Business Objectives and Strategy

Exam-style Questions

1.

a) Why is it important for a business to specify its objectives?

b) Explain, with examples, why differing stakeholder and organisational objectives might cause problems for managers.

(Marks available: 10)

Answer

Answer outline and marking scheme for question: 1

Give yourself marks for mentioning any of the points below:

a) Focus for all employees, measure by which to judge the performance of the business, informs strategic planning.

(5 marks)

b) Conflict, e.g. local community objective - clean environment, company objective - profit (cost cutting creates pollution).

Decision making: e.g. Shareholders may demand high dividends, but management seek to invest profits for long term.

(5 marks)

(Marks available: 10)

2.

Explain, with examples, what is meant by the stakeholders in a company.

Is it in the interests of all stakeholders that a company should try to maximise its profits?

(Marks available: 20)

Answer

Answer outline and marking scheme for question: 2

Stakeholders are those persons who hold a stake in the company; they include shareholders, banks, the local community, customers, employees, government - if the American definition of "anyone who may be affected by the actions of the corporation" is adopted, even competitors.

(max 12)

A candidate might wish to refine the question and write of "long term" profits and then argue, with Milton Friedman, that the objective of the company is to increase shareholder wealth.

Many will argue that the company has a duty to other stakeholders. Johnson and Johnson, for example, put the customer first, then the employees, and the shareholders last. Green issues may be mentioned.

(max 12)

Excellent A clear and concise explanation of the stakeholder concept and a well sustained argument for or against the maximising of profits.
Competent An informed account of the stakeholder concept and a reasoned argument for
or against maximising profits.
Adequate A knowledge of what is meant by stakeholders and some reasons for or against
maximising profits.
Weak A limited knowledge of what is meant by stakeholders and ill-connected
comments for or against maximising profits.

(Marks available: 20)

Objectives

An objective is a goal that needs to be achieved.

Under both UK and EU law, a company must state what it is in business to do - this is known as its overall aim and it can be embodied in a mission statement. This is often a simple and memorable sentence which explains what the organisation is in business to do and what it wants to achieve. A mission statement can often be found in the front of a company's annual report and it is, effectively, a summary of its day-to-day activities and long-term objectives, showing a sense of underlying purpose and direction.

It is often argued that mission statements are best when they are simple and informal. For example:

Ford Motor Company PLC "...is a worldwide leader in automative products and services, as well as in newer industries such as aerospace and communications. Our mission is to improve continually and meet our customers' needs, allowing us to prosper as a business and to provide a reasonable return for our shareholders."

Cadbury Schweppes PLC "...is a major international company with a clear focus on its two core businesses - confectionery and beverages. Our quality brands are bought and enjoyed in more than 110 countries around the world..."

The Body Shop PLC "...to dedicate our business to the pursuit of social and environmental change..."

A good mission statement should be clearly defined, realistic and achievable, and at the same time it should ensure that the employees' attention is focussed towards the overall company aim.

Mission statements normally express the organisation's objectives in qualitative terms, (as opposed to quantitative, that is, facts and figures) and many businesses include the following variables in their mission statement: their number one priority, their product definitions, their non-financial objectives and their overall values and beliefs.

Although many people view mission statements as a focus for employees and for other stakeholders, they are still viewed by their critics as nothing more than a publicity seeking exercise.

It is important to understand how business ojectives 'fit in' with business aims and strategies.

-An aim states what you want

-An objectives set out what you need to have achieved to get what you want

-A strategy is a course of action which enables you to meet your objectives.

In order for objectives to be effective, they must:

1.provide detail about what specifically needs to be achieved (often in a quantitative form)

2.have a time limit by when they need to have been achieved

3.need to state the necessary resources that they require in order to be met.

Setting clearly defined and realistic objectives will enable many employees to understand exactly what their job entails and achieving clearly stated objectives might be linked to bonus payments - this can easily act as an incentive and motivator to employees.

A primary objective is an ultimate long-term goal of the business (e.g. survival, profit maximisation, diversification and growth). They are often referred to as strategic objectives.

A secondary objective is a day-to-day objective, and it makes a direct contribution to meeting the primary objectives (e.g. increase sales by 5% each year, keep labour turnover at less than 4%). They are often referred to as Tactical objectives.

Private sector

Private sector objectives will often differ considerably from objectives set in the public sector. Profit maximisation is often quoted as the over-riding objective for businesses in the private sector. This will involve trying to produce at the point where there is the maximum difference between the firm's total revenue and its total cost - resulting in large dividend payments for the shareholders. However, it is far more likely that businesses will aim to profit satisfy rather than profit maximise (that is, they will aim to earn a satisfactory level of profits to keep shareholders content, and then use the remaining resources to pursue other objectives such as diversification and growth).

Another objective in the private sector, for a rapidly growing business, may well be to maximise sales (or sales revenue) and so increase their market share in order to gain a competitive advantage.

Many businesses set objectives to improve their image and to appear more socially responsible and environmentally friendly - this is often achieved through strategies of recycling materials, sponsoring local events and strictly adhering to all employee legislation (e.g. pay levels, Health & Safety, discrimination, etc.).

Public sector

Public sector objectives have, traditionally, been centred around providing a public service, rather than make a profit (e.g. when British Gas was a public corporation it had to provide gas supplies to all areas of the UK, many of which were isolated and very unprofitable for the organisation). This regularly led to loss-making organisations being subsidised by the government, and complacency crept in with regards to customer service, quality levels and response times. However, in the UK in the 1980s and 1990s, a massive privatisation programme by the government was implemented and many large utilities such as British Gas, British Telecom and the Electricity Boards were sold to the private sector.

The remaining public sector organisations were told to run in a more cost-efficient manner and to improve the quality of their services to consumers. Performance targets were set for many Local Health Authorities, Local Education Authorities and council services in an attempt to make them more accountable, to reduce their costs and to improve the quality of their output.

Short-term objectives will often differ from long-term objectives, especially if the business is experiencing poor financial performance at present. A short-term objective may be to consolidate, or even simply to survive the difficult trading conditions that it is experiencing. Once this has been achieved and the business has stabilised its performance, then it may well look to achieve its long-term objective of diversification into new products and new markets, or growth through amalgamation.

Strategy

A strategy is a way of achieving an objective

Businesses of all sizes have to make many decisions each day - some are fairly simple and routine, whilst others are more complex and require significant management time and effort. Some examples of decisions that all businesses need to make are:

  • Where should we locate the business?
  • What goods should we produce?
  • What price should we charge?
  • What should we do if a supplier fails to deliver on time?
  • Which job agency should we use to provide us with some temporary workers?
  • Which employee appraisal system should we use?

Decision-making is the basic task of all managers in all departments of the business, and both in the private and the public sectors. These decisions are, effectively, designed to influence the actions of other people.

A strategic decision is one which is very high-risk and is likely to influence the overall long-term policy and direction of the business. As such, it is likely to be dealt with by senior management (e.g. what new products to develop).

A tactical decision is a fairly routine, predictable, short-term decision, which is normally handled by middle management (e.g. what price to charge for products). Other decisions which are repetitive, day-to-day and fairly risk-free are handled by lower-level management, and are generally referred to as operational decisions (e.g. how long should tea-breaks be?).

Businesses have to make decisions in order to achieve their objectives.

There are eight key stages involved in the traditional decision-making process:

  1. Set objectives. The decision-making process cannot proceed without an achievable, realistic and identifiable target to be met.
  2. Gather data. Use market research to collect as much information as possible from inside and outside the business, so to enable the decision-makers to have the necessary data with which to make an effective decision.
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  3. Analyse the data. Look at the different courses of action and decide which ones look the most achievable and realistic to meet the objective.
  4. Make a decision. This stage is vital to the whole process. The decision-makers must ensure that they follow the correct course of action and do not reject a better alternative.
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  5. Communicate. This to the whole organisation. The relevant people, both inside and outside the organisation, need to be informed about the decision and how it may affect them.
  6. Implement the decision. The course of action that has been decided upon is implemented, using the available resources of the business.
  7. Look at the results. Obtain as much feedback as possible concerning the recently implemented decision, from as many sources as possible.
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  8. Evaluate the outcome. Did the decision work ? Was it the best course of action ? How can it be improved next time? What went wrong?

Businesses can rarely carry out their decision-making in a totally open and risk-free environment, and there are often many constraints which exist, that will limit the possible options available to a business. These constraints can be internal (such as the lack of available finance, or the lack of a multi-skilled workforce) and external (such as a rise in interest rates, a new competitor entering the market, or new legislation which restricts the activities of the business).

There are many tools available to a business that will help it limit both the risk involved and the chance of failure, when making a vital decision (such as launching a new product, taking over a competitor, or breaking into foreign markets). Three types of decision making tools are shown below:

A decision tree is a diagram that sets out the different options that are available to a business when making decisions and it also shows the chance (or probability) of their occurrence. It sets out the actual values to be expected should a particular course of action be followed. These can then be multiplied by the relevant probability of that event happening, to give an expected value, which represents the average pay-off if the decision was taken many times.

For example: Mr. Smith owns a piece of land and he wants to sell it to raise some money for his ailing business. He has been informed that he has just two options open to him:

1.He could sell the land now for a guaranteed price of £250,000, with associated selling costs of £5,000.

2.He could wait for 12 months for the market price to hopefully rise and he could then sell it, with associated selling costs of £7,000. An estate agent has informed him that the chance of receiving a higher price for the land is 0.6, while the probabilities of the price remaining the same or worsening are 0.3 and 0.1 respectively. If the market price does rise, then the land is likely to be valued at £325,000. However, if the price deteriorates, then it is likely to be valued at £200,000 in 12 months.

The decision-tree below illustrates the above scenario:

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Calculation of expected value at node B:

£325,000 x 0.6 = £195,000
£250,000 x 0.3 = £75,000
£200,000 x 0.1 = £20,000

Total expected value = £290,000

The tree diagram points in favour of delaying the sale of the land for 12 months, since it predicts that IF THE DECISION WAS TAKEN MANY TIMES then Mr.Smith would ON AVERAGE receive £283,000 (£290,000 minus £7,000 costs), instead of the £245,000 (£250,000 minus £5,000 costs) that he would receive by selling the land now. There are several points to note from the diagram:

1. The tree diagram is laid out from left to right.

2.Node A is represented as a square and it is called a decision node (i.e. at this node, the decision-maker can only choose one branch to follow).

3.Node B is represented as a circle and is called a chance node (i.e. there are several possible outcomes from this node, one of which will definitely happen).

4.Each event stemming from a chance node has a probability attached to it (these probabilities must always add up to 1).

5.The actual values are always listed at the end of each branch.

In order to calculate the expected value at a chance node (e.g. node B) then the decision-maker must calculate along the branches from right to left, by multiplying the actual value by the probability and adding the results. Hence, £325,000 is multiplied by 0.6, the £250,000 is multiplied by 0.3, and the £200,000 is multiplied by 0.1. These are then all added together to give the expected value of £290,000 at node B.

The cost associated with each branch is written beside it, and these costs have to be deducted before a decision can be made.

Each branch is cut-off as it is rejected (this is represented by two parallel lines cutting through the start of the rejected branch). This leaves just the best alternative option remaining.

There are several advantages of using decision trees to analyse a particular situation:

1.They set out problems clearly and logically.

2.They show the likely amounts of money involved in the decision, and the probabilities of their occurrence.

3.Constructing a decision tree may show possible courses of action which had not been previously considered.

4.They are tangible and therefore people can easily see the issue that they are faced with, rather than attempting to visualise somebody's description.

However, decision trees are not without their faults:

1.The probabilities are only estimates and are, therefore, subject to change.

2.They can only show quantitative data - they do not take account of peoples' feelings, legal constraints, etc.

3.The results can be biased, in order to show just one side of an argument.

4.There can be significant time delays whilst making the decision, and some of the data may be out-of-date by the time the decision is finally made.

This is another method of helping management to reduce the risk involved in making decisions in a dynamic industry. It involves analysing the current position of a product, a department or even the whole organisation, and trying to identify its possible future courses of action, by looking at its Strengths, Weaknesses, Opportunities and Threats.

A strength is a factor which a business currently possesses and which it performs effectively, such as having a strong management team, a profitable portfolio of products, or a loyal customer base.

A weakness is an area in which the business currently performs poorly, such as having a high level of industrial disputes, falling profitability, or falling productivity levels.

An opportunity is a potentially successful or profitable activity that the business could take advantage of in the future, such as the take-over of a competitor, the development of new products, or breaking into new markets.

A threat represents a potential future problem which the business may face in the future, such as new competitors entering the industry, new legislation restricting the use of certain raw materials, or the possibility of being taken-over by another company.

Remember, the strengths and weaknesses are internal factors which the company currently faces. The opportunities and threats are external factors which the company may face in the future.

The S.W.O.T. analysis is represented in a simple four-box diagram, as illustrated below:

Example of a S.W.O.T analysis for a Chocolate manufacturer.

Strengths: Weaknesses:

Plenty of R&D, leading to many new product ideas

Achieving economies of scales in production

High level of customer loyalty and repeat purchasing

Effective promotion

Several of our products are reaching the end of their life-cycle

Too many marketing personnel are leaving the business

Restricted product range

Opportunities: Threads:

New markets in Far East

A joint venture with a foreign chocolate manufacturer

Product extensions, such as different sizes of bars

Competitors are threatening a price war

Take-over by domestic rival

New legislation may affect the source of our ingredients

This diagram is simple and easy to follow, and it can provide the basis for discussion of business strategy at meetings. The results of a S.W.O.T. analysis may often identify possible courses of action that had not been considered, as well as categorising and prioritising the problems that the business faces. In most large businesses, the marketing department will carry out a S.W.O.T. analysis as part of its annual marketing audit - this highlights the products which are performing effectively, those which are reaching the end of their lifecycle, potential new markets to break into and the overall effectiveness of its personnel.

Not all the opportunities and events that a business faces will go to plan, and some may prove detrimental to the continuity of the business (such as a huge downturn in demand for their products). Contingency planning means preparing for these unwanted and unlikely possibilities. A business may produce a contingency plan in case of:

1.a severe recession;

2.an environmental disaster;

3.a sudden strike by its workforce.

Contingency plans enable a business to be in a better position to manage a crisis, rather than to try and simply cope with it when it occurs.

Before contingency planning can take place, a business must consider many possible threats and crises that it may face, in order to be able to react to them swiftly and efficiently if they do ever occur. These potential scenarios are often computer-simulated, and they can predict to a high level of accuracy the likely effects of a crisis on the finances and resources of a business.

Crisis management is the response of an organisation to a crisis (e.g. a fire, terrorist activity, natural disaster). Many companies will have some sort of contingency plan to cater for such situations, but it is rare that the actual crisis will go according to plan. It is likely that the person in charge at the time of the crisis will manage the crisis in a very authoritarian fashion, as he needs to make quick and effective decisions without the time for discussion and consultation with others. Effective planning should reduce the impact of a crisis on a business, but nevertheless to overcome any crisis is likely to cost the business a significant amount of time and money.

Some crises will be long-lasting and will affect the whole economy (such as a recession, or a natural disaster), some crises will affect all the businesses in a particular industry (such as the collapse in demand for UK ship building) and others crises will simply affect a single business (such as the Perrier Water contamination scandal, or a strike by a workforce).

Any crisis is likely to have implications for the finances of the business, the effectiveness of personnel and communications and the production patterns. The business must be seen to be acting swiftly when faced with a crisis, and it must try to ensure that the damage to the business (especially to its reputation and its image) is minimised by using which ever resources are at its disposal.

Successful public relations campaigns, adequate finance, strong leadership, rapid action and effective communication (both internal and external) are the key ingredients for a crisis to be solved effectively. Crises will always pose a number of unexpected and unforeseen problems and dilemmas for businesses. However, as long as the business is seen to be limiting the effects of the crisis upon its various stakeholder groups (especially its customers) then its reputation may well remain intact.

Stakeholders

There are many groups of people who have an interest, financial or otherwise, in the performance of a business - these different groups are known as stakeholders. The main stakeholders are considered to be:

Shareholders

These people have a clear financial interest in the performance of the business. They have invested money into the company through purchasing shares and they expect the company to grow and prosper so that they receive a healthy return on their investment. The return that they receive can come in two forms. Firstly, by a rise in the share price, so that they can sell their shares at a higher price than the purchase price (this is known as making a capital gain). Secondly, based on the level of profits for the year, the company issues a portion of this to each shareholder for every share that they hold (this is known as a dividend). The shareholders are also entitled to vote each year at the A.G.M. to elect the Board of Directors, who will run the company on their behalf.

Employees

This group also has an obvious financial interest in the company, since their pay levels and their job security will depend on the performance and the profitability of the business. It is employees who perform the basic functions and tasks of the business (producing output, meeting deadlines and delivery dates, etc.) and over recent years their traditional role has started to change. They are often now encouraged to become involved in multi-skilled teamworking, problem solving and decision making - thus having a significant input to the workings of the business.

Customers

Customers are vital to the survival of any business, since they purchase the goods and services which provides the business with the majority of its revenue. It is therefore vital for a business to find out exactly what the needs of the consumers are, and to produce their output to directly satisfy these needs - this is done through market research. The goods and services must then be promoted in such a way as to appeal to the target market and to inform them of the availability, price, etc. Once the goods and services have been purchased by the customer, it is essential that after-sales service is offered and that the customer is happy with his/her purchase. The business must try to keep the customer loyal so that they return in the future and become a repeat-purchaser.

Suppliers

Without flexible and reliable suppliers, the business could not guarantee that it will always have sufficient high quality raw materials which they require to produce their output. It is important for a business to maintain good relationships with their suppliers, so that raw materials and components can be ordered and delivered at short notice, and also so that the business can negotiate good credit terms from the suppliers (i.e. buy now, pay at a later date).

The Government

The government affects the workings of businesses in many ways:

1. Businesses have to pay a variety of taxes to central and local government, including Corporation tax on their profits, Value-Added Tax (V.A.T) on their sales, and Business Rates to the local council for the provision of local services.

2. Businesses also have to adhere to a wide-ranging amount of legislation, which is aimed at protecting the consumers, the employees and the local environment from business activity.

3. Businesses will be affected by different economic policies, (for example, if interest rates are increased, then this will discourage businesses from borrowing money since the repayments will now be significantly higher). However, businesses can also benefit from government incentives and initiatives, such as new infrastructure, job creation schemes and business relocation packages, offering cheap rent, rates and low-interest loans.

The Local Community

Businesses are likely to provide significant amounts of employment for the local community and often will produce and sell much of their output to the local residents. The sponsorship of local events and good causes (such as local charity work) can also help the business to establish itself in the community as a caring, socially responsible organisation. Many businesses develop links with local schools and colleges, offering sponsorships and resources to these under-funded institutions. However, businesses can also cause many problems in local communities, such as congestion, pollution and noise, and these negative externalities may often outweigh the benefits that the businesses bring to the community.

Due to the demands placed on businesses by so many different stakeholders, it is no surprise that there are often disagreements and conflict between the different groups. Some of the more common areas of conflict are:

Shareholders and management

Profit maximisation is often the over-riding objective of shareholders - resulting in large dividend payments for them. However, it is far more likely that the managers of the business will aim to profit satisfy rather than profit maximise (that is, they will aim to earn a satisfactory level of profits, and then use the remaining resources to pursue other objectives such as diversification and growth). This conflict between these two groups is often referred to as divorce of ownership (the shareholders) and control (the management).

Customers and the business

Customers are unlikely to remain loyal and repeat purchase from the business if the product that the have purchased is of poor quality and/or is poor value for money. More customers are prepared to complain about the quality of products and after-sales service than ever before, and the business must ensure that it has in place a number of strategies designed to satisfy the disgruntled customer, reimburse any financial loss that they may have incurred and persuade them to remain loyal to the business.

Suppliers and the business

Suppliers are often quoted as complaining about the lack of prompt payments from businesses for deliveries of raw materials, and if this became a regular problem then the suppliers may well refuse credit to the businesses or may even cease all dealings with them. On the other hand, many businesses have been known to complain about the late deliveries of raw materials and components from suppliers, and the dubious quality of the parts once they have been inspected.

The community and the business

As outlined previously, the local community can often suffer at the hands of a large company through the negative externalities of pollution, noise, congestion and the building of new factories in areas of outstanding beauty. However, if the business faces strong protests from residents and from pressure groups concerned about its actions, then it may decide to relocate to another area, causing much unemployment and a fall in investment in the community it leaves behind.

S-Cool Revision Summary

Aims

These are the long-term goals that provide direction for setting objectives. They are often expressed in the form of a mission statement. A typical corporate aim might be 'to become Europe's number 1 car manufacturer'. From this aim, a company can set a number of objectives and targets, such as to increase the quality of its products, to improve productivity levels, or to increase the effectiveness of its promotional campaigns.

Contingency planning

This means preparing for unwanted and unlikely possibilities. A business may produce a contingency plan in case of:

  1. a severe recession
  2. an environmental disaster
  3. a sudden strike by its workforce

Contingency plans enable a business to be in a better position to manage a crisis, rather than to try and simply cope with it when it occurs.

Corporate objectives

These are the goals of the whole company. These should be based upon the company's aims and mission statement. Each department should then set its objectives based on the corporate objectives. Examples of corporate objectives include:

  1. to achieve long-term growth.
  2. to diversify the range of products and markets.
  3. to maximise profits.

Crisis management

This is the response of an organisation to a crisis (e.g. a fire, terrorist activity, natural disaster). Many companies will have some sort of contingency plan to cater for such situations, but it is rare that the actual crisis will go according to plan. It is likely that the person in charge at the time of the crisis will manage the crisis in a very authoritarian fashion, as he needs to make quick and effective decisions without the time for discussion and consultation with others.

Decision tree

This is a diagram that sets out the various possible options available to a business when it makes a decision (such as an investment) plus the probable outcomes that might result from each option. A decision tree also shows the likely probability of each option occuring and it sets out the likely amounts of money that can be expected at the end of each branch. Essentially, a decision tree shows the average amounts of money that are likely to be received if the decision was taken many times.

Mission statement

This outlines the aims of a business in an attempt to provide a sense of direction and shared purpose for the stakeholders of the business. It often states what the business has done, what it would like to do and the strategies that it will use to achieve its overall aims.

Objectives

These are the medium- to long-term goals and targets of a business. Objectives must be achievable and realistic if they are to be of any use to employees, since an unrealistic objective is likely to act as a demotivator to the workforce. Objectives need to be agreed through consultation with employees, rather than simply being set by the managers and Directors. This gives the employees a sense of belonging and responsibility - which is likely to lead to higher levels of motivation and job satisfaction.

Stakeholder

This is an individual, or a group of people, with a direct interest (financial or otherwise) in a business. The main stakeholders are employees, shareholders, customers, the government, suppliers, creditors, pressure groups and the local community. Each group of stakeholders is likely to want the business to achieve a different objective or to follow a different course of action. These differing opinions and views often, inevitably, result in conflict between the stakeholder group and the business.

Strategy

This is a medium- to long-term course of action, which will enable the business to achieve its objectives. The strategy would include what needed to be done, the resources required and the likely timescale involved.

SWOT analysis

This is an investigation into the strengths (e.g. high level of market share), weaknesses (e.g. high gearing), opportunities (e.g. new markets to break into), and threats (eg new competitors entering the industry) that a business is faced with at a specific point in time. Strengths and weaknesses are internal factors which the business has direct control over, while opportunities and threats arise from the external environment and are, therefore, more unpredictable and potentially dangerous.

"What if...?" questions

Before contingency planning can take place, a business must consider many possible threats and crises that it may face, in order to be able to react to them swiftly and efficiently if they do ever occur. These are often computer-simulated and they can predict to a high level of accuracy the likely effects of a crisis on the finances and resources of a business.

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