Purpose of Business
Purpose of Business
Every business exists for a purpose whether this be to supply products such as Currys PC World who sell electrical goods such as TVs and PCs or to provide a service such as a barber shop. However, many businesses now offer a hybrid approach to maximise the value and experience they provide to their customers as well as to boost their profit margins.
Within this hybrid approach, businesses which predominantly supply products offer services in addition. For example, Currys PC World offer services to their customers which compliment the products they purchase such as the opportunity to have a PC set up or a cooker delivered and fitted through their ‘Knowhow’ team. In comparison, businesses which predominately provide services offer customers the opportunity to purchase products which complement the service. For example, it’s common for a barber to offer customers hair care products to purchase such as gel and wax following a hair cut.
The business purpose is normally captured in its Vision Statement and Mission Statement.
A vision statement is inspiring or aspirational declaration of what an organization ultimately strives to be, or wants to achieve, in the distant future. This usually includes, or at least indicates, the organization’s core values. The vision statement is intended to act as a clear guide for key stakeholders when planning and implementing current and future corporate strategies.
Examples of Vision Statements:
To be earth’s most customer centric company; to build a place where people can come to find and discover anything they might want to buy online - Amazon
To stay connected with friends and family, to discover what's going on in the world, and to share and express what matters to them - Facebook
To create a better everyday life for the many people - IKEA
To be our customers’ favourite place and way to eat and drink - McDonald’s
A mission statement is a succinct and motivating declaration of an organization’s core purpose (why it exists), identity (who they are) and focus (what they do). It is, therefore, a written declaration that normally remains unchanged over time.
Examples of Mission statements:
We work hard every day to make American Express the world's most respected service brand - American Express
To refresh the world in mind, body and spirit - Coca-Cola
To give people the power to build community and bring the world closer together. - Facebook
To organize the world’s information and make it universally accessible and useful - Google
As we discussed earlier, not every business exists just to make a profit and they don’t all measure success by the numbers on their balance sheet. Whilst many businesses are profit seeking, many others are non-profit seeking businesses.
Regardless of the reason the business exists, the way every business measures success depends on its:
Aims and objectives - which are extremely important for any business as they typically link directly to the reason it exists and essentially provide a clear purpose and outcome for everyone involved in the business.
The clarity of vision - which is essential to ensure the business is focused on its direction by ensuring the vision of the business is clear and market forces are taken into account as and when they influence change in the business etc.
Innovation of its products and processes – in the modern business world, it is crucial for businesses to be innovative in relation to both its products and processes. Having a culture where processes are continually evaluated and improved in terms of quality and efficiency, whilst investment into the research and development of its products is taken seriously is critical to support the business to be innovative and ultimately increase the likelihood of the business being successful.
Whilst the Vision and Mission Statements give the business a sense of purpose, use business objectives to ensure that the business is taking measurable steps to achieve its overall purpose. Business objectives (or simply objectives) are the clearly defined and measurable targets of an organization, used to to achieve its overall goals. Examples include "to generate greater shareholder value by targeting new market segments" or "to achieve sales growth of $500 million in the Asia Pacific region in 2022”. Business objectives are essential for all businesses so that people know where they are striving to go or what they are trying to accomplish. They give people a sense of common purpose, thus promote a greater sense of belonging and team spirit (cohesiveness). They also enable managers and entrepreneurs to measure progress towards to their stated vision or mission statement.
Objectives can be long-term (strategic objectives) or short-term (tactical objectives).
Tactical objectives are easier to change or reverse than strategic objectives. They are specific targets with definitive timelines.
Strategic objectives are targets that the whole organization is striving to achieve. It require a greater investment in human and financial resources than tactical and operational objectives. It is often related to what the owners of the business want to focus on, such as business survival, growth, or profit maximization.
Organizations will have varying objectives. For example, public sector organizations, charities and cooperatives will not primarily strive for profit maximization, whereas private sector firms are likely to do so. Organizational objectives also change due to changes in the external business environment.
There are four common business objectives outlined below:
Many businesses strive to grow in order to gain from the benefits of growth. Growth refers to an increase in the size of a business and its operations. These benefits include:
Higher sales revenue and profit - as a firm grows, its sales revenue increases, thereby improving the changes of higher profits.
Economies of scale - these are cost-saving benefits for firms as they grow larger, such as being able to purchase raw materials in bulk at a discounted price from their suppliers.
Reduced risks - larger firms tend to be less vulnerable to changes in the external environment (see BMT 3 - STEEPLE analysis), such as an economic recession in the economy.
Growth can be pursued by internal and/or external methods. Internal growth (also known as organic growth) takes place when an organization expands without the help of an external partner firm. Instead, it uses its own resources to do so, such as using retained profits to invest in production facilities in new locations.
External growth (also known as inorganic growth) refers to the expansion and evolution of a business by using third party resources and organizations rather than relying on internal sources and activities. Read more about methods of external growth here.
Methods of measuring the growth of a business include:
Sales revenue - the monetary value of the products that the business has sold, per time period).
Sales volume - the number of products that the business sells, per time period).
Profits - the financial surplus that remains after all costs of production have been deducted from a firm's sales revenue).
Customers - the more customers that the business has, the larger it tends to be).
Number of employees (size of the workforce) - the more people that are hired by the business, the larger it tends to be.
Market share - this measures the firm's sales revenue as a proportion of the whole industry's sales revenue.
An increase in any of the above measures suggests that the business will have grown. It is common for managers to work out the percentage change in the variable being measured in order to determine the size or magnitude of growth.
Profit (or financial surplus) is the positive difference between a firm's sales revenue and its total costs of production, per time period. Profit as a business objective is important for two main reasons:
It acts as a reward for the owners and investors of the business.
It provides an internal source of finance to further develop the business.
Profit acts as an incentive for entrepreneurs to take risks and start up new businesses. It also provides incentives for them to remain in business and pursue growth in order to reap greater financial returns. Profit as an internal source of finance enable the business to grow further without the need to over rely on external sources of finance that incur interest and debt.
It is assumed that profit maximization is a top priority for traditional commercial (for-profit) businesses. For many businesses and their owners/shareholders, profit is the most important organizational objective. They strive to operate at the optimal size that enables them to sell their output where the difference between total revenue and total costs is maximised.
There could be liquidity issues for a business that does achieve profit in the long-term, which could possibly lead to bankruptcy and business closure.
A company is owned by its shareholders. Protecting shareholder value is about safeguarding the interests of the owners of a limited liability company (one owned by shareholders either as a private or publicly traded company). Protecting shareholder value is ultimately the responsibility of the company's chief executive officer (CEO) and board of directors, based on their strategic plans to earn a healthy return on the capital invested in the business.
Protecting shareholder value encompasses both short- and long-term objectives, including survival, profit, and growth in order to give owners a financial reward/return on their investments.
Survival - This is the most basic of all business objectives as nothing else matters if the business cannot survive. Every business must earn enough revenue to keep it operating or else it will collapse. A business cannot protecting shareholder value if it cannot survive, perhaps due to a prolonged economic recession or fierce competition from larger companies.
Profit - The profit motive provides a financial return for shareholders in the form of dividend payments. Most private sector, for-profit businesses have this as their main organizational objective in order to provide value for their owners.
Growth - Enlarging the business can help to increase sales revenues, profits, and customer loyalty. These combined benefits of business growth help to generate improved shareholder value over time.
Market share - Firms may aim to increase their market share (their sales revenue as a proportion of the entire market's sales revenue) in order to gain the benefits of being the market leader. These advantages include enhanced brand awareness, brand value, and brand loyalty, all of which help a company to protect the interests of their shareholders.
Business ethics are the guiding principles that provide moral guidelines for the conduct of business activities. Ethical objectives are organizational goals based on moral guidelines in order to influence or determine business decision-making. Ethical decision-making considers more than just calculating costs, benefits and profits. This means such businesses act morally towards their various stakeholder groups, including employees, managers, customers, shareholders, suppliers, financiers, local community (including consideration for the natural environment), the government, and even competitors.Examples of ethical objectives include:
improving the overall wellbeing of workers
honesty and fair treatment with regards to dealings with customers and suppliers
adopting green (clean / renewable) technologies
pursuing sustainable growth strategies
observing and respecting intellectual property rights of others
using socially responsible advertising, and corporate governance (such as financial integrity and transparency).