Mission Objectives, Decisions and Performance (AQA A-Level Business): Revision Notes
Mission Objectives, Decisions and Performance
Factors affecting share prices
Several key factors influence the share price of public limited companies. Understanding these helps explain why businesses monitor their performance and make certain decisions.
Expectation of profit performance
Investors buy and sell shares based on their expectations of how well a company will perform financially. If investors believe a company will launch a successful new product or increase profits, demand for shares rises and the share price increases. Conversely, if poor performance is anticipated, share prices may fall as investors sell their shares.
The relationship between investor expectations and share prices creates a self-reinforcing cycle: positive expectations drive prices up, while negative expectations can trigger selling and further price declines.
Changes in the market or competitive environment
Shifts in consumer behaviour and competitive pressures can significantly impact share values. For example, when shoppers moved away from traditional supermarkets like Tesco towards discount retailers such as Lidl and Aldi, Tesco's share price was negatively affected. The company lost market share and this was reflected in its valuation.
Exam tip: Economic changes affect different businesses in different ways. An economic downturn may harm some businesses (like luxury retailers) but benefit others (like discount supermarkets). Similarly, international conflicts might damage some industries but help others, such as arms manufacturers.
World uncertainty
Global events create uncertainty that makes share prices volatile. International conflicts (such as those in the Middle East) or economic downturns cause investors to become cautious. This nervousness leads to fluctuating share prices as investors react to changing circumstances and news.
Market capitalisation
Market capitalisation measures the total value of a company as determined by the stock market. It is calculated using a simple formula:
This calculation provides a valuation of the entire company. When the share price changes, so does the company's market capitalisation.
Why market capitalisation matters
Changes in market capitalisation have important implications:
- A rising share price increases market capitalisation, which may attract investment opportunities or make the company a takeover target
- A falling share price reduces market capitalisation, potentially indicating the business is declining
- Market capitalisation helps investors compare the size and value of different companies
Worked Example: Calculating Market Capitalisation
If XYZ plc has a share price of 57p and has issued 2,100 million shares, its market capitalisation would be:
The effects of ownership on mission, objectives, decisions and performance
The ownership structure of a business significantly influences how it operates, makes decisions, and prioritises its objectives. Different types of businesses face different pressures from their owners.
Public limited companies (PLCs) and shareholder influence
Profit is a primary objective for most private sector businesses. However, for public limited companies, this profit focus can dominate the entire decision-making process.
PLCs are owned by shareholders who have purchased shares in the company. Many shareholders are primarily motivated by profit, as this generates:
- Dividends (payments made to shareholders from company profits)
- Capital gains (profit made when share prices increase)
This shareholder focus on profit often leads to a short-term approach to business decisions. Companies may prioritise actions that boost immediate profits and share prices, even if this means the mission statement and longer-term objectives take a back seat.
Real-world example: The Dangers of Excessive Profit Focus
Tesco provides a cautionary tale about the dangers of excessive profit focus. In 2014, Tesco experienced falling profits but reported higher profits than were actually achieved. When this accounting error was discovered, the company's share price fell dramatically and the Chief Executive Officer (CEO) resigned.
This demonstrates how pressure to deliver profits can lead to poor decision-making and serious consequences.
Sole traders and private limited companies
Sole traders and private limited companies experience less pressure from this profit imperative. These business types are not publicly traded, so they don't face constant scrutiny from shareholders seeking maximum returns.
As a result, these businesses can:
- Maintain a closer focus on their mission statement
- Pursue longer-term objectives without constant pressure for immediate profit
- Make decisions based on values and purpose, not just financial returns
- Build sustainable businesses that balance profit with other goals
This doesn't mean profit is unimportant to these businesses—they still need to be profitable to survive. However, profit doesn't necessarily dominate every decision they make. This flexibility allows them to take a more balanced approach to business growth and development.
Understanding that businesses operate within an external environment
All businesses exist within an external environment that is constantly changing and largely beyond their control. This environment is both unpredictable and uncertain, creating challenges for business planning and operations.
Impact of the external environment
Changes in the external environment affect businesses in multiple ways:
- Demand for goods and services may increase or decrease based on economic conditions, consumer trends, or demographic changes
- Costs can fluctuate due to changes in supplier prices, wage rates, or raw material availability
- Operating methods may need to adapt to new regulations, technological developments, or competitive pressures
Businesses must monitor their external environment closely and remain flexible enough to respond to changes. Those that fail to adapt to external changes risk losing competitive advantage or even business failure.
Key consideration: The external environment includes factors such as the economy, competition, technology, legal regulations, social trends, and environmental concerns. All of these can impact how successfully a business achieves its objectives.
Successful businesses develop strategies to monitor these factors and build flexibility into their operations to respond quickly when changes occur.
Key Points to Remember:
- Share prices fluctuate based on profit expectations, market changes, and global uncertainty—these factors influence investor confidence
- Market capitalisation (share price × number of shares) provides a measure of company value and changes as share prices move
- Public limited companies often face short-term profit pressure from shareholders, which can overshadow their mission statement and long-term objectives
- Sole traders and private limited companies can maintain better focus on their mission and objectives because they face less shareholder pressure
- The external environment is unpredictable and affects demand, costs, and how businesses operate—successful businesses monitor and adapt to these changes