H2 Management of Business (PU1)

Topic 1: Nature and Purpose of Business

TOPIC 1: NATURE AND PURPOSE OF BUSINESS

References: Stimpson and Farquharson, Business Studies, 3rd Edition, p3-p6, p38-p46 and p51-58

Objectives:
1. Explain what is meant by a business and the different business activities.
2. Explain the primary purpose of a business
3. Discuss the interests, importance and influence of stakeholders on business and its decision-making
4. Discuss how a business creates value to meet the interests of various stakeholders
5. Explain the different business objectives, their importance, and how they affect decision-making

Content:
1 INTRODUCTION
2 PURPOSE OF BUSINESS
3 STAKEHOLDERS
4 BUSINESS OBJECTIVES
5 CONCLUSION

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H2 Management of Business (PU1)
Topic 1: Nature and Purpose of Business

1 INTRODUCTION Notes

A business is any organisation that uses resources to meet the needs of customers
by providing a product (goods or services) that they demand for a profit. In doing
so businesses are engaged in activities that include identifying the needs of
customers, acquiring the resources and transforming these resources to produce
goods and services that satisfy the needs, with the aim of making a profit.

Some examples of businesses in Singapore include McDonald’s, Singapore Airlines,

Metro and Razer. Neighbourhood shops such as hair salons, minimarts and shoe
cobblers and even the school canteen food stalls are engaged in business activities.

2 PURPOSE OF BUSINESS

Traditionally, the purpose of a business is defined as producing goods and services

to meet the needs and wants of consumers to maximise profit. To provide a
product at a price where consumers are willing to pay while covering the full costs
of producing it is an important part of the purpose of business. Thus, the business
is providing for others on condition it receives something of fair value in return to
ensure continuity.

Increasingly, business and society are becoming mutually interdependent; society

depends on business for wealth creation while business depends on society for an
environment where it is able to create that wealth. The actions of business leaders
affect not only themselves, but also customers, employees, investors, suppliers,
governments, citizens, and communities. Hence the responsibilities of business go
far beyond simply profit-making.

In summary, other purposes of business include:

• providing society with goods and services that include necessities such as
housing, clothing, food, transportation, communication and health care, etc.
• providing employment opportunities so as toimprove the well-being and
standard of living of the society.
• Providing a source of revenue to the government through taxes paid which in
turn used to fund various government services to benefit society such as
transportation infrastructure, education, and scientific research;

Hence, the primary purpose of business has shifted from ‘providing goods and
services to customers to maximise profit’, to ‘creating value for the various
stakeholders of the business’.

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H2 Management of Business (PU1)
Topic 1: Nature and Purpose of Business

2.1 Definition of Value Notes

Value is the capacity of a good, service, or activity to satisfy a need or provide a

benefit to a person or an entity.

2.1.1 Examples of Value

In simplistic terms, value is created when a business processed a raw material or
resource into a product for which customers are willing to pay a price higher than
the costs of making it. This thus enables the business to make a profit. Hence, value
is created when resources are processed into goods and services.

However, the purpose of business goes beyond creating value only for customers.
A business also seeks to create value for owners or shareholders by increasing the
monetary value of their investments, and ensuring attractive returns in the form
of dividends. One way businesses do this is by employing the right employees,
developing their competencies and rewarding them for their contributions.

2.1.2 Measurement of Value

Value can be measured in terms of financial and non-financial benefits. Financial

benefits affect a business positively in monetary terms, both in the short and long
term. An example of a financial benefit would be the revenue earned from
providing a good or service, which after deducting costs or expenses would result
in profits for the business.

Non-financial benefits might not result in an immediate positive monetary impact

for the business, but could potentially create financial benefits in the future. An
example of a non-financial benefit would be training and development of workers.
While a well-trained workforce might not result in an immediate financial gain for
a business, it might result in higher productivity, the production of better quality
products or better customer service, leading to increased sales and customer
loyalty. In the long term, the business would gain greater market share and high
profits.

3. STAKEHOLDERS

Stakeholders refer to individuals or organisations with an interest in the activities

of a business. They are affected by and can affect the decision-making of a
business.

3.1 Examples of Stakeholders

Examples of stakeholders include shareholders/ owners, employees, customers,

suppliers, banks and financial institutions, government agencies, local
communities, trade associations, trade unions, public interest groups, the media
and society at large.

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H2 Management of Business (PU1)
Topic 1: Nature and Purpose of Business

3.1.1 Shareholders and owners Notes

Shareholders and owners are the ones who invest and contribute capital to the
business. At times, they also count as part of the workforce in the business. Their
main interests in the business are to reap increased value of investments and to
receive dividends.

3.1.2 Employees

Employees form the workforce and provide labour to the business in exchange for
salary. Employees’ main interests in the business would thus include the receiving
their salary on time, have job security and to gain job satisfaction.

3.1.3 Customers

Customers purchase goods and services provided by the business to satisfy their
needs and wants. While customers expect the business to provide quality and
value for money goods or services as well as good after-sales customer service, the
business depends on the customers for its survival and growth

3.1.4 Suppliers

Suppliers are businesses that provide the required resources for businesses to
produce their goods and services. Suppliers rely on other businesses as a means to
generate profit and their main interest in the business is to receive prompt
payments for the resources supplied and to establish long-term contracts through
long-term trading relationship.

3.1.5 Banks and Financial Institutions

Banks and financial institutions provide businesses with funds through both long-
term and short-term borrowings, beyond the capital contributed by owners and
shareholders. The main interest of banks and financial institutions is to ensure
businesses are able to repay both the principal amount as well as the loan interest.

3.1.6 Governments/ Government Agencies

Governments rely on businesses for tax revenue to support public policies and
projects. Businesses rely on governments to provide infrastructure as well as
ensuring political, social, and legal stability to enable smooth business operations.
At the same time businesses also provide governments with goods and services.

3.1.7 Local Communities

Local communities such as charitable organisations rely on businesses as a source

of donations and support. Other civic and community organisations might also
partner businesses to achieve community goals. The community also looks to
businesses to provide locals with jobs.

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Topic 1: Nature and Purpose of Business

3.1.8 Society at large Notes

A business cannot function outside of a society, which is the set of institutions that
facilitate useful social interactions including the establishment of markets where
businesses can offer their goods and services. In turn, society is affected by
businesses because they make up part of the society.

3.2 Influence of Stakeholders on Business Decision-making

Decisions made by a business would affect the different stakeholders and at the
same time, stakeholders in turn influence business decisions. Businesses need to
be responsible to stakeholders in their decision-making and in doing so, businesses
may gain potential benefits.

3.2.1 Responsibilities to Customers

Businesses will need to ensure they meet customer satisfaction in order to earn
revenue and stay viable. This will mean that goods and services provided must be
functional and of good quality, and sold at reasonable prices. Also, businesses must
ensure that information provided in advertisements are accurate and they do not
pressure customers into buying. If businesses perform the above, they are likely to
benefit from customer loyalty and positive publicity.

3.2.2 Responsibilities to Suppliers

Businesses will need to ensure the suppliers provide quality resources and prompt
delivery. To achieve good trading relationship, businesses should ensure that they
pay on time, place regular orders, and establish long-term contracts. The potential
benefits for businesses would be supplier loyalty and better credit terms.

3.2.3 Responsibilities to Employees

Businesses should go beyond just the legal requirements on employment, and seek
to provide job security, fair salary, good working conditions and ample training and
development opportunities. In return, business would benefit from low staff
turnover, and are likely to be able to recruit better employees that could
contribute towards the success of the business.

3.2.4 Responsibilities to Community

Businesses may face problems from the local community with regard to expansion,
or local customers may not buy from them if they do not fulfil certain
responsibilities such as offering secure employment, buy from local suppliers and
minimise the undesirable harms on the environment resulting from their activities.
The local community is also more likely to support and buy from businesses which
are perceived as contributing to the society through donations to community
groups or projects.

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H2 Management of Business (PU1)
Topic 1: Nature and Purpose of Business

3.2.5 Responsibilities to the Government Notes

Businesses must always obey the law, pay taxes on time and support all
government initiatives. The benefits of doing so would lead to the establishment
of good relations, and businesses are more likely to obtain government clearance
on business activities, receive government contracts, as well as potential grants
and subsidies.
3.3 Conflict of Interests between Stakeholders
As the interests of stakeholders vary, decisions made by the business might result
in the interests of one stakeholder to be in conflict with those of another
stakeholder. Examples of business decisions that might result in stakeholder
conflict include:

Example 1
A business might decide to reduce costs by carrying out a retrenchment exercise
(cutting jobs). This decision is likely to be supported by shareholders/ owners as a
reduction in costs will lead to higher profits and hence more dividends for
shareholders. This decision, however, is detrimental to the interest of employees
as they would lose their jobs, and hence their income.

Example 2
A business might decide to purchase a new machine to reduce the need for manual
labour, and to ensure consistency in the quality of goods produced. This decision
is likely to please customers who will benefit from better quality goods, but existing
employees would suffer due to job and income losses.

Example 3
A business might decide to increase selling price significantly so that profit margin
would be improved. This decision would benefit the interest of shareholders/
owners as they are likely to receive higher dividends, while customers are likely to
oppose this move as they do not wish to pay high prices.

Hence, businesses will need to weigh up the conflicting interests of the different
stakeholders, prioritise and balance the trade-offs between their varied needs.

3.4 Stakeholders and Value Creation

The following are examples of value that can be created for each of the following
groups of stakeholders:

3.4.1 Shareholders

Businesses could invest the funds contributed by the shareholders to develop new
products or enter new markets that could bring about greater profits that could in
turn result in greater returns to the shareholders. Increasingly, some shareholders
may also expect the practices of the business to match their beliefs and values.

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Topic 1: Nature and Purpose of Business

3.4.2 Employees Notes

Businesses could ensure prompt payment of the wages and salaries to the
employees for the work done. In addition, businesses could look into the long-term
employability of the employees through their training and development
programme and providing benefits such as health insurance, paid vacation time,
family sick leave, and childcare facilities as part of the compensation package.

3.4.3 Customers

Customers could be offered quality products that satisfy their needs and wants at
reasonable prices. Convenience and good after-sales service would allow for
greater customer satisfaction.

3.4.4 Suppliers

Ensuring prompt payment to suppliers and establishing long-term trading

relationship as well as possible technology transfer would allow for continued
trade opportunities and a steady source of sales revenue.

3.4.5 Society at large

Businesses should ensure that their activities do not cause harm or damage the
environment. Businesses could invest in techniques that do not result in pollution
or traffic congestion. Alternatively, businesses could look into improving the
quality of life through their activities including donations and contributions.

4 BUSINESS OBJECTIVES

All businesses require clear objectives or targets to work towards. The long-term
objectives set by a business, often termed as strategic objectives, are influenced
by its vision, mission and values.

Vision
A vision captures aspirations of a business. It is an aspirational description of what
an organization would like to achieve in the mid to long-term future. It is intended
to serve as a clear guide for choosing current and future courses of action. An
effective vision will inspire all members of the business, from top management to
rank and file employees. An example is that of Starbucks where the business wants
“To establish Starbucks as the most recognized and respected brand in the world
and become a national company with values and guiding principles that employees
could be proud of.“ — Starbucks vision statement, 2008.

Mission (Mission Statement)

A mission or mission statement describes what a business actually does, and the
reasons for doing it. For Starbucks, its mission is “to inspire and nurture the human
spirit – one person, one cup and one neighbourhood at a time”.

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H2 Management of Business (PU1)
Topic 1: Nature and Purpose of Business

Values Notes
These are important and lasting beliefs or ideals shared by the members in the
business about what is desirable or undesirable. Values define the ethical
standards and norms all members within a business should follow. The values of
the business will determine how much ethical consideration a business has during
its decision-making process and Starbucks included ‘Creating a culture of warmth
and belonging, where everyone is welcome’ as one of its core values.

4.1 Importance of Objectives

Objectives allow a business to direct, control and review the success of its
activities.
The business should also constantly assess and review its processes to ensure that
it is on track to achieve its objective.

Objectives provide a sense of direction for the management to guide the business,
enabling them to develop appropriate strategy(s) or detailed action plan(s)
including allocating and utilising resources to achieve the objectives.

Objectives serve as a communication tool and help to create unity between

employees and the business. A clearly set objective that is understood by all
employees would enable them to know the role they play in contributing to the
success of the business, and hence work better together.

Objectives could act as a mean for the management to monitor its processes and
operations. The management should constantly assess and review its processes to
find out if the business is on track to achieving its objectives, and to take
appropriate actions if it is not.

The overall long-term objective set by a business, also known as strategic objective,
will influence the objectives of the different business functions, such as marketing,
operations, finance and human resources. Objectives at functional level, also
known as tactical objectives, should support and align with the strategic objectives.

4.2 Types of Business Objectives

The following are the common types of business objectives:

4.2.1 Survival

This is a short-term objective and is more applicable to new business start-ups

which are more prone to failure in the first few years of operation. Survival
objective is about ensuring that business is able to sustain its operations This
objective might also be applicable to established businesses during times of crisis,
such as during an economic recession or when a business is making huge losses or
losing market share.

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Topic 1: Nature and Purpose of Business

4.2.2 Profit Maximisation Notes

This is one of the most common business objectives, where a business aims to
make as much profit as possible. This objective is highly preferred by owners and
shareholders as maximising profits will allow them to gain a higher return on their
investments, such as receiving higher dividends.

4.2.3 Profit Satisficing

Profit satisficing objective seeks to achieve enough profit to keep the owners
happy or satisfied, but not to maximise profit. This objective is more applicable for
owners of small businesses who may wish to live comfortably but are not willing
to work longer hours to maximise profit. Once the business achieves a satisfactory
amount of profit, the owners might prefer to spend time on other priorities such
as leisure.

4.2.4 Growth

The growth objective means that a business seeks to expand and become larger. A
business might seek to grow in different aspects. For example, a business might
seek to grow organically or internally by hiring more employees, developing new
products, or even seek to grow by selling more to increase market share.
Alternatively, a business could grow by merging with another business, or buying
over another business.

4.3 Conflict between Objectives

At times, conflicts between objectives could occur. Business managers would need
to make decisions and try to resolve the conflicting objectives. The following are
examples of conflicting objectives.

Example 1
A business might seek to grow by increasing market share through higher sales. To
achieve this, the business would have to spend more on promotional expenses
such as advertising. The increase in promotional expenses would lead to reduced
profits, hence come into conflict with profit maximisation objective.

Example 2
Business managers might be willing to accept lower profits in the short term due
to large investments in new technology, or research and development. These
investments would hopefully result in higher profits in the long-term future.

Due to the possibility of conflicts between objectives, it is essential for business

managers to establish some form of priority in importance of objectives. Also, the
objective of a business might change across time and stage of a business. For
example, the main objective of a new business is likely to be survival. As the
business becomes more established, the owners or managers might seek to
maximise profit instead of just surviving. Over time, once revenues and profits
become stable, the main objective of the business might shift towards growth by
expanding overseas to gain a larger market share.

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H2 Management of Business (PU1)
Topic 1: Nature and Purpose of Business

5 CONCLUSION

In summary, the following are covered in this topic:

1. The primary purpose of a business is to create value for stakeholders.
2. Value can be measured in terms of financial and non-financial benefit.
3. Stakeholders are individuals or organisations with an interest in the activities of a business, and can
influence the decision-making of the business. They can also be affected by a business’s decisions.
4. As the interests of stakeholders vary, the interest of one stakeholder may be in conflict with that of
another stakeholder. Businesses will need to balance the trade-offs between the varied needs of
stakeholders.
5. Business objectives influence how a business allocates and uses its resources, as well as the decisions
it makes.
6. Common business objectives include survival, profit maximisation, profit satisficing and growth.
7. As conflicts between objectives may occur, businesses should establish a priority in the importance
of objectives.
8. Objectives might change across time or the various stage of a business.

My Mindmap

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