4. Business Objectives Flashcards
The importance of business objective
- create a sense of direction and purpose for all employees, which will increase their motivation
- provide specific targets for future business strategies to aim for, as new business strategies will lack focus without an objective to work towards
- give a means of assessing success or failure when actual business performance is judged against the original objectives
Objectives of private-sector businesses
- Profit maximisation: it means producing at that level of output where the greatest positive difference between total revenue and total costs is achieved.
- Profit satisfying: is a common aim for owners of small businesses, who wish to live comfortably but do not want to work longer hours to earn more profit
- Growth - internal and external growth
- Increasing market share - An increase in market share indicates that the business’s marketing strategies are proving more successful than those of its competitors
- Survival - key objective of most new business start-ups. high failure rate of new businesses means that to survive for the first two years of trading is an important aim for entrepreneurs. Once the business has become firmly established, then other longer term objectives can be established
- Corporate social responsibility (CSR) - objectives about social, environmental and ethical issues. There is a growing belief that businesses must adopt a wider perspective than just profit when setting their objectives. One reason for this is the adverse publicity given to business activity that is seen to be damaging to stakeholder groups and the wider world. Influential pressure groups are forcing businesses to reconsider their approach to decision-making. Also, legal changes at local, national and international level are forcing businesses to stop activities that harm the environment or damage the social and ethical interests of external stakeholders
Objectives of social enterprise
Profit is not the sole objective
of these enterprises, their objectives are triple bottom line.
- economic (financial) – to make a profit to re-invest back into the business and provide some financial return to the owners
- social – to provide jobs or support for local, often disadvantaged, communities
- environmental – to protect the environment and to manage the business in an environmentally sustainable way
The benefits of being the brand leader with the highest market share
- Retailers will be keen to stock and promote the best-selling brand.
- Products can be supplied to retailers at a low discount rate, since the shops will be more keen to stock them. This will give the producer a higher profit margin.
- Effective promotional campaigns are often based on ‘You can buy our product with confidence as it is the brand leader.’
limitations of profit maximisation
- The focus on high short-term profits may encourage competitors to enter the market.
- Profit maximisation may be the preferred objective of the owners and shareholders, but other stakeholders will prioritise other objectives. Managers’ concerns over workers’ job security or environmental protection may force profitable business decisions to be modified, yielding lower profit levels.
- Most business analysts assess the performance of a business through return on capital employed
rather than through total profit figures
Objectives of public-sector businesses
- to provide an efficient, reliable service to the public, such as water supply or postal service
- to encourage economic and social development, especially in deprived areas
- to create employment or prevent major job losses if the industry is making a financial loss
- to meet financial targets set by the government, but not necessarily make a profit
- to achieve high environmental standards.
SMART objectives
S – Specific: Objectives should focus on what the business does and should apply directly to that business. A hotel business might set the objective of a 15% return on capital in each of its hotels. This objective is specific to this 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. An example would be to increase sales in the south-east region by 15% this year.
A – Achievable: Setting objectives that are almost impossible in the time frame given will be pointless. They will demotivate the staff who have the task of trying to reach these targets. So, objectives should be achievable.
R – Realistic and relevant: Objectives should be realistic when compared with the resources of the company and should be expressed in terms that are relevant to the people who have to carry out the objectives. So, informing hotel cleaners about increasing market share is less relevant than giving them a target to reduce the amount of cleaning materials they use by 20%.
T – Time-limited: 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 met. An example would be to increase profits by 5% over the next three years
Factors that determine business objectives
Business culture
Culture is a way of doing things that is shared by all those within an organisation. 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 or 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
Business aims
The core central purpose of a business’s activity is expressed in its business aims. Broad indications of what a business hopes to achieve in future.
Example:
Mission statement
Mission statements are an attempt to condense the central purpose of a business’s 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
Mission statements
* Advantages
- inform groups outside the business what the central aim and vision are
- motivate employees, as they are associated with the positive qualities the statement refers to
- often include moral statements or values to be worked towards, which might help to guide and direct individual employees’ behaviour at work
- help to establish what the business is about, for the benefit of other groups.
Mission statements
* Disadvantages
- too vague and general, so that they end up saying little that is specific about the business and cannot be used as actual targets
- just a public relations exercise to make stakeholder groups feel good about the organisation
- virtually impossible to really analyse or disagree with
- too general and lacking in specific detail, so two completely different businesses could have very similar mission statements.
- mission statements are insufficient for forming strategies. They do not tell managers what decisions to take or how to manage the business
How objectives might change over time
- 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 maximising 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. Usually, these targets form part of a department’s budget or financial plan.
Communicating 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.
- 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
- If managers fail to communicate with employees on objectives or changes in objectives, fear and uncertainty might spread amongst the workforce.
