3.1.1 Understanding the nature and purpose of business

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    3.1.1 Understanding the nature and purpose of business

    Why businesses exist

    Key business objectives:

    • To make money
    • To provide a service
    • Provide employment opportunities
    • Fill a gap in the market
    • Help the community (social enterprise)
    • Be environmentally friendly
    • Improve existing products
    • Survive

     

    The relationship between mission and objectives

    Mission Statement = this provides the overriding goal of a business and the reason for its existence; and a strategic perspective for the business and a vision for the future

     

    Benefits of a good mission statement:

    • Clarifies purpose and focus
    • Motivates staff and those interested in the business
    • Attracts people (such as investors) and resources
    • A good public relations tool

     

    Characteristics of a good mission statement:

    • Contains a formulation of objectives that enables progress towards them to be measured
    • Differentiates the business from its competitors
    • Defines the markets or business in which the firm wants to operate
    • Is relevant to all major stakeholders – not just shareholders and managers
    • Excites, inspires, motivates, and guides – particularly important for employees

     

    Criticisms of mission statements:

    • Not always supported by actions of the business
    • Often too vague and general
    • Views as a public relations exercise
    • Sometimes regarded cynically by employees
    • Not supported wholeheartedly by senior management

     

    Corporate aims and objectives:

    • Mission statement – the overall reason for the business’ existence
    • Corporate aims – the long term targets and plans to fulfil the mission statement
    • Corporate objectives – the medium to long term quantifiable targets to fulfil the mission statement
    • Corporate strategy – the actions to be taken by the business to achieve its objectives

     

    Common business objectives

    Types of business objectives:

    • Ethical – (e.g. completely cruelty free; change packaging to cut down on plastic use; no harmful chemicals used throughout production; reduce waste; environmentally friendly)
    • Profit (e.g. increase profit margins; maximise profit)
    • Growth (e.g. number of shares (quantifiable) – volume; gain market share; increase number of outlets)
    • Survival (e.g. achieve minimum level of sales and sales revenue to ensure costs are met and market share is retained; maintain levels of stock)
    • Cash flow (e.g. reduce outflows; increase inflows)
    • Social (e.g. support and solutions; enhance brand images and reputation)

     

    Why businesses set objectives

    Main functions of objectives:

    • A clear statement of what needs to be achieved
    • Focus’ on all activities of the business (marketing, operations, finance, human resources)
    • Provides targets for individual and group achievements
    • A means of measuring performance (business, departments, individual employees)
    • Provides a clear focus for decision making and a target to aim for
    • Provides criteria for evaluating performance

     

    The measurement and importance of profit

    Profit = revenue – total costs

    Total Costs = fixed costs (stay the same regardless of output eg rent) + variable costs (change in relation to the number of items produced)

     

    Importance of profit:

    • Motivator
      • Sole traders can keep all the profit
      • Ltds owned by people running the business
      • Profit sharing schemes in which staff are given incentives to work effectively
    • Further investment
      • Guide to see where it is easier to make profits
      • Where profits are high and low
    • Stakeholders
      • Reliable customers
      • Purchase goods
      • Easier to establish links and work with others businesses
    • Finance
      • Avoiding paying interest
      • Fund expansion plans and capital investment
    • Success
      • Compare profits to competitors
      • Before this though, have to look at competitor business objectives
    • Reward
      • Many business owners take risks with money
      • Every 6 months, plcs pay dividends to shareholders
      • Retain profit to buy more resources to make more profit in the future

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