Chapter 4- Business Objectives
Learning Objective: Business objectives of private and public sector businesses
Business objectives are important for directing, controlling, and reviewing the success of the business activity:
They give a sense of direction to employees - increasing their motivation;
They give targets for strategies to aim for - focus on what to work towards;
They make it possible for success/failure to be assessed against.
There are a few objectives that are very common among private-sector businesses:
Profit Maximization: Producing at that level of output where the greatest positive difference between total revenue and total costs is achieved.”
“Short-termism” is a consequence of this objective and can jeopardize the long-term survival of the firm.
Considerations:
High profitability of a firm doesn’t necessarily mean high performance (return on capital employed does);
Other stakeholders (other than shareholders) may not be necessarily aligned with this objective (environmental protection, residents, etc.);
Difficult application might lead to negative consumers’ reaction (when companies are trying to find the optimum point between revenue and cost they need to change prices so many times which can backfire).
Profit Satisficing:
Happens when there is separation between ownership and control;
The goal of managers is just enough to keep owners satisfied;
Common type of objective for small business owners willing to have their businesses as a means of income only.
Growth:
It can be measured by both sales and value of output and lead to several benefits:
Firms are less prone to takeovers;
Employees motivation (bigger firm represents bigger opportunities and better benefits);
Keeps investors engaged (as growth is one of their main objectives);
Limitations of Growth as objective:
Sales growth may happen on the expense of profit margin;
Diseconomies of scale can be experienced by large firms - they can happen due to:
Unplanned expansion may lead to cash-flow problems as an inefficient management may grow too quickly and too big;
Technical difficulties (there is an optimum amount of output given the production factors of a such firm and going beyond this can bring extra costs);
Increased marketing costs to keep up with growth leads to increased costs;
Businesses increase retained profit for targeting growth which can upset shareholders;
Extensive and uncontrolled diversification leads to loss of focus and control.
Increasing Market Share:
Increasing the likelihood of retailers of stocking up and promoting the best-selling brands;
Increasing profit margins as retailers will probably require lower discounts for carrying a popular brand;
Giving the business a 'marketing advantage' over other businesses that are not the top-of-mind brand.
Survival:
Common objective amongst new businesses;
Usually the first objective of a business;
It's oftentimes changed to other objectives once the business establishes itself (> 2 years).
Corporate Social Responsibility (CSR):
- As a result of the growing view that businesses should have other objectives than profit:
Social
Environmental
Ethical
- Improves reputation and avoids bad publicity;
- Avoids pressure group actions;
- Helps on following laws/regulations and avoid fines.
There are even businesses that go so far as to become Social Enterprises, in other words, they develop three main objectives (e.g. the triple bottom line):
Economic (financial) - to make a profit to re-invest back into the business and provide some financial return to owners;
Social - to provide jobs or support for local, often disadvantaged, ommunities;
Environmental - to protect the environment and to manage the business in an environmentally friendly way.
Corporate Social Responsibility: when businesses consider 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 created by people with a common interest or aim, who put pressure on businesses and governments to change policies to that an objective is reached.
Other objectives include:
Maximizing Short-Term Revenue: when managers are striving for bonuses. It might undermine business' profitability if it's achieved through price reductions;
Increasing Shareholder Value: putting shareholders' interests among others. Shareholder value is created through increased dividends and share value - both of which are a consequence of higher profits.
The objectives of public-sector businesses, however, are usually different:
To provide efficient, reliable service to the public (i.e. water supply);
To provide social and economic growth in deprived areas (e.g. create employment);
To achieve environmental standards;
To meet government's financial targets (not necessarily make a profit).
As you can see, public-sector businesses do not have a profit-motive and therefore are said to be less efficient. However, they might meet other social or environmental objectives helping governments meet their political objectives.
To-Do-List:
Chapter 4 - Exam-Style Questions (Q3, Q4, Q6, Q12, Q13, Q14)
Chapter 4 - Essay Question (1b)
Chapter 4- Business Objectives
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