Need for and importance of business objectives
An objective is an aim or a target to work towards. All businesses
should have objectives. They help to make a business successful -
although just setting an objective does not 'guarantee success. There
are many benefits of setting objectives:
>> They give workers and managers a clear target to work towards
and this helps motivate people.
>>> Taking decisions will be focused on: 'Will it help achieve our
objectives?'
>> Clear and measurable objectives help unite the whole business
towards the same goal.
>> Business managers can compare how the business has performed
to their objectives to see if they have been successful or not.
So setting objectives is very important for all businesses - small or
large, newly formed or well established.
Different business objectives
Objectives are often different for different businesses. A business may
have been formed by an entrepreneur to provide employment and
security for the owner or his/her family. It could have been started to
make as big a profit as possible for the owner. On the other hand, the
business might have a more charitable aim in mind many of the
leading world charities are very large businesses indeed.
The most common objectives for businesses in the private sector are
to achieve:
>> business survival
>> profit
>> returns to shareholders
>>> growth of the business
>> market share
>> service to the community.
Survival
When a business has recently been set up, or when the economy is
moving into recession, the objectives of the business will be more
concerned with survival than anything else. New competitors can also
make a business feel less secure The managers of a business
threatened in this way could decide to lower prices in order to survive,
even though this would lower the profit on each item sold.
Profit
When a business is owned by private individuals rather than the
government it is usually the case that the business is operated with
the aim of making a profit. The owners will each take a share of these
profits. Profits are needed to:
>> pay a return to the owners of the business for the capital invested
and the risk taken
>> provide finance for further investment in the business.
Without any profit at all, the owners are likely to close the business.
Will a business try to make as much profit as possible? It is often
assumed that this will be the case. But there are dangers to this aim.
Suppose a business put up its prices to raise profits. It may find that
consumers stop buying its goods. Other people will be encouraged to
set up in competition, which will reduce profits in the long term for the
original business.
It is often said that the owners of a business will aim for a satisfactory
level of profits which will avoid them having to work too many hours or
pay too much is tax to the government.
Returns to shareholders
Shareholders own limited companies (see Chapter 4). The managers of
companies will often set the objective of 'increasing returns to
shareholders. This is to discourage shareholders from selling their
shares and helps managers keep their jobs! Returns to shareholders
are increased in two ways:
>> Increasing profit and the share of profit paid to shareholders as
dividends. Increasing share price managers can try to achieve this not
just by making profits but by putting plans in place that give the
business a good chance of growth and higher profits in the future.
Growth
The owners and managers of a business may aim for growth in the size
of the business usually measured by value of sales or output in order
to:
>>make jobs more secure if the business is larger increase the
salaries and status of managers as the business expands
>>open up new possibilities and help to spread the risks of the
business by moving into new products and new markets
>>obtain a higher market share from growth in sales
>>obtain cost advantages, called economies of scale, from business
expansion.
Growth will be achieved only if the business's customers are satisfied
with the products or services being provided. For this reason it might
be important to put meeting customers' needs as a very high priority.
Market share
If the total value of sales in a market is $100 million in one year and
Company A sold $20 million, then Company A's market share is 20 per
cent.
Market share % = Company sales
Total market sales. × 100
Increased market share gives a business:
>> good publicity, as it could claim that it is becoming 'the most
popular’.
>>> increased influence over suppliers, as they will be very keen to
sell to a business that is becoming relatively larger than others in the
industry.
>>> increased influence over customers (for example, in setting
prices).
Providing a service to the community - the objectives of social
enterprises
Social enterprises are operated by private individuals - they are in the
private sector - but they do not just have profit as an objective. The
people operating the social enterprise often set three objectives for
their business:
>>> Social: to provide jobs and support for disadvantaged groups in
society, such as the disabled or homeless.
>> Environmental: to protect the environment.
>> Financial: to make a profit to invest back into the social enterprise
to expand the social work that it performs.
An example of a social enterprise is RangSutra in India. This helps very
poor village communities develop skills in craft work and clothing
products and helps them market their products at a fair price.
Why business objectives could change
It is most unusual for a business to have the same objective forever!
Here are some examples of situations in which a business might
change its objective.
1 A business set up recently has survived for three years and the
owner now aims to work towards higher profit.
2 A business has achieved higher market share and now has the
objective of earning higher returns for shareholders.
3 A profit-making business operates in a country facing a serious
economic recession so now has the short-term objective of survival.
Objectives of public sector businesses
the government owns and controls many businesses and other
activities in mixed economies. These were in the public sector. What
are the likely objectives for public sector businesses and organisations?
>> Financial: Meet profit targets set by government - sometimes the
profit is reinvested back in the business and on other occasions it is
handed over to the government as the 'owner' of the organisation.
>> Service: Provide a service to the public and meet quality targets
set by government. For example, health services and education
services will be expected to achieve targets laid down for them, and
state-owned train and postal services will have reliability and
punctuality targets.
>>> Social: Protect or create employment in certain areas - especially
poor regions with few other business employers.
