Nature and Purpose of Business

Understanding the Nature and Purpose of Business

• Businesses exist to make money, provide a service, offer employment, fill market gaps, aid communities (social enterprises), be environmentally conscious, improve products, and ensure survival.

Key Business Objectives

• Primary objectives include making money and providing a service.
• Additional goals are providing employment, filling market gaps and helping the community.
• Businesses can also aim to be environmentally friendly, improve existing products, and ensure the business's survival.

Mission Statements

• A mission statement provides the overriding goal, reason for existence, strategic perspective, and vision for the future.
• Benefits include clarifying purpose, motivating staff, attracting resources, and serving as a public relations tool.
• Effective mission statements contain measurable objectives, differentiate from competitors, define the operational markets, relate to stakeholders, and inspire/motivate.
• Criticisms include a lack of action, vagueness, being viewed as a PR exercise, cynicism from employees, and lack of management support.

Corporate Aims and Objectives

• Mission statement: the overall reason for the business’ existence.
• Corporate aims: long-term targets to fulfill the mission statement.
• Corporate objectives: medium to long-term quantifiable targets to fulfill the mission statement.
• Corporate strategy: Actions taken to achieve objectives.

Common Business Objectives

• Ethical objectives: cruelty-free practices, sustainable packaging, eliminating harmful chemicals, reducing waste, and being environmentally friendly.
• Profit objectives: increasing profit margins and maximizing profit.
• Growth objectives: Increasing the number of shares, gaining market share, and expanding the number of outlets.
• Survival objectives: Achieving minimum sales to cover costs and retaining market share and maintaining stock levels.
• Cash flow objectives: Reducing outflows and increasing inflows.
• Social objectives: Providing support and solutions, enhancing brand image, and reputation.

Importance of Setting Objectives

• Objectives provide a clear statement of what needs to be achieved and a focus for all business activities.
• They also provide targets for individuals and groups and a means of measuring performance.
• Clear objectives provide a focus for decision-making and criteria for evaluating performance.

Measurement and Importance of Profit

• Profit = revenue - total costs
• Total costs = fixed costs (e.g. rent) + variable costs (related to production).
• Profit motivates sole traders, Ltds, and staff through profit-sharing.
• It also guides investment decisions.
• Profit helps build stakeholder relationships, secures finance, and rewards risk-taking.
• Comparing profits to competitors measures success.

Different Business Forms

• Private businesses are not state-controlled and are run by individuals or companies, usually for profit.
• Public businesses are owned and run by the government.

Factors Affecting Business Form Choice

• Finances, size, taxes, profit sharing, risks, ownership, control, registrations, payments, and liability (limited vs. unlimited) influence the choice of a business form.
• Unlimited liability means owners are personally responsible for business debts which may require selling personal assets during bankruptcy
• Limited liability means the business has its own legal identity, separate from its owners

Sole Trader: Strengths & Weaknesses

• Strengths: simple registration, owner keeps all profits, complete control.
• Weaknesses: unlimited liability, limited access to capital.

Private Limited Company: Strengths & Weaknesses

• Strengths: limited liability, own legal structure, various ways to raise finance.
• Weaknesses: profits shared with shareholders via dividends, corporation tax, registration fees.

Public Limited Company: Strengths & Weaknesses

• Strengths: limited liability, own legal structure, diverse ways to raise finance.
• Weaknesses: profits shared with shareholders, high registration costs which must be £50,000, corporation tax.

Shareholders

• Shareholders are owners of a limited company who receive financial rewards through dividends and growth in share value.
• They play a key role in financing, operations, governance, and control.
• Share price indicates the market value of the business, and can be expressed as a Price/Earnings ratio
• The annual dividend can be compared with the share price to indicate an annual return ("dividend yield")

Market Capitalisation

• Market Capitalization represents the total market value of a company's issued share capital
• Calculated by multiplying the current share value by the number of shares issued.
• Increased demand for shares causes the share price to increase.

Factors Affecting Share Price

• Availability of shares: The more shares, the greater the investment interest.
• Business expansion: Increased dividends due to higher profit margins.
• Investment: Successful investments increase share value.
• Publicity, e-commerce activity, and economic conditions (recessions) all are factors.

Effects of Ownership on Business Aspects

• Business form influences ownership, which affects mission, objectives, decision-making, and performance.
• Sole traders focus on work-life balance, while PLCs feel pressure to maximize shareholder returns.
• NGOs focus on social actions.
• Sole traders make decisions quickly, while PLCs require more steps, such as calling meetings.
• Performance is measured differently based on ownership, affecting the ability to employ specialists, access finance, and maintain a competitive advantage.

External Environment’s Impact on Costs and Demand

• External factors like natural disasters, interest rates, material availability, and recessions impact businesses.
• External factors can directly affect a firm's costs and product demand, leading to price adjustments.

Components of the External Environment

• Market conditions and competition, incomes, interest rates, demographic factors, and environmental issues are all components.

Factors Affecting Demand

• Price, income, substitutes, supply, market trends, complementary goods, marketing, seasons, and government actions affect demand.

What Managers Do

• Managers plan, organize, and coordinate resources to follow orders.
• Leaders decide on a direction and motivate staff.

Roles of Managers

• Setting objectives, analyzing data, leading teams, making decisions, and reviewing performance are key roles.

Influences on Management and Leadership Styles

• Company structure, span of control, situation, organizational culture, task nature, employee skills, group size, manager personalities, and time frame all influence styles.

McGregor’s Theory X and Theory Y

• Theory X assumes workers dislike work and need control, while Theory Y assumes workers are self-motivated and seek job satisfaction.
• Theory X managers believe workers are lazy, need supervision, and lack ambition.
• Theory Y managers believe workers enjoy work, will take responsibility, and wish to contribute to decisions.

Leadership Styles

• Authoritarian: Centralized power, top-down communication, minimal consultation, use of rewards and penalties, and little delegation.
• Democratic: Shared leadership, employee involvement in decision making, emphasis on delegation and consultation.
• Paternalistic: Leaders decide what is best for employees, akin to a parent/child relationship, little delegation.
• Laissez-faire: Minimal leader input, delegated power, freedom for managers/employees, effective with motivated and trusted staff.

Management Theories

• Tannenbaum-Schmidt Continuum Theory outlines a range of actions related to the degree of authority used by the leader or manager
• Also area of freedom available to non-managers

Tannenbaum-Schmidt Continuum Theory

• Four leadership styles are identified, including:
  • Tells: leader identifies problems, makes decision and announces to subordinates; expects implementation
  • Sells – leader still makes decision, but attempts to overcome resistance through discussion & persuasion
  • Consults – leader identifies problem and presents it to the group. Listens to advice and suggestions before making a decision
  • Joins – leader defines the problem and passes on the solving & decision-making to the group (which manager is part of)

The Blake Mouton Grid

• The Blake Mouton Grid asks series of questions about leadership and management style
• Maps style in terms of concern for people (High = 9 Low = 1)
• Maps style in terms of concern for task (High = 9 Low = 1)

Scientific Decision Making

• Scientific decision making involves setting objectives, gathering data, selecting an option, implementing the decision, and reviewing.
• Benefits include clear direction, logic-based decisions, and flexibility.

Non-Scientific Decision Making

• Non-scientific decision making involves intuition, quick results when under a time scale, and is mainly used by smaller businesses.

Scientific Approach vs Intuition

• Depends upon the speed of decisions, information available, the size of business, predictability of situation and character of person or culture

Decision Trees

• Characteristics of decision trees:
  • They are good at choosing between several courses of action
  • Provides a highly effective structure within which you can lay out options and investigate the possible outcomes of choosing these options
  • It uses estimates and probabilities to calculate likely outcomes
  • It helps to decide whether the net gain from a decision is worthwhile
• Expected Value = the financial value of an outcome, which equals the estimated financial effect x its probability
• Net Gain = the value to be gained from taking a decision which equals the expected value of each outcome – the costs associated with the decision

Advantages of Decision Trees

• Gives you a decision
• Evidence to gain a source of finance
• Set out logically
• Easy to understand and results are tangible
• Likely costs considered as well as benefits
• Assesses risks
• Potential options and choices are considered at the same time – direct comparison

Disadvantages of Decision Trees

• Always probe to arrow
• Calculating probability can be rad
• Could be inaccurate or unreliable as only estimates
• Doesn’t necessarily reduce the amount of risk

Influences on Decision Making

• Business mission and objectives, ethics, risk involved and external environment are influences on decision making
• Also resource constraints and stakeholders are influences

Stakeholder Considerations

• It is vital to consider stakeholder needs when making decisions

Stakeholder Definition

• Stakeholder = anyone with an interest in the business and its operations
• Stakeholder groups include; customers, employees, investors/banks, suppliers/distributors, shareholders, owners/managers, competitors, the government, local communities, environmental pressure groupies and the media

Stakeholder Mapping

• Power = their part in decision making or how much they would negatively affect you
• Purpose = helps you when making decisions and prioritise stakeholders where there will be potential conflict

Stakeholder Needs

• Stakeholder needs:
• Employees: a happy environment, high wage, keeping their job, good & safe working conditions
• Suppliers: regular orders, contractual agreement, security
• Customers: low price, high quality, good customer service, value for money
• Competitors: price, customers, (affected by other decisions)
• Government: wants them to do well, collect taxes (and raise them)
• Local communities: local environment, friendly firms
• Owners and managers: dividends, potential benefits, expansions, happy employees, profit
• Investors and banks: repayments on time and with full interest
• Shareholders: regular dividends, how much profit the firm makes

Factors That Affect Stakeholder Relationships

• Quality of products made, information available, and ease of communication
• Also their status, customer service, influence or power
  • Workplace environment for employees
  • How much money they have invested into the business
  • Views on the environment
  • Revenue produced
  • Prices of products being sold
  • Decisions made by the firm

Communication With Stakeholders

• How to communicate with stakeholders:
  • General meetings
  • Letters
  • Email and social networking
  • Posters of advertising
  • Public forums
  • Media release