Setting business aims and objectives (AQA GCSE Business): Revision Notes
Setting business aims and objectives
What are business aims and objectives?
Different companies will have varying aims and objectives depending on their size, industry, and circumstances. Understanding these objectives is crucial for comprehending how businesses operate and make decisions. Let's explore the various types of objectives that businesses commonly pursue.
Business aims are broad, long-term goals that a company wants to achieve, while objectives are specific, measurable targets that help achieve these aims. Think of aims as the "what" and objectives as the "how".
Types of business objectives
Financial objectives
Survival is often the primary concern for new businesses. Statistics show that over half of new ventures fail within their first five years, making survival the most immediate priority. Many entrepreneurs discover that their initial business concept wasn't as viable as they had hoped, leading to cash flow problems that threaten the company's existence. Environmental changes can also make survival more challenging, so ensuring the business can continue operating remains the top priority.
Critical Point: Over half of new businesses fail within their first five years, making survival the most immediate and essential objective for new ventures.
Profit maximisation serves as the primary goal for most commercial enterprises. This represents the reward entrepreneurs receive for their hard work, investment, and risk-taking. Ideally, profits should provide sufficient income for the business owner to live comfortably whilst also allowing for reinvestment in business expansion and development. Companies may also focus on related financial goals such as increasing revenue or reducing costs to support profit maximisation.
Personal wealth building motivates some entrepreneurs to establish businesses as a long-term strategy. Rather than seeking immediate returns, these business owners aim to create valuable enterprises that will significantly enhance their future financial position.
Sales maximisation and market share become particularly important for businesses seeking to dominate their markets. Some companies will accept lower short-term profits to increase their sales volume and capture a larger market share. This strategy is especially common amongst large corporations that can afford to sacrifice immediate profitability for long-term market dominance.
Market Share Strategy: Large companies often use this approach because they have the financial resources to sustain temporary losses in exchange for long-term market control and eventual higher profits.
Share value matters greatly to shareholders who invest in companies. These investors are interested in both dividend payments (their share of company profits) and share price appreciation. Rising share prices indicate increasing company value, which benefits shareholders if they choose to sell their shares for profit in the future.
Non-financial objectives
Quality objectives focus on providing excellent products or services rather than simply maximising profits. Companies with quality objectives often aim to enhance customer satisfaction, which can lead to increased sales and profits over time, even if this isn't their primary motivation.
Growth appeals to most businesses, though not all. Growth enables companies to increase their profits and overall business value. However, businesses must be careful not to expand too rapidly, as this can strain resources and threaten survival. Growth can occur domestically within the home country or internationally through expansion into different countries, though international growth presents additional challenges such as adapting to different cultural contexts.
Growth Warning: Businesses must avoid expanding too rapidly as this can strain resources and actually threaten survival - growth must be managed carefully and sustainably.
Social responsibilities are increasingly important as businesses recognise their duties to society. These may include environmental protection and ethical behaviour, such as avoiding cheap labour practices. Not-for-profit organisations typically have objectives related to their specific charitable or social purposes, such as supporting unemployment or providing local community services.
Why businesses need clear objectives
Having well-defined objectives provides numerous benefits for business operations and success. Without clear objectives, companies may struggle to provide appropriate goods and services, potentially leading to failure. However, simply writing down objectives isn't sufficient - they must be implemented and monitored over time to be effective.
The Four Key Benefits of Clear Objectives:
- Direction: Provides clear guidance for decision-making at all levels
- Focus for employees: Ensures everyone works towards the same goals
- Allows planning: Enables strategic planning and resource allocation
- Measurement of success: Allows businesses to track progress and achievements
The benefits of clear objectives extend beyond basic direction-setting. When all employees understand and work towards the same objectives, this creates improved efficiency throughout the organisation. Clear objectives also enable consistent strategic planning, allowing businesses to develop comprehensive business plans that align with their goals.
Measuring success becomes much easier with well-defined objectives. Businesses can review their progress regularly and determine whether they're achieving their goals or need to adjust their strategies. Financial objectives are typically easier to measure than non-financial ones, as they involve quantifiable metrics. Non-financial objectives such as ethics or customer satisfaction can be more challenging to measure accurately.
Measurement Challenge: While financial objectives can be measured with concrete numbers (profit, sales figures), non-financial objectives like customer satisfaction or social responsibility are harder to quantify and require different measurement approaches.
When and why objectives change
Businesses may need to modify their objectives for various reasons, which can be categorised as either internal or external factors.
Internal reasons for change
Internal factors are within the business's control and might include achieving one objective and needing to set another. For example, a company that has successfully survived its first year might shift focus to increasing profits. Another scenario involves a business that has captured the largest market share in the UK and now wants to expand internationally to gain more customers, sales, and profits.
Changes in ownership or shareholder requirements can also drive objective changes. A business might originally aim to become the market leader through competitive pricing and sales maximisation. Once this goal is achieved, the company might change its objective to maintaining market leadership, which could involve strategies such as developing new products for existing markets or launching existing products into new markets.
Example: Objective Evolution
Step 1: New business focuses on survival (first year) Step 2: Once established, shifts to profit maximisation Step 3: After achieving good profits, aims for market leadership Step 4: Once market leader, focuses on maintaining position through innovation
This shows how objectives naturally evolve as businesses grow and succeed.
External reasons for change
External factors are beyond the business's direct control and might include new competition entering the market. This could force a company to change from profit maximisation to survival objectives. Economic environmental changes, such as economic growth, might encourage businesses to pursue expansion objectives. Technological developments can also necessitate objective changes, particularly if competitors introduce new technology first.
Small businesses typically find it easier to change objectives quickly, whilst large companies may need to consult shareholders before making significant changes. Large corporations are also more likely to face substantial costs when changing objectives, such as relocating production to different countries.
Size Matters: Small businesses can adapt their objectives quickly and at lower cost, while large corporations face more complex decision-making processes and higher costs when changing direction.
Understanding non-financial objectives
Whilst most businesses focus primarily on financial objectives, many other priorities can be equally important. Providing high-quality service becomes crucial for many companies, as this can lead to employee loyalty and reduced recruitment costs. The John Lewis Partnership, for example, is well-known for prioritising employee welfare as a key objective.
It's important to recognise that success can be measured in various ways beyond just profit review. This becomes particularly evident when examining not-for-profit organisations, whose objectives typically relate to their specific charitable or social purposes, such as reducing local homelessness or improving community facilities for young people.
Sometimes non-financial objectives may conflict with financial ones. For instance, improving quality might increase costs and reduce profits initially. However, better quality can lead to increased brand loyalty and higher selling prices, potentially resulting in greater long-term profits that offset the initial cost increases.
Potential Conflict: Non-financial objectives (like quality improvement) may initially reduce profits through higher costs, but can lead to greater long-term profitability through customer loyalty and premium pricing.
Overall, businesses prioritise objectives that are most important to their individual organisations and stakeholders, measuring success through regular review of their most relevant objectives.
Key Points to Remember:
- Survival is the top priority for new businesses, as over half fail within five years
- Clear objectives provide direction for decision-making, employee focus, strategic planning, and success measurement
- Objectives can be financial (profit, sales, share value) or non-financial (quality, growth, social responsibility)
- Internal factors (achieving goals, ownership changes) and external factors (competition, economic changes, technology) can trigger objective changes
- Non-financial objectives are particularly important for not-for-profit organisations and can sometimes conflict with but ultimately support financial goals
- Financial objectives are easier to measure than non-financial ones, which require different measurement approaches