3.1.1 Understanding the nature and purpose of business
Why businesses exist
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
The relationship between mission and objectives
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
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
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
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
Corporate aims and objectives:
- Mission statement – the overall reason for the business’ existence
- Corporate aims – the long term targets and plans to fulfil the mission statement
- Corporate objectives – the medium to long term quantifiable targets to fulfil the mission statement
- Corporate strategy – the actions to be taken by the business to achieve its objectives
Common business objectives
Types of business objectives:
- Ethical – (e.g. completely cruelty free; change packaging to cut down on plastic use; no harmful chemicals used throughout production; reduce waste; environmentally friendly)
- Profit (e.g. increase profit margins; maximise profit)
- Growth (e.g. number of shares (quantifiable) – volume; gain market share; increase number of outlets)
- Survival (e.g. achieve minimum level of sales and sales revenue to ensure costs are met and market share is retained; maintain levels of stock)
- Cash flow (e.g. reduce outflows; increase inflows)
- Social (e.g. support and solutions; enhance brand images and reputation)
Why businesses set objectives
Main functions of 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
The measurement and importance of profit
Profit = revenue – total costs
Total Costs = fixed costs (stay the same regardless of output eg rent) + variable costs (change in relation to the number of items produced)
Importance of profit:
- Motivator
- 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
- Further investment
- Guide to see where it is easier to make profits
- Where profits are high and low
- Stakeholders
- Reliable customers
- Purchase goods
- Easier to establish links and work with others businesses
- Finance
- Avoiding paying interest
- Fund expansion plans and capital investment
- Success
- Compare profits to competitors
- Before this though, have to look at competitor business objectives
- 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