UNIT 1 – CHAPTER 4 – BUSINESS OBJECTIVES.

INTRODUCTION
An objective is a target. Objectives are set at the corporate, departmental and
individual level. Successful organisations set objectives as the managers think about
the future and set targets for it.

THE IMPORTANCE OF OBJECTIVES.

Gives the business direction and a guide to action – This can help motivate
employees as they will know the direction the business is headed and what is
expected of them. It also provides a sense of unity while reducing uncertainty.
Objectives give business a clearly defined target to work towards. This enables
plans to be made to achieve these targets. Strategy should be well formulated.
Enables business to measure progress towards to its set objectives and make
the necessary adjustments.
give a means of assessing success or failure when actual business performance
is judged against the original objectives.

COMMON CORPORATE OBJECTIVES

1. Profit maximization – this is involves achieving the highest level of profit possible
– producing at that level of output where the greatest positive difference
between total revenue and total costs is achieved. Profits are necessary to
persuade business owners or entrepreneurs to take risks. Failure to maximize
profits is seen as a missed opportunity.
The limitations of profix maximization include:
› The focus on high short term profits may encourage competitors to enter
markets and jeopardize the long term survival of the business.
› Many businesses seek to maximize sales in order to secure the greatest possible
market share rather than maximize profits. The business would expect to make
a target rate of profit from these sales.
› The owners of smaller businesses may be more concerned with ensuring that
leisure time is safeguarded. The issues of independence and retaining control
assume greater significance than making higher profits.
› Most business analysts assess the performance of a business through return on
capital employed rather than through total profit figures.

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› Other stakeholders may give priority to other issues. Concerns over job security
and environmental concerns of local residents may force profitable business
decisions to be modified.
› In reality, it is very difficult to assess whether the point of profit maximization
has been reached and constant changes to prices or output to attempt to achieve
it may well lead to negative consumer reactions.

2. Profit satisficing.
This means aiming to achieve enough profit to keep the owners happy but not aiming
to work flat out to earn as much profit as possible. Once a satisfactory level of
profit has been achieved the owners consider, other aims take priority. This
objective is common among owners of small businesses who wish to live comfortably
but do not want to work longer and longer hours in order to earn even more profit.

3. Growth.
This is measured in terms of sales or value of output. Larger firms are less likely to
be taken over and should be able to benefit from economies of scale. Managers will
be motivated to see the business achieve its full potential from which they may gain
higher salaries and fringe benefits. It is also argued that a business that does not
attempt to grow will cease to be competitive and eventually will lose its appeal to
new investors.
Limitations of growth as an objective.
 Expansion that is too rapid can lead to cash flow problems.
 Sales growth might be achieved at the expense of lower profit margins.
 Larger businesses can experience diseconomies of scale.
 Using retained profits to finance growth– can lead to lower short term returns
to shareholders.
 Growth into new business areas and activities – away from the firm’s core
activities can result in a loss of focus and direction for the whole organization.

(a) Briefly explain two reasons why many businesses set growth as an objective. [3]
(b) Discuss why some businesses do not set a growth objective. [12]

4. Increasing market share.

Closely linked to overall growth of a business is the market share it enjoys within its
main market. It is possible for an expanding business to suffer market share
reductions if the market is growing at a faster rate than the business itself.

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Increasing market share indicates that the marketing mix of the business is proving
to be more successful than that of its competitors.
Benefits resulting from having the highest market share include:
 Retailers will be keen to stock and promote the bestselling brand.
 Profits margins offered to retailers may be lower than competing brand as the
shops it – this leaves more profit for the producer.
 Effective promotional campaigns are often based on ‘buy our product with
confidence it is the brand leader’.

5. Survival
This is likely to be the key objective of most new business start-ups. The high failure
rate of new businesses means that to survive for the first two years of trading is
an important aim for entrepreneurs. Once the business has become firmly
established, then other longer term objectives can be established.

6. Corporate social responsibility.

There is general agreement that businesses should consider the interests of society
by taking responsibility for the impact of their decisions and activities on customers,
employees, communities and the environment. Greater adverse publicity has been
given to business activity that is perceived as being damaging to stakeholders’ groups
and the wider world. Pressure groups are forcing businesses to reconsider their
approach to decision making.

Explain why many businesses have corporate responsibility as an objective. [5]

7. Maximizing short term sales revenue;

This could benefit managers and staff when salaries and bonuses are dependent on
sales revenue levels. If this is achieved by reducing prices the actual profits of the
business might fall.

8. Maximizing shareholders value:

This could apply to public limited companies and directs management action towards
taking decisions that would increase the company share price and dividends paid to
shareholders. These targets might be achieved by pursuing the goal of profit
maximization. This shareholders-value objective pursues interest of shareholders
above those of other stakeholders.
9. Sufficient cash flow. 10. Diversification.

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 OBJECTIVES OF PUBLIC SECTOR BUSINESSES.
(a) Providing a service to the community.
(b) Public sector businesses in some countries have an objective to generate a
financial surplus which is reinvested to improve the service offered by the business.
(c) To encourage economic and social development, especially in deprived areas.
(d) To create employment or prevent major job losses if the industry is making a
financial loss.
(e) To achieve high environmental standards.

OBJECTIVES OF SOCIAL ENTERPRISES.

Social enterprises are businesses which operate to benefit the community or society
in general. The objectives of social enterprises include:
 Economic – make a profit to reinvest back into the business and provide some to
owners. This also refers to financial surplus.
 Social responsibility and contribution.
 Environmental impact.
The above objectives are known as triple bottom line. The profit from a business
could be used to support a social aim, such as funding the programming of a non-
profit organization. Moreover, a business could accomplish its social aim through its
operation by employing individuals from disadvantaged backgrounds or lending to
micro-businesses that have difficulty in securing investment from mainstream
lenders. John Elkington, a business author and advisor, suggested a business’
performance should be measured by examining three Ps: its profits, its treatment
of people and its impact on the planet.

Some businesses also have target known as corporate social responsibility (CSR) which means
accepting obligations to society over and above the legal minimum. CSR often involves the
focus on a triple bottom line. A business that acts responsibly believes it is a corporate
citizen with obligations to society.
Discuss:
• is CSR a help or a hindrance to long term profitability?
• does CSR assist a business to ‘create value’?

Briefly explain two aims of a social enterprise. [3]

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 SMART OBJECTIVES
The most effective business objectives meet the SMART criteria. This includes:
S - Specific – Objectives should focus on what the business does and should apply
directly to that business.
M – Measurable – Objectives that have quantitative value are likely to prove to be
more effective targets for directors and staff to work towards.
A - Achievable – Setting objectives that are almost impossible in the time frame
given will be pointless. They will demotivate staff who have the task of trying to
reach these targets.
R - Realistic and Relevant - Objectives should be realistic when compared with the
resources of the company and should be expressed in terms relevant to the people
who have to carry them out.
Timed – A time limit should be set when an objective is established. Without a time
limit it will be impossible to assess whether the objective has actually been met.

Examples of objectives.
» To earn at least a 20 percent after-tax rate of return on our net investment
during the next fiscal year.
» To lower operating costs by 15 percent over the next two years by improving the
efficiency of the manufacturing process.
» To reduce the call-back time of customers’ inquiries and questions to no more
than four hours.

RELATIONSHIP BETWEEN MISSION STATEMENT, AIMS, OBJECTIVES,

STRATEGY AND TACTICS
A well-managed business should have what is known as hierarchy of objectives. At
the top of the hierarchy is a mission statement.
 MISSION STATEMENTS.
A mission statement is a written statement making clear to all stakeholders a firm’s
overall aims and values in a motivating and appealing way. It answers the question
“Why do the business exist”? Businesses communicate their mission statements in a
number of ways such as
(a) Published accounts and in other communications to shareholders.
(b) They will appear in the business plans.
(c) Internal company newsletters and magazines may draw their title from part of
the mission statement. (d) Advertising campaigns are frequently based around the
themes of the mission statements.

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 MISSION
mnionin
AIMS

CORPORATE OBJECTIVES

FUNCTIONAL OBJECTIVES

INDIVIDUAL OBJECTIVES

Benefits of mission statements

 They quickly inform groups outside the business what the central purpose of the
business is.
 They can prove motivating to employees when associated with the positive
qualities the statement refers to.
 Often include moral statements or values to be worked towards then these can
help to guide and direct individual employees behaviour at work.

Limitations of mission statements:

 Too vague and general so that they end up saying little that is specific about the
business or its future plans.
 Based on a public relations exercise to make stakeholders groups feel good about
the organisation.
 Virtually impossible to really analyse or disagree with
 Often general so it common for two completely different businesses to have very
similar mission statements.

(a) Define the term ‘mission statement’. [2]

(b) Briefly explain two limitations of mission statements. [3]
(c) Explain the importance of a mission statement to the employees of a public
limited company. [5]
(d) Analyse why mission statements are important to many businesses. [8]

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  CORPORATE AIMS.
These are long term goals which a business as a whole hopes to achieve. The core of
a business’s activity is expressed in its corporate aims and plans. They are designed
to provide guidance to the whole organizations and not just a part of it.

 CORPORATE OBJECTIVES.
Corporate objectives are designed to turn the aims into targets that are specific to
the business. They are based on the business's central aim or mission, but they are
expressed in terms that provide a much clearer guide for management action or
strategy. Objectives are set at various levels in a business
Corporate objectives - These are targets that the whole business is trying to
achieve. Often related to what the owners of the business want to focus on e.g.
market share, return on investment, survival, growth, profits, sales revenue,
shareholder value or corporate image and reputation.
Departmental/functional objectives these are targets for specific functions in
the business. E.g. objectives for the marketing department to achieve. These
need to be consistent with corporate objectives.
Team/Individual objectives – Departmental objectives are broken down further
into team or individual targets.

Once these targets have been set, the business has to decide how to achieve them
most effectively. A business needs to have a strategy which can be interpreted to
be (i) A means to achieve an end - method or action that will be employed to achieve
the result. (ii) A long term plan and (iii) An organisation planned response to the
environment. Strategy is a course of action which enables a business to meet its
objectives.
Strategy The long-term plan to achieve an objective is known as a strategy. For example, if a
business wanted to increase profits by 30 per cent in three years, the strategy
might be to target overseas markets. However, this strategy has to be put into
action; in this example, a decision has to be taken on which countries will be
targeted.
Tactics Tactics are the short-term actions needed to implement the strategy. These
decisions support strategic plans by translating them into specific plans relevant to
a different area of the organization. These are short range plans emphasizing the
current operations of various parts of the organization. Examples include, changes
to marketing plans, product modification etc.

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(a) Define the term ‘strategy’. [2]
(b) Distinguish between ‘strategy’ and ‘tactics’. [2]
(c) Explain why corporate objectives are important to a business. [5]
(d) Analyse the importance to a large business of setting corporate objectives. [8]
(e) Analyse the importance of corporate objectives and departmental objectives to the
success of a business. [8]

HOW OBJECTIVES MIGHT CHANGE.

Factors in the environment which may make a change in business objective essential
might include:
 A business may achieve an objective and will need to move onto another one.
E.g. survival in first year may lead to an objective of increasing profit in second
year.
 The absence of sufficient resources to enable the enterprise to meet previously
predicted levels of activity. The securing a necessary finance to carry out planned
production expansion may not occur as budgeted and therefore result in the
scaling back of operations.
 Competitive environment might change - The withdrawal from the market of a
major competitor could provide the business with unanticipated opportunities for
growth. The launch of new products from competitors may require a change.
 Economic and legal environment may change such as increased government
regulation might burden the business with additional unforeseen costs.
 A short-term objective of growth in sales or market share might be adapted to
a longer-term objective of maximising profits from the higher level of sales.

(a) Explain why the objectives of a business might change over time. [5]
(b) Discuss why a bank might change its corporate objectives over time. [12]

OBJECTIVES AND BUSINESS DECISION MAKING.

Effective decision making requires clear objectives. Business managers cannot
decide on future plans of action/strategies if they are uncertain of which direction
they want to take the business in. The stages include;
 Set objectives to provide focus for strategic decision – The decision makers
should have a clear idea of what is to be achieved.
 Assess and clarify the problem – separating the symptoms of the problems from
the causes of the problem.

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  Gather data about the problem and possible solutions – collect both quantitative
and qualitative data on both internal and external constraints.
 Consider all the decision options – Managers weigh the pros and cons of each
potential solution.
 Make the strategic decision – choose the best solution.
 Plan and implement the decision.
 Review its success against the original business objectives.

COMMUNICATING OBJECTIVES
Employees need to be aware of the business objective so that they can contribute
to achieving them. Making employees aware and involving them in setting of individual
targets can result in;
 Employees and managers achieving more through greater understanding of both
individual and company-wide goals.
 Employees seeing the overall plan and the understanding how individual goals fit
into the company business objectives.
 Creating shared employee responsibility – by interlinking their goals with others
in the company.
 Managers stay in touch with employees’ progress – regular monitoring of
employees work allows immediate reinforcement or training to keep performance
and deadlines on track.

Discuss the importance to an expanding business of effectively communicating its

objectives to its workforce. [12]

TRANSLATION OF OBJECTIVES INTO TARGETS AND BUDGETS

The overall objectives of a business need to be cascaded down into departmental
and then individual targets for people which ensure everyone is working towards the
same aim. With each objective there should be a strategy of how it is to be achieved
and specific tactical targets showing the details of the activities that need to be
undertaken. Departmental targets form part of a department’s budget.
A budget is a financial target that might set out expected revenues and also
anticipated expenditure. This helps with financial planning. The size of the budget
will depend on what the objective is and what has to be done to achieve it. or financial
plan.

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ETHICAL ISSUES ON BUSINESS OBJECTIVES AND DECISIONS
Ethics are the moral principles/guidelines that determine decision making. It refers
to generally accepted conduct – it involves matters of right and wrong, evil and bad
etc. The acceptance of corporate social responsibility has led to businesses adopting
an ethical code to influence the way in which decisions are taken. Consider the
following cases
? Should a bank invest in a company that manufactures weapons or tests new
chemical on animals.
? Is it acceptable to feed genetically modified food to cattle?
? Is it acceptable to close a factory to save costs and increase profits even though
many jobs will be lost and workers may find it hard to get other jobs?
? Should chief executives receive substantial pay increases and bonuses when
other workers in the business are being made redundant?
? If a business can ‘get away with it’, should it employ child labour to reduce costs
compared to employing adults.

The way in which employees behave and take decisions in these cases should be
covered and explained by a company’s ethical code of conduct. there is
now considerable evidence that more and more companies are considering the ethical
dimension of their actions – not just the impact they might have on profits.

Adopting and keeping to a strict ethical code in decision making can be expensive
in the short term due to;
# Using ethical and fair-trade suppliers can add to business’s costs.
# Not taking bribes to secure business contracts can mean failing to secure
significant sales.
# Limiting some advertising to just adults to reduce pester power may result in
lost sales.
# Accepting that it is wrong to fix prices with competitors might lead to lower
prices and profits.
# Paying fair wages even in very low wage economies raises wage costs and may
reduce a firm’s competitiveness against businesses that exploit workers.

In the long term there could be substantial benefits from acting ethically.
› Ethical businesses attract ethical customers and as world pressure grows for
corporate social responsibility this group of consumers is increasing.

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 › Ethical businesses are more likely to be awarded government contracts.
› Well qualified staff may be attracted to work for the companies with the
most ethical and socially responsible policies.
› Reducing potentially expensive court cases can reduce costs of fines.
› Bad publicity from being caught acting unethically can lead to lose consumer
loyalty and long term reduction in sales, ethical policies can lead to good
publicity and increased sales.

(a) Define the term ‘ethics’. [2]

(b) Briefly explain two ways ethics might influence the activities of a business. [3]
(c) Explain how ethics may influence the objectives of a business. [5]
(d) In recent years a significant number of businesses have been accused of being unethical.
Discuss whether senior managers should consider ethics when making business decisions. [20]
(e) Discuss how ethics may influence the decisions of private sector banks. [12]

References:
1. P. Stimpson and A. Farquharson (2021) Cambridge International AS and A-level Business
4th edition Cambridge university press.
2. M. Surridge and A. Gillespie (2021) Cambridge International AS and A-level Business 2nd
edition by Hodder education.
3. I. Marcouse, A. Hammond, N. Watson (2019) Pearson Edexcel A-level Business by
Hodder education.
Compiled by J. Musyoka.
.

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