Nature and purpose of business (01)

Question 1

SUMMARY

Answer 1

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.

Question 2

What is a business?

Answer 2

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.

Question 3

What is the purpose of the business?

Answer 3

-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
-Thus the business is providing for others on condition it receives something of fair value in return to ensure continuity

Question 4

What are other purposes of a business?

Answer 4

-Providing society with goods and services that include necessities e.g. housing, clothing, food, transportation, communication, and healthcare etc
-Providing employment opportunities so as to improve the well-being and standard of living of 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

Question 5

What is Value?

Answer 5

Value is the capacity of a good, service, or activity to satisfy a need or provide a benefit to a person or an entity

Question 6

Examples of Value

Answer 6

1. 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, enabling the business to make a profit

Hence value is created when resources are processed into goods and services

2. A business also seeks to create value for owners or shareholders by increasing the monetary value of their investments -> ensuring attracting returns in the form of dividends

One way a business does this is via employing the right employees, developing their competencies and rewarding them for their contributions

Question 7

How can Value be measured?

Answer 7

1. Financial benefits -> financial benefits affect a business positively in monetary terms, both in short and long term -> e.g. revenue earned from providing a good or service, which after deducting costs or expenses would result in profits for the business
2. Non-financial benefits -> might not result in immediate positive monetary impact, but could potentially create financial benefits in the future -> e.g. training and development of workers, which will result in higher productivity , better qualitied products or customer service, leading to increased sales and customer loyalty, gaining greater market share and high profits

Question 8

What are examples of Stakeholders

Answer 8

-Shareholders and owners
-Employees
-Customers
-Suppliers
-Banks and Financial Institutions
-Governments/ Government Agencies
-Local Communities
-Society at large

Question 9

How are Governments and Government Agencies stakeholders to a business?

Answer 9

Governments rely on business 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

Question 10

How are local communities stakeholders to a business?

Answer 10

Local communities such as charitable organisations rely on businesses as a source of donation and support.

Other civic and community organisations might also partner businesses to achieve community goals.

The community also looks to businesses to provide locals wth jobs

Question 11

How is the society at large a stakeholder to a business?

Answer 11

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.

Question 12

What are the responsibilities to Customers the business must have?

Answer 12

-Goods and services provided must be functional and of good quality, and sold at reasonable prices
-Information provided in advertisements are accurate and do not pressure customers into buying

If the above is performed -> benefit from customer loyalty and positive publicity

Question 13

What are the responsibilities to Suppliers the business must have?

Answer 13

-Businesses should ensure that they pay on time, place regular orders and establish long-term contracts

If the above is performed -> benefit from supplier loyalty and better credit terms

Question 14

What are the responsibilities to Employees the business must have?

Answer 14

-Provide job security, fair salary, good working conditions, and ample training and development opportunities

If the above is performed -> benefit from low staff turnover, able to recruit better employees that could contribute towards success of the business

Question 15

What are the responsibilities to the Community the business must have?

Answer 15

-Offering secure employment, buying from local suppliers, and minimising undesirable harm on the environment from their activities

If the above is performed -> support from local community is more likely and they will buy from the businesses which are perceived as contributing to the society through donations to community groups or projects

Question 16

What are the responsibilities to the Government the business must have?

Answer 16

-Businesses must always obey the law, pay taxes on time and support all government initiatives.

If the above is performed -> 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

Question 17

What are some conflicts of interests between stakeholders?

Answer 17

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.

(check pg6 of PU1 nature of business notes)

Question 18

How could value be created for Shareholders?

Answer 18

Businesses could invest the funds contributed by the shareholders to develop new products or enter new markets that could bring about greater profits -> result in greater returns to shareholders

Shareholders may also expect the practices of the business to match their beliefs and values

Question 19

How could value be created for Employees?

Answer 19

-Businesses could ensure prompt payment of wages and salaries
-Businesses could look into the long-term employability of 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

Question 20

How could value be created for Customers?

Answer 20

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

Question 21

How could value be created for Suppliers?

Answer 21

Ensuring prompt payment to suppliers and establishing long-term trading relationship as well as possible technology transfer -> continued trade opportunities and a steady source of sales revenue

Question 22

How could value be created for the Society at large?

Answer 22

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

Question 23

What are the Business Objectives?

Answer 23

-Vision
-Mission (Mission Statement)
-Values

Question 24

What is a Vision?

Answer 24

-A vision captures aspirations of a business
-It is an aspirational description of what an organisation would like to achieve in the mid to long-term future
-Intended to serve as a clear guide for choosing current and future courses of action

e.g. Starbucks, where the business wants
“To establish Starbucks as the most recognised 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.

Question 25

Why is the Vision important?

Answer 25

An effective vision will inspire all members of the business, from top management to rank and file employees.

Question 26

What is a Mission (Mission Statement)?

Answer 26

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

Question 27

What are Values?

Answer 27

-Values 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 e.g. Starbucks, 'Creating a culture of warmth and belonging, where everyone is welcome' as one of its core values

Question 28

What are the common types of business objectives?

Answer 28

-Survival -Profit Maximisation -Profit Satisficing -Growth

Question 29

What is Survival?

Answer 29

Survival objective is about ensuring that business is able to sustain its operations. Note: 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 the market share

Question 30

What is Profit Maximisation?

Answer 30

It is 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

Question 31

What is Profit Satisficing?

Answer 31

Profit satisficing objective seeks to achieve enough profit to keep the owners happy or satisfied, but NOT to maximise profit e.g. -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

Question 32

What is Growth?

Answer 32

The growth objective means that a business seeks to expand and become larger. A business might seek to grow in different aspects. e.g. -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 OR -A business could grow by merging with another business , or buying over another business

Question 33

What are some Conflicts between Objectives?

Answer 33

A business might seek to grow by increasing market share through higher shares. 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 (Another example in pg9 PU1 notes)

Question 34

Note:

Answer 34

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. E.g. 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.