by Objectives (MBO)

Communicating Objectives to Employees

Communication of corporate objectives and translating these into individual targets is essential for the effective setting of aims and objectives.  If employees are communicated with - and involved in the setting of individual targets - then these benefits should result in :

• Employees and managers achieving more - through greater understanding of both individual and company-wide goals
• Employees seeing the overall plan - and understanding how their individual goals fit into the company's business objectives
• Creating shared employee responsibility - by interlinking their goals with others in the company
• Managers more easily staying in touch with employees' progress - regular monitoring of employees' work allows immediate reinforcement or training to keep performance and deadlines on track

Ethical Decisions

Adopting and keeping to a strict ethical code in decision-making can be expensive in the short term:

• Using ethical and Fairtrade suppliers can add to business's costs
• Not taking bribes to secure business contracts can mean failing to secure significant sales
• Limiting the advertising of toys and other child-related products to just adults to reduce 'pester power' 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 raises wages costs and may reduce a firm's competitiveness against businesses that exploit workers

However in the long term there could be substantial benefits from acting ethically:

• Avoiding potential expensive court cases can reduce costs of fines
• Ethical policies can lead to good publicity and increased sales
• Ethical businesses attract ethical customers and as world pressure groups grows for corporate social responsibility, this group of consumers is increasing
• Ethical businesses are more likely to be awarded government contracts
• Well-qualified staff may be attracted to work for the companies with the most ehtical and socially responsible policies