3.1.1 Understanding the nature and purpose of business Flashcards
Why do businesses exist?
In other words, what are key business objectives?
- To make money
- To provide a service
- Provide employment opportunities
- Fill a gap in the market
- Help the community (social enterprise)
- Be environmentally friendly
- Improve existing products
- Survive
What is a mission statement?
This provides the overriding goal of a business and the reason for its existence; and a strategic perspective for the business and a vision for the future
What are the benefits of a good mission statement?
- Clarifies purpose and focus
- Motivates staff and those interested in the business
- Attracts people (such as investors) and resources
- A good public relations tool
What are the characteristics of a good mission statement?
- Contains a formulation of objectives that enables progress towards them to be measured
- Differentiates the business from its competitors
- Defines the markets or business in which the firm wants to operate
- Is relevant to all major stakeholders – not just shareholders and managers
- Excites, inspires, motivates, and guides – particularly important for employees
What are criticisms of mission statements?
- Not always supported by actions of the business
- Often too vague and general
- Views as a public relations exercise
- Sometimes regarded cynically by employees
- Not supported wholeheartedly by senior management
What are corporate aims?
Corporate aims – the long term targets and plans to fulfil the mission statement
What are corporate objectives?
The medium to long term quantifiable targets to fulfil the mission statement
What is corporate strategy?
The actions to be taken by the business to achieve its objectives
What are types of business objectives?
- Ethical
- Profit
- Growth
- Survival
- Cash flow
- Social
Examples of ethical objectives
(e.g. completely cruelty free; change packaging to cut down on plastic use; no harmful chemicals used throughout production; reduce waste; environmentally friendly)
Examples of profit objectives
(e.g. increase profit margins; maximise profit)
Examples of growth objectives
(e.g gain market share; increase number of outlets)
Examples of survival objectives
(e.g. achieve minimum level of sales and sales revenue to ensure costs are met and market share is retained; maintain levels of stock)
Examples of cash flow objectives
(e.g. reduce outflows; increase inflows)
Examples of social objectives
(e.g. support and solutions; enhance brand images and reputation)
Why do businesses set objectives?
- A clear statement of what needs to be achieved
- Focus’ on all activities of the business (marketing, operations, finance, human resources)
- Provides targets for individual and group achievements
- A means of measuring performance (business, departments, individual employees)
- Provides a clear focus for decision making and a target to aim for
- Provides criteria for evaluating performance
How do you measure profit and total costs?
Profit = revenue – total costs
Total Costs = fixed costs + variable costs
State the reasons for profit being important
- Motivator
- Further investment
- Stakeholders
- Finance
- Success
- Reward
Why is profit important as a motivator to different business forms?
- Sole traders can keep all the profit
- Ltds owned by people running the business
- Profit sharing schemes in which staff are given incentives to work effectively
Why is profit important for further investment?
- Guide to see where it is easier to make profits
- Where profits are high and low
Why is profit important for shareholders?
Shareholders become happier as they receive more dividends
Why is profit important for finance?
- Avoiding paying interest (through retained profit)
- Fund expansion plans and capital investment
Why is profit important to success?
- Compare profits to competitors
- Before this though, have to look at competitor business objectives
Why is profit important as a reward?
- Many business owners take risks with money
- Every 6 months, plcs pay dividends to shareholders
- Retain profit to buy more resources to make more profit in the future
