Business’s Objectives

Nadeeka Kuruppu
Lecturer/Consultant
NIBM
 Every business has a hierarchy of
objectives, with a primary objective
supported by secondary objectives.

Together these form multiple

Overview objectives.

Profit and wealth maximisation is

usually the primary objective, though
sometimes managers pursue a policy
of profit satisficing only.
 • The fact that a business is oriented towards
making a profit means that the simple
answer to the question ‘what are the
The hierarchy business’s objectives?’ is: making as much
profit as possible so as to increase
of objectives shareholder wealth.
• In fact there is a hierarchy of objectives, with
one primary objective and a series of
secondary (subordinate) objectives which
should combine to ensure the achievement
of the primary objective
Primary objective

• For a business the primary objective is financial: making as much profit as possible
(profit maximisation) so as to increase shareholder wealth.
• Profit is revenue less costs. It measures how the business creates value by making sure
the cost of inputs (labour, materials and finance) is less than the output (revenue
generated)
• Shareholder wealth can only be maximised if profit is earned at an acceptable level of
risk: focusing solely on maximising profit and ignoring risk can lead to decreased
shareholder wealth (and financial collapse). Avoiding unnecessary risk should go hand-
in-hand with making profits so as to maximise shareholder wealth
• Profit cannot be pursued at any cost. Any business is subject to the laws and
regulations of the country in which it operates, and it also has social responsibilities.
Secondary Secondary objectives support the
objectives primary objective.
• Market position
• Product development
• Technology
• Employees and management
Market position

• Achieve a particular market share of

each market that the business
operates in
• Grow sales
• Customers or potential customers
• Avoid reliance on a single customer
for too big a proportion of total sales
• Enter or leave markets when the
time is right.
Product development

• Bring in new products

• Develop a product range
• Invest in research and
development
• Provide products of a certain
quality at a certain price level.
Technology

• Improve how much is produced from the

resources available
• Reduce the cost per unit of output
• Exploit appropriate technology.
 • Train employees in necessary skills
Employees and • Reduce the number of employees leaving
management and having to be replaced (labour turnover)
• Create an innovative,flexible culture
• Employ high quality leaders
 Where the person who has put their money at stake (often called the
Is wealth ‘entrepreneur’) is in full managerial control of the business, as in the
case of a small owner-managed company or partnership, assuming
maximisation wealth maximisation as the primary would seem to be very reasonable.

always the Even in companies owned by shareholders, but run by non-shareholding

primary managers, we might expect the wealth maximisation assumption to be
valid.
objective?
However managers do not necessarily make decisions that will maximise
shareholder wealth.They may have no personal interest in the creation
of wealth, except in so far as they are accountable to owners.

The market may lack competitive pressure to be efficient by minimising

costs and maximising revenue, for example where there are few
businesses in the market.
 Decision might be taken by managers with their own managerial
objectives in mind rather than the aim of wealth maximisation.
Profit
Satisficing A company’s managers may choose to achieve simply a
satisfactory profit, by operating at profit and risk levels which are
acceptable to shareholders, and which provide enough profits
for future investment in growth, but which are not designed
actively to maximise profit and shareholder wealth.

This is called ‘satisficing’, and is linked to a view of the strategy

process called ‘bounded rationality’ put forward by the
economist Herbert Simon
 A business may act to maximise revenue (not
necessarily profit or wealth) in order to maintain
Revenue or increase its market share, ensure survival, and
maximisation discourage competition.

This is a view put forward by the economist

William Baumol. Managers benefit personally
from following this objective because of the
prestige of running a large company, and also
because salaries and other benefits may be
higher in bigger companies than in smaller ones.
Multiple objectives

Management writer Peter Drucker points out that: ’To manage a business is to balance a variety of needs and goals…. The very nature of
business enterprise requires multiple objectives’. He suggests that objectives are needed in eight key areas.
• Market standing: this includes market share, customer satisfaction, size of product range and distribution resources
• Innovation: in all major aspects of the business
• Productivity: meeting targets for the number of outputs (items produced or tasks completed) within set timescales
• Physical and financial resources: efficient use (minimising waste) of limited resources (including people, space, materials, plant and
equipment, finance and so on)
• Profitability
• Manager performance and development: managerial effectiveness in meeting objectives and creating a positive environment in the
business; grooming of managers for continuity (managerial succession)
• Worker performance and attitude: labour productivity, stability (controlled labour turnover), motivation and morale, development of skills
and so on
• Social responsibility: in areas such as community and environmental impacts, labour standards and employment protection
Constraints theory

• Herbert Simon has also pointed out that decisions for some business areas
are taken without reference to the wealth objective at all. This is not
because managers are ignoring profit, but because profit is not the most
important constraint in their business.
• This situation is seen most clearly when constraints such as the need for
good staff relations, or for environmental protection, apply. It is also seen
in the need to satisfy customers with quality products and service, which
may lower profitability.
Mission, goals,
plans and
standards
Overview

The direction of the business is

A business’s planning and control
cycle ensures that its objectives,
mission and goals are met by setting
plans, measuring actual performance
against plans , and taking control
action.
expressed in its mission, which sets
out its basic function in society in The business’s goals can be classified
terms of how it satisfies its as its aims (which are non-operational
stakeholders.The mission and qualitative) and its operational,
encompasses the business’s purpose, quantitative objectives.
strategy, policies, standards of
behaviour and values.

Plans and standards set out what

Operational objectives should be should be done to achieve the
SMART: specific, measurable, operational objectives. The
achievable, relevant and timebound. organisation’s plans are a result of its
strategic planning process
 • Businesses need to direct their activities by:
-Deciding what they want to do to achieve
Planning and their primary objective – these become detailed
objectives that the business sets out to achieve,
control such as ‘grow revenue by 20%’ or ‘reduce costs by
system 10%’
-Deciding how and when to do it and who is
to do it (setting plans and standards)
-Checking that they achieve what they
want, by measuring and monitoring what
has been done and comparing it with the
plan
-Taking control action to correct any
deviation
 planning and control System

Comparison of On target no
Plans and Actual
objectives performance with corrective action
standards performance
plans/ standards required

Control action? Control action?

Deviation
identified

Where there is a deviation from plan, a decision has to be made as to whether to adjust the plan (because it was
unachievable) or adjust how the plan is performed (because performance was substandard).
Mission

Definition Mission: ‘The

The overall direction of a business’s basic function in
business is set by its society’ expressed in terms
mission. of how it satisfies its various
stakeholders

Mission
• Even though the mission
may be very general, you
can see it should have real
implications for the
policies and activities of
the organisation, and how
individuals go about what
they do.
Elements of mission Comments
purposes Why does the organisation exist and for
whose benefit (eg shareholders)
Strategy What is the operational logic of the
organization;
What do we do?
How do we do it?
Policies and standards of behavior What do our people actually do and how
do they behave?
The mission of a hospital is to save lives,
and this affects how doctors and nurses
interact with patients.
values What does the organisation believe to be
important – what are its core principles?
 • Some businesses also have a vision of the
future state of the industry or business
which determines what its mission should
Vision be.
• For instance, ‘being the leading provider of X
by 2018’ is a vision of a business’s future,
which ties it in to a mission of ‘providing
high-quality environmentally-friendly X to all
our customers’.
 aims and objectives
Definition
Goal: ‘A desired end result’ (Shorter Oxford
English Dictionary).

Goals
Identifying goals give flesh to a business’s
mission. There are two types of goal: ·
Non-operational aims, or qualitative goals: for
example, a university’s aim may be ‘to seek
truth’. (You would not see: ‘increase truth by 5%’)
·
Operational objectives, or quantitative goals: for
example,- ‘To increase sales volume by 10%’
 Characteristics of Example
operational objectives
Characteristics Objectives should be Operational aim: cut cost
of operational SMART
Specific
Operational objective:reduce
budgeted expenditure on
objectives Measurable office stationery by 5% by
Achievable 31st December 2020
Relevant
Time-bound
Quiz
Inch plc’s operational objective for its Yem manufacturing division is
‘increasing manufacturing activities within a year’. On which of the
SMART criteria for objectives does this objective fail?
A Specific
B Measurable
C Relevant
D Time-bounded
Interactive question 2

• Goals [Difficulty level: Intermediate] Most organisations establish

quantifiable operational goals (objectives).
• Give reasons why non operational goals (aims) might still be important
 • Aims can be just as helpful as quantifiable
Answer to objectives. Customer satisfaction, for
example, is not something which is achieved
Interactive just once. Some goals are hard to measure
question 2 and quantify, for example ‘to retain
technological leadership’. Quantified
objectives are hard to change when
circumstances change, as changing them
looks like an admission of defeat:qualitative
aims may support greater flexibility
The purpose of setting operational objectives in
a business

• ’Objectives are needed in every area where performance and results directly
and vitally affect the survival and prosperity of the business’ (Peter Drucker).
Objectives in these key areas should enable management to:
-Implement the mission, by setting out what needs to be
achieved
-Publicise the direction of the organisation to managers and staff, so
that they know where their efforts should be directed
-Appraise whether decisions are valid, by assessing whether these are
sufficient to achieve the stated objectives
-Assess and control actual performance, by using objectives as targets
for achievement
Plans and standards

• Plans: state what should be done to achieve the operational objectives. Standards and
targets specify a desired level of performance.
• The desired level of performance for what is done can be expressed as a standard to be
met, in terms of:
-Physical standards :eg units of raw material per unit produced
- Cost standards. These convert physical standards into money measurement
by the application of standard prices. For example, the standard labour cost of
making product X might be 4 hours at £8 per hour = £32
-Quality standards:These can take a variety of forms, such as percentage of
phone calls answered within three rings (customer service quality standard)
How are plans
set? • The strategic planning process sets the
overall mission, goals, plans and standards
that the business will try to achieve
 1 What is an organisation?
2 List four ways in which organisations may differ from each
other.
3 A government funded agency exists to provide services to a
Self-test group of beneficiaries. What would its secondary objective be?
4 What is a business?
5 What three things are normally expected of a business by its
suppliers as stakeholders?
6 State two possible primary business objectives other than
profit/wealth maximisation.
7 Define what is meant by a business’s mission.
Thank You