The Purposes of a Business - PDF

III. THE PURPOSES OF A BUSINESS never stop daring III. THE PURPOSES OF A BUSINESS Today’s business must have a triple purpose: o Economic o Social o And societal (especially environmental). 114 III. THE PURPOSES OF A BUSINESS A. Economic (Productio...

III. THE PURPOSES OF A BUSINESS never stop daring III. THE PURPOSES OF A BUSINESS Today’s business must have a triple purpose: o Economic o Social o And societal (especially environmental). 114 III. THE PURPOSES OF A BUSINESS A. Economic (Production & Distribution) The economic role of the business is to produce wealth (added value) which ensures its sustainability. To do this, it transforms factors of production (inputs) into goods or services intended to be sold on the market (outputs). 115 III. THE PURPOSES OF A BUSINESS A. Economic (Production & Distribution) The economic role of the company is essentially to produce income & wealth which ensures its sustainability and remunerates the agents who made this production possible. The company transforms factors of production (inputs) into goods or services intended to be sold on the market (outputs). The production function is a representation of this transformation. 116 III. THE PURPOSES OF A BUSINESS A. Economic (Production & Distribution) The factors of production are: Labor : Hours of work provided by qualified employees Fixed Capital (Investment) : Land, machines, buildings, trademarks, patents Intermediate Goods & Services : Energy, Primary goods,.. Residual factors : Know-how, technology, … By themselves the factors of production are useless. Only the combination of these factors makes it possible to create products which are useful to people and which will be traded in the market at a price that covers their cost. 117 PRODUCTION Example of Pizza Labor (L) Pizzaiolo, Order Taker Fixed Capital (K) Oven, Kitchen tools, Building, Intermediate Goods and Services (IGS) Flour, yeast, Water, Tomatoes, Herbs, Cheese, Toppings, … Electricity Residual Factors (RF) Process to transform the ingredients. Know- The Production Function : how in making pizza. 𝑄 = 𝑓 (𝐿, 𝐾, 𝐼𝐺𝑆, 𝑅𝐹) 118 III. THE PURPOSES OF A BUSINESS A. Economic (Production & Distribution) To these factors we add natural resources. The objective being for the business to choose the most efficient productive combination. It seeks to achieve productivity gains. Example : Produce more wealth with the same production factors. Produce as much wealth with fewer production factors … Some firms achieve greater productivity by substituting capital for labor. 119 III. THE PURPOSES OF A BUSINESS A. Economic (Production & Distribution) These factors of production being capital labor Method Value complementary, the company must choose an Created efficient productive combination. 100 100 A 1000 It thus seeks to achieve productivity gains. 100 100 B 1200 This is the case when it: 100 90 B 1000 Produces more wealth with the same factors of production. Produces as much wealth with fewer factors of production. Example: some companies obtain better productivity by substituting capital for labor.. 120 III. THE PURPOSES OF A BUSINESS A. Economic (Production & Distribution) By producing, the company creates income = added value (VA). VA = (Value of production) – (value of intermediate consumption) VA represents the wealth created by the business. VA measures the creation of income by the company and thus its contribution to general economic activity. VA allows the company to remunerate its factors of production and start its production cycle over again. 121 III. THE PURPOSES OF A BUSINESS A. Economic (Production & Distribution) Farms Juicing Distributors Retailers 1€ 1,50€ 2,25€ 3,50€ Value added = 1,00€ Value added = 0,50€ Value added = 0,75€ Value added = 1,25€ TOTAL VALUE ADDED = 3,50€ 122 III. THE PURPOSES OF A BUSINESS A. Economic (Production & Distribution) Activity Cost of Inputs Price of Output Value Added by Activity Growing Oranges 0 1€ Making Orange Juice 1€ 1,50€ Distributing Juice to Stores (Wholesale) 1,50€ 2,25€ Selling Juice to Consumer (Retail) (final good) 2,25€ 3,50€ TOTAL 123 III. THE PURPOSES OF A BUSINESS A. Economic (Production & Distribution) Activity Cost of Inputs Price of Output Value Added by Activity Growing Oranges 0 1€ 1€ Making Orange Juice 1€ 1,50€ 0,50€ Distributing Juice to Stores (Wholesale) 1,50€ 2,25€ 0,75€ Selling Juice to Consumer (Retail) (final good) 2,25€ 3,50€ 1,25€ TOTAL 4,75 8,25 3,50€ Total Production – Intermediate Consumption = Value Added 8,25 – 4,75 = 3,50 124 III. THE PURPOSES OF A BUSINESS A. Economic (Production & Distribution) The VA measures the creation of wealth by the business and its contribution to economic activity: In 2022: Agriculture: 2.1% Industry: 13.3% Construction: 5.5% Merchant services: 56.9% Non-market services: 22.2% 125 WHERE DOES THE VALUE GO ? never stop daring III. THE PURPOSES OF A BUSINESS A. Economic (Production & Distribution) The added value therefore makes it possible to remunerate economic agents who have participated directly or indirectly in the production activity: Employees (salary, profit sharing) PO (prélèvements obligatoires): compulsory contributions from the State, local communities, social organizations Capital providers: lenders (interest), partners (dividends) Self-financing (reserves) The company: to finance its future investments (self-financing) 127 III. THE PURPOSES OF A BUSINESS A. Economic (Production & Distribution) Net profit Reserves profit = EBIT Operating Dividends Dividends = 30 to 50% Corp Taxes Corporate taxes = 25% Interest Social fees Value Added = = Salaries Value of Production Payment to suppliers Payment to suppliers for intermediate for intermediate goods and services goods and services (inputs) (inputs) 128 III. THE PURPOSES OF A BUSINESS A. Economic (Production & Distribution) VALUE ADDED Total Gross Compensation Operating Surplus Social Net Retained Dividends Interest Taxes Fees Salaries Earnings 129 III. THE PURPOSES OF A BUSINESS A. Economic (Production & Distribution) So there are two ways to calculate VA SUBTRACTIVE METHOD (distribution to ADDITIVE METHOD (distribution to stakeholders) stakeholders) COST of - intermediate G&S TURNOVER EMPLOYEE COMPENSATION (SALES) VALUE ADDED + INTEREST + PROFIT TAX + RESERVES DEPRECIATION 130 III. THE PURPOSES OF A BUSINESS A. Economic (Production & Distribution) This distribution of wealth can be a source of conflict between the different actors: Between wages and profits Between manager and shareholders “Orange made a record profit in 2020 and the employees received nothing,” laments Jérôme Meneuf, FAPT CGT Between the different delegate from Haute-Vienne. “With the expansion of teleworking and the consequent development of categories of staff telecommunications networks, Orange made a record profit in 2020. Management preferred to increase shareholder dividends rather than our salaries.” 131 III. THE PURPOSES OF A BUSINESS A. Economic (Production & Distribution) Value added distribution by Volkswagen (Germany) and Budimex Construction (Poland) 132 III. THE PURPOSES OF A BUSINESS A. Economic (Production & Distribution) At a macro level, the choice is often linked to trends in politics and culture. According to the Trades Union Congress (UK) things have evolved differently 133 III. THE PURPOSES OF A BUSINESS A. Economic (Production & Distribution) Value added distribution changes over time Salaries Social Gross Other Fees Surplus 134 III. THE PURPOSES OF A BUSINESS A. Economic (Production & Distribution) In FRANCE 2000 2010 2020 Salaries 41,6% 42,7 43,5 Social Fees 15,1% 15,1% 14,6 Total for Employees 56,7% 57,9% 58,2% 135 III. THE PURPOSES OF A BUSINESS B. Social The business is a social entity bringing together individuals linked by a set of relationships (especially hierarchical). It therefore constitutes a network where goods and services circulate, but also information , influences and feelings. 136 III. THE PURPOSES OF A BUSINESS B. Social The company is not only an economic actor who is focused uniquely on profit. It is also an organization with its own dynamics, a team called upon to make decisions to achieve common goals. The company is a social entity bringing together individuals linked by a set of relationships (in particular hierarchical). It therefore constitutes a network circulates not only goods and services, but also information, influences and feelings. 137 III. THE PURPOSES OF A BUSINESS B. Social An economic function: A social function: It creates jobs It allows men to be active, to communicate, to feel useful, to use their capacities (physical and intellectual). it provides its employees with an income intended to meet their needs It allows its employees to have social status. (salaries, bonuses, participations, The business is the core of social life: it is the etc.) meeting point for men and women who devote to their work a time comparable to that of their private and family life. It trains and ensures the development of staff in the workplace (job security, promotion, improvement of working conditions, career management, etc.). 138 III. THE PURPOSES OF A BUSINESS B. Social It is therefore up to the business’s management to define and maintain a good working climate. in the business. Unfortunately, sometimes the company is a place of frustration , conflict or uneasiness. 139 III. THE PURPOSES OF A BUSINESS B. Social What describes your ideal work environment ? 140 EMPLOYER BRANDING Captivating company: dimensions of attractiveness in employer branding, Berthon et.al. Development Value The employer provides recognition, self-worth and confidence, a career- enhancing experience and a springboard to future employment Interest Value Economic Value The employer provides an exciting work The employer provides above-average environment, novel practices and salary, compensation package, job makes use of employee creativity security and promotional opportunities. Social Value Application Value The employer provides a working The employer provides an opportunity environment that is fun, for the employee to apply what they happy, provides good collegial have learned & teach others, in a relationships and a team atmosphere. customer orientated and humanitarian environment 141 III. THE PURPOSES OF A BUSINESS B. Social Putting the Service-Profit Chain to Work, HBR, by James L. Heskett, Thomas O. Jones, Gary W. Loveman, W. Earl Sasser, Jr., and Leonard A. Schlesinger 142 III. THE PURPOSES OF A BUSINESS B. Social Why employee engagement matters According to Gallup , having a highly engaged workforce leads to 20% higher sales, and 21% higher profitability. III. THE PURPOSES OF A BUSINESS B. Social Why employee engagement matters : productivity Employees who are not engaged or who are actively disengaged cost the world $8.8 trillion in lost productivity, according to Gallup's State of the Global Workplace: 2023 Report. That's equal to 9% of global GDP. 144 III. THE PURPOSES OF A BUSINESS B. Social Decreasing Engagement Job insecurity: fear of job loss is particularly likely during a recession. Unfairness, particularly in reward and pay systems. Jobs with no space (repetitive work with short cycle times such as call centre) Work with very short call times (come now !). Highly stressful jobs with very little flexibility or autonomy Poor line management behaviour and bullying. Working for long periods of time without a break. 145 III. THE PURPOSES OF A BUSINESS B. Social HOW CAN MANAGERS INCREASE ENGAGEMENT ? 146 ENGAGEMENT MEASURE - GALLUP In the last six months, has someone at work talked to you about your progress? In the last year, have you had opportunities to learn and grow? At work, do your opinions seem to count? Does the mission/purpose of your company make you feel your job is important? Are your associates (fellow employees) committed to doing quality work? Do you have a best friend at work? At work, do you have the opportunity to do what you do best every day? In the last seven days, have you received recognition or praise for doing good work? Does your supervisor, or someone at work, seem to care about you as a person? Is there someone at work who encourages your development? Do you know what is expected of you at work? Do you have the materials and equipment to do your work right? 147 LEVELS 148 149 HTTPS://WWW.GALLUP.COM/394373/INDICATOR-EMPLOYEE-ENGAGEMENT.ASPX 150 CSR AND ENGAGEMENT 86 percent of employees who are satisfied with their organisation’s CSR commitment have high levels of engagement When employees were sceptical of the organisation’s commitment to CSR, only 37 per cent were engaged. When organisations demonstrate a commitment to ‘improving the human or environmental condition, it creates meaning and value for employees, customers, and shareholders alike’ Source: Sirota Survey Intelligence of Purchase, 2007 151 III. THE PURPOSES OF A BUSINESS C. Societal The environment in which businesses operate is increasingly restrictive. They must not only ensure economic performance but also societal performance: that is to say, respect for certain values shared by the community. (Ex: respect for human rights, the environment, etc.). 152 III. THE PURPOSES OF A BUSINESS C. Societal The concept of corporate social responsibility (CSR) or organizational social responsibility (RSO) expresses these new missions. CSR arises from the application of the concept of sustainable development to companies. 153 III. THE PURPOSES OF A BUSINESS C. Societal The notion of CSR stems from the application to companies of the concept of sustainable development (macro concept) "Sustainable development is development that meets the needs of the present without compromising the ability of future generations to Gro Harlem Brundtland Head of World Commission on meet their own needs.“ Environment and Development United Nations Brundtland Report (Our Common Future), 1987 154 III. THE PURPOSES OF A BUSINESS C. Societal 3 Pillars of the Bruntland Report (1987) The economy: Developing and sustaining economic growth and efficiency to encourage the creation of wealth for all, through sustainable modes of ECONOMIC production and consumption. Viable Equitable Social: Satisfying human needs (in terms of health, housing, social integration, consumption, education, ENVIRONMENTAL SOCIAL Liveable etc.) and working towards social justice objectives. The environment: Preserving, improving and valuing the environment and natural resources in the long term. 155 III. THE PURPOSES OF A BUSINESS C. Societal CSR: the voluntary integration of the social and ecological concerns of companies into their business activities and into their relations with all stakeholders. CSR means that the company must be concerned with:  PROFIT : Its profitability and financial results  PLANET : Environmental and social impacts of its activities  PEOPLE : The expectations of its stakeholders: employees, shareholders, customers, suppliers, civil society (NGOs, etc.). 156 III. THE PURPOSES OF A BUSINESS C. Societal Reminder : A stakeholder is an actor , individual or collective (group or organization), whose interests can be affected positively or negatively by the activities of the company. We distinguish : Internal stakeholders: managers, employees, unions, shareholders, etc. External stakeholders: Customers, suppliers, financing intermediaries (banks, fund managers, etc.), insurance companies NGOs, associations, citizens of a community where the company operates Local authorities, Chamber of Commerce and Industry… 157 III. THE PURPOSES OF A BUSINESS C. Societal CSR has brought about a new form of business: Entreprise à Mission (Pacte Law 2019) (purpose driven company) For a company, it is a question of publicly asserting its reason for being through several social and environmental objectives. Similar to the B-Corp in the USA. 158  III. THE PURPOSES OF A BUSINESS C. Societal o In the United States, a benefit corporation (B-Corp) is a type of for-profit corporate entity, authorized by 35 U.S. states and the District of Columbia that includes positive impact on society, workers, the community and the environment in addition to profit as its legally defined goals, in that the definition of "best interest of the corporation" is specified to include those impacts. o Traditional C corporation law does not specify the definition of "best interest of the corporation" which has led to profit motivations being used as the main driver for best interests. o In France, the Pacte law introduced a new form for companies (Société à mission) allowing a company to declare its raison d'être through several social and environmental objectives. 159 160 III. THE PURPOSES OF A BUSINESS C. Societal These elements must be included in the company's statutes and declared to the commercial court registry. The law provides for verification by an independent third party organization (OTI) of the execution by the mission company of the social and environmental objectives mentioned in its statutes. In 2022, there were 1008 businesses in Mission (their number has almost doubled in 1 year). 161 III. THE PURPOSES OF A BUSINESS 162 III. THE PURPOSES OF A BUSINESS Example: Crédit Mutuel became the first bank in Mission. The actions : Equal pay between men and women. Recruitment of 25% of work-study students from priority neighborhoods and rural areas. Investment of €3 billion in French companies (and no longer investing in gas and oil). Removal of the health questionnaire for granting a real estate loan… 163 III. THE PURPOSES OF A BUSINESS Advantages and risks of being an « entreprise à mission » SOME BENEFITS SOME RISKS Enhanced Brand Image and increased trust Legal obligations and transparency demands Employee engagement and talent acquisition Align business strategy to the mission Differentiation & customer loyalty Short vs long term tension for resources Investor interest Investor pressure 164 III. THE PURPOSES OF A BUSINESS C. Societal o Employer Branding : Three-quarters (76 percent) of Millennials consider a company’s social and environmental commitments when deciding where to work and nearly two-thirds (64 percent) won’t take a job if a potential employer doesn’t have strong corporate social responsibility (CSR) practices, according to the 2016 Cone Communications Millennial Employee Engagement Study o Consumer loyalty, satisfaction and trust : Research has shown that CSR actions, aimed at the consumer as the main stakeholder of the company, can increase the perceived value by the consumer. This also strengthens the relationship with the consumer by improving trust and commitment. This translates into an increase in consumer satisfaction (Shin & Thai, 2015) and loyalty (Choi & La, 2013) to the company. o Investors : Based on empirical evidence, high CSR performance increases customer loyalty, boosts employee productivity and lowers financing costs, all of which contribute to the economic value of innovation and shareholder wealth. Research from MIT has shown that the positive (negative) stock market reaction to eco-friendly (-harmful) events is smaller for companies with higher levels of environmental CSR (volatility) 165 thank you for your attention. audencia.com