Introduction to BusinessQCF Level 4 Unit

Learning Outcome #1 Business Objectives, Resources and Accountability

A. Business Objectives

A corporate aim is the long term intentions of what a particular type of business is trying to achieve and how it seeks to develop in the future. (Qualitative)

Corporate objectives are the stated, measurable targets that a business must meet in order to achieve its longer term corporate aims. Each business will adopt its own unique and individual corporate objectives, many are common and may change throughout the life of a business. (Quantitative)

The corporate strategy is a plan of action that provides clear direction of a business and the way in which the various business operations work to achieve the corporate objectives.

Qualitative relating to, measuring or measured by the quality of something rather than its quantity.Quantitative relating to, measuring or measured by the quantity of something rather than its quality.

Objectives, Growth and the Business Life Cycle

Survival - is the first objective of a business, that is, to reach a sustainable level of sales that allows the firm to break-even. Break-even is the point at where Total Cost = Total Revenue. Once a firm has reached a sustainable level of sales it might change its objective to one of profit maximization. Survival might also be an objective if the business is suffering from low sales during a recession. Profitability - is the state or condition of yielding a financial profit or gain. It is essential if enterprises are to continue business in the longer term. Profit maximization is the short run or long run process by which a firm determines the price and output level that return greatest profit. In practice firm are unlikely to try for it all the time; they will seek to achieve some accounting measure like a level of return on capital employed or income per share. Market penetration - is an important short-term objective when a firm enters a new market and wants to achieve a viable level of sales for example, a firm may set a target of 15% of the market, to be able to earn enough profit to cover the cost of entry. Market share - is often a longer term objective. The larger the share of the market the more dominant a business can become for example, setting price levels. This is linked to competitive advantage whereby a firm attempts to achieve and maintain its position in the market. Sales maximization - refers to plans and strategies employed by a business to increase its sales or revenue to the highest attainable level. Business growth - by increasing in size, a business can find it easier to survive for example, by diversifying into different products and markets, a firm can take advantage of economies of scale thereby increasing the size and the profits of the organization. Revenue maximization - can be the prime objective of organizations like bus companies that are paid a subsidy. The subsidy covers the cost of providing the service after allowing for a certain number of ticket sales and any additional revenue is bonus for the firm. Diversification - to reduce the risk it faces, a business may choose to produce different products in different markets. Therefore, if one of the product fails to achieve its sales the business has other sufficient products to ensure that the business continues to trade and not go out of business. Satisficing a decision-making strategy that aims for the satisfactory or adequate result, rather than an optimal solution. For larger organizations with several divisions or subsidiaries it is important to pursue one single objective. Because all the parts of the firm may have different goals, a minimum level of achievement is set for the organization as a whole. It is said to satisfice instead of maximize. Level of service - is the objective of organizations in the public sector and in not-for-profit areas. They may aim at the highest possible level of service or at the best attainable service at a given cost. Business firm also have a high standard of service to customers as an objective. Technical excellence - is an objective of research organizations and engineering firms. The pursuit of excellence may bring the kind of reputation that binds sales and profits in the long term.

B. Business Resources

Resources can be categorized into three factors of production: Land Labour CapitalMany economists have argued that there is a fourth factor entrepreneurship.

Land

This is used in two sense: The space occupied to carry out any production process for example, the space for a factory or building. The basic resources with land, air, sea which can be extracted for productive use for example, metal ores, coal and oil.Land is invariably owned by someone and that person(s) will want a price for its use in terms of rent or for its sale. The extraction of materials from the land also incurs a cost.

Land is finite resource. Two important consequences to this are:1. There is a limited amount of it and once it is used up it cannot be replaced (or at least not easily).2. Where land is scarce, there is great competition for access to it and this drives the price up. This also applies to the availability of raw materials extracted from land.

Labour

Labour is any physical or mental effort by humans used in the production process. People demand a return on their labour a reward in the form of money. Every economy has a workforce the total amount of people available to work, for gain, to produce goods and services. Characteristics of a workforce are: Physical characteristics not just simply in terms of overall numbers, but men and women, age range etc. which are important in defining the types of jobs that may be done. Skills of the workforce businesses need people with particular abilities in order to carry out the work required. Availability for work full time, part time or temporary. We could consider the hours for which they are available, as well as how many are already in work and, therefore, not currently available (in the short term). Geographical location where they are located (locally, regionally, nationally and internationally).

Capital

This can be placed into two categories: Real capital consists of tools, equipment and human skills employed in production. It can be either physical capital for example, factory buildings, machines and equipment or human capital the accumulated skill, knowledge and experience without which physical capital cannot reach its full potential. Financial capital is the fund of money, in a modern society, is usually needed to acquire and develop real capital.A business needs to ensure that it has sufficient money flowing into the business as revenue from selling goods and services to at least match the expenditure required to pay for items for example, wages.

C. Accountability

Accountability is the process by which a person is required to report to others on (held to account for) the exercise of responsibilities given to them those others.

A stakeholder is a person, group or organization that has interest or concern in an organization and its undertakings. A shareholder owns part of a company through stock ownership, while a stakeholder is interested in the performance of a company for reasons other than just stock appreciation. Shareholders are stakeholders, but stakeholders are not always shareholders.

The Interest of Stakeholders

a) Owners the owners of a large business will be the shareholders and some of these are likely to be institutional investors from major investment organizations such as pension and insurance funds, investment and unit trusts. These institutional shareholders may very well have large blocks of shares and have a more active and informed interest in the business than a typical private shareholder might. The key interest of owners are profits and for shareholders, that is likely to be just as clearly focused on dividend payments. They will also have an interest on overall business performance as this may affect share prices.b) Workforce directors are a group of individuals elected by the shareholders and are responsible for formulating overall company objectives and strategies for the business. The directors are accountable to shareholders for the performance of he business.Directors are supported by mangers who lead and control the workers to achieve organizational goals. They will have an interest in the overall success of the business, but will be more particularly concerned with objectives closer to their division or section and level of authority and responsibility. They are likely to be working towards specific targets and will have an interest in how successfully these have been achieved.Members of the general workforce and, possibly, representatives in the form of trade unions are likely to primarily interested in jobs and pay for example, job security, job satisfaction, improving current pay levels etc. To some extent the ability to do this will be linked to the overall success of the business.c) Customers are external to the business and their interests reflects this. We would expect them to be concerned with issues such as price, product, quality and customer service levels. Customers may very well have an ambivalent attitude towards profit, recognizing that firms need to make a profit, but also realizing that large profits can result from customer exploitation. They also may also have an interest in the continuance of the business.d) Suppliers interests are for long lasting business relationships and fair treatment. The continued survival of the business is important in correlation to future orders. The interests of the supplier also include the ability of the business to meet its obligations. Most large businesses have several suppliers and they may supply products and services on credit terms. These creditors need to be assured that payments will be made. Also lenders want guarantee of interest payments and eventual repayment of the loan.e) Creditors (financial institutions that lend money to businesses) have a direct stake in the business. They want the business to succeed so that loans and interest charged are paid on time. If a business does not repay its loan, the bank may seek to sell the businesses assets to get its money back.f) Competitors in many industries there is a growing interest in what the competition is doing. The overall business performance (evidenced by sales), profitability, growth and innovation is important to competitors. It is increasingly common for businesses to establish benchmarks based on various performance indicators of companies, especially companies within the same industry. This can be used to help shape strategies and policies.g) The state includes both the local government and the central government. The states main interest is the ability of the business to meet its tax and social security obligations. In the short term, it is a question of the cash flow of the business. However, in the longer term the interests are in the overall employment levels and contribution to general prosperity that the business can deliver.h) The community the term community can be taken to include all those with whom the organization has relationship with that is not a direct business relationship. Hence, local communities, pressure and interest groups of various kinds. The local community will be interested in the overall performance of organizations as this affects local employment and prosperity. The success of small businesses may be linked to the presence and success of big local businesses. There are interests in the particular type of business or the impact of its activities on the environment. There are many issues that may affect the quality of life of the local community such as land use, pollution, traffic etc. i) Pressure groups are non-profit and usually voluntary organizations that tries to influence policy in the interest of a particular case and to achieve a declared objective. Interest groups try to defend a cause (maintain the status quo), whereas pressure groups try to promote it (change the status quo).

Conflicts of Interest

By recognizing the needs of different stakeholder groups, incorporating the, into their own objectives and taking action to meet them a business can reap rewards for example, attracting new customers, recruiting and retaining high quality employees. This can in turn increase the chances of the business achieving its own prime objectives. However there are a range of stakeholders that have many interests and their different views and perspectives will all have an influence on the decisions made by the business. It is highly unlikely that a business will be able to satisfy all the needs of its stakeholders and so, conflicts can and do occur arise.

Stakeholder Influence

Some stakeholders tend to take a more proactive approach by trying to shape and influence policies and events in ways that further their interests.

a) Owners amongst owners, perhaps the key shareholders are large institutional investors such as pension funds and insurance company life funds, investment and unit trusts. These investors will invest very substantial funds and professional funds mangers seeking the possible returns. These fund managers will try to exercise their powerful influence on the board of directors to produce profits and dividends in line with the funds expectations. These influences can be very strong in shaping business objectives and strategies towards the interests of shareholders. The impact of these policies may be less beneficial to other shareholders such as workers and consumers.b) Financial creditors the main interests of financial creditors (particularly banks) are the payment of interest charged and the eventual repayment of loans. Even if loans are secured on company assets, these investors would rather see loans repaid by a viable business rather than having to recover their investments by selling of the businesss assets. These investors may seek to influence business policies to protect their interests.c) Workforce operating through trade unions, the workforce may decide to make their interests more prominent. Trade unions may take several actions to promote the interests of its member for improved pay and conditions and job security. Action can include strike action, working to rule and overtime bans. Establishing the interests of the workforce as dominant at a particular time is likely to have an effect on other stakeholders for example, a business may concede to pay claim if it feels it can pass on the higher cost to the customers.d) Customers are less organized than workers and managers and as a consequence their pressure tends to be less focused on. They can exert their pressure through what they choose to buy or not to buy. Where there is general consumer movements, as in concerns about food quality and growing demand for organic foods, changes in consumer spending can have a significant impact on company profits and can force businesses to change policy. This can be seen in the increasing for particular levels of quality in delivery of services or the standard of products. Similar effects can occur from changes in consumer tastes and preferences and in concerns for the environment, and can affect businesses in issues as diverse as packaging, policy labelling and control of emissions.e) Companies acting as customers themselves, expect their suppliers to meet stringent quality standards and is especially important when just-in-time production methods are used. Firms are aware that customers judge them based on the quantity of their products. If a component supplied by another company fails, the customer blames the maker not the supplier of the faulty component.f) Public sector in the public sector, quality standards have often been in incorporated into customer charters and performance is examined to see if standards have been met.g) Consumers can also exert influence by bringing pressure to bear on the state to enact legislation to further their interests, such as the Trade Description Act or the Sales of Goods Act. One group of stakeholders may seek to gain influence through other stakeholders. This can also be seen in the practices of some pressure groups acting on behalf of the environment in seeking to influence both government policy and shareholders.h) The state can exercise influence through the tax and spend system or through interest rate and exchange rate policy. These policies have general effects for example, an increase in interest rates will raise the cost of businesses in general and will have an ongoing impact on a range of stakeholder interests. In some cases the effects are more specific in that they affect individual firms or industries for example, tax policies on tobacco or oil product.i) The influence of the government can also be seen in relation to its own spending priorities. If the government decides to switch from defense to health services, it will affect a range of businesses in both industries. It may also offer subsidies to support particular businesses that will further governments policies for example, regional regeneration.

Ethics

The ethical code of conduct that seeks to prevent directors and other senior managers from exploiting their positions would cover the following areas: The duty of manger to take into account of the interests of all stakeholders in the organization, as well as the general public and to make a profit. The need to have regard to the safety of workers and users of products. Avoidance of bribery and corruption and of giving excessively large gifts or generous contract terms, even in countries where these practices are accepted. The principle that mangers should not use their authority for personal gain. The need to respect confidentiality of customer and supplier information. Making every effort to comply with good business practices, such as paying on time according to terms.

Satisficing

A decision-making strategy that aims for a satisfactory or adequate result rather than the optimal solution. This is because aiming for the optimal solution may resuscitate needless expenditure of time, energy and resources.