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’.
2.1
Definition of Value
Value is the capacity of a good, service, or activity to satisfy a need or provide a
benefit to a person or an entity.
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H2 Management of Business (PU1)
Topic 1: Nature and Purpose of Business
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.
Notes
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.
3.1.1
Shareholders and owners
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.
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H2 Management of Business (PU1)
Topic 1: Nature and Purpose of Business
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
Notes
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 longterm 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.
3.1.8
Society at large
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.
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H2 Management of Business (PU1)
Topic 1: Nature and Purpose of Business
3.2
Influence of Stakeholders on Business Decision-making
Notes
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.
3.2.5
Responsibilities to the Government
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.
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H2 Management of Business (PU1)
Topic 1: Nature and Purpose of Business
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:
Notes
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.
3.4.2
Employees
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.
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H2 Management of Business (PU1)
Topic 1: Nature and Purpose of Business
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
Notes
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”.
Values
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 decisionmaking process and Starbucks included ‘Creating a culture of warmth and belonging,
where everyone is welcome’ as one of its core values.
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H2 Management of Business (PU1)
Topic 1: Nature and Purpose of Business
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.
4.2.2
Profit Maximisation
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.
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H2 Management of Business (PU1)
Topic 1: Nature and Purpose of Business
4.2.3
Profit Satisficing
Notes
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.
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