1.3 | Room 123

1.3 Organizational Objectives

Learning Goal

I can explain the importance of setting objectives in managing an organization.

Introduction

Businesses of any size can benefit from setting clear objectives. In small businesses, such as sole traders, these objectives are often not written down or formalized in any way, but the owners will often have a clear idea of what they are trying to achieve. In partnerships, it is important for partners to agree on the direction their business should take to avoid future disagreements. Limited companies must state the overall objectives of the business.

The Importance of Objectives

For any aim to be achieved, there has to be a detailed plan of action in place to ensure that resources are correctly directed towards the final goal. This strategy should be reviewed often to check whether the business is on target to achieve its objectives. Both the aims of an organization and the strategies it adopts will often change over time.

1.3 KEY TERMS

mission statement

vision statement

strategic objectives

corporate social responsibility

operational objectives

ethics

ethical code

environmental audit

social audit

The most effective business objectives usually meet the following SMART criteria:

S – Specific

Objectives should focus on what the business does and should apply directly to that business.

M – Measurable

Objectives that have a quantitative value are likely to prove to be more effective targets for directors and staff to work towards.

A – Achievable

Objectives must be achievable. Setting objectives that are almost impossible to achieve in a given time will be a waste of time. They will demotivate staff who have the task of trying to reach these targets.

R – Realistic and relevant

Objectives should be realistic when compared with the resources of the company, and should be expressed in terms relevant to the people who have to carry them out.

T – Time-specific

A time limit should be set when an objective is established. Without a time limit it will be impossible to assess whether the objective has actually been met.

Aims, Objectives, Plans and Strategies

Corporate aims are the long-term goals which a business hopes to achieve. The core of a business’s activity is expressed in its corporate aims and plans. A typical corporate aim is: ‘To increase shareholder returns each year through business expansion.’ This example demonstrates a typical corporate aim. It tells us that the company aims to give shareholders maximum returns on their investment by expanding the business. Other corporate aims tend to concentrate on customer-based goals, such as ‘meeting customers’ needs’, or market-based goals, such as ‘becoming the world leader’. Corporate aims are designed to provide guidance to the whole organization, not just a part of it.

Corporate aims have several benefits:

They become the starting point for departmental objectives on which effective management is based.
They can help develop a sense of purpose and direction for the whole organization if they are clearly communicated to the workforce.
They allow an assessment to be made of how successful the business has been in attaining its goals.
They provide the framework within which the strategies or plans of the business can be drawn up.

A business without a long-term corporate plan or aim is likely to drift from event to event without a clear sense of purpose. It is becoming common for businesses to express the corporate aim in one short guiding statement to be made known to as many stakeholders as possible. This is known as the mission statement.

Learning Goal

I can explain the purpose of mission statements and vision statements.

Mission Statements and Vision Statements

A mission statement is an attempt to condense the central purpose of a business’s existence into one short paragraph. It is not concerned with specific, quantifiable goals but tries to sum up the aims of the business in a motivating and appealing way.

Here are some examples of mission statements:

Nike – ‘To bring inspiration and innovation to every athlete in the world’.
Microsoft – ‘To enable people and businesses throughout the world to realize their full potential’.
Google – ‘To organize the world’s information and make it universally accessible and useful’.

An effective mission statement should answer three key questions:

What do we do?
For whom do we do it?
What is the benefit?

Mission statements outline the overall purpose of the organization. A vision statement, on the other hand, describes a picture of the ‘preferred future’ and outlines how the future will look if the organization achieves its mission. It is a clear statement that offers the ideal of what owners and directors want their business to become.

So what is the link between vision statements, mission statements and strategies? Without the direction and focus of vision and mission statements, planning new strategies will be like trying to steer a ship with no idea of either where it is or the direction it is meant to be heading in. Vision and mission statements give the organization a sense of purpose and can prevent it from drifting.

Evaluation of These Statements

One of the potential limitations of such statements is that they are too general and could apply to any business. In recent years, virtually every organization of any size has created a mission statement. Are they useful or are they just another management fad? Here are some arguments in favor of these statements:

They quickly inform groups outside the business what the central aim and vision are.
They help to motivate employees, especially when an organization is viewed, because of its mission statement, as caring and environmentally friendly. Employees will then be associated with these positive qualities.
When they include ethical statements, they can help to guide and direct individual employee behavior at work.
They help to establish in the eyes of other groups ‘what the business is about’.

On the other hand, these statements are often criticized for being:

too vague and general, lacking in specific detail
a public relations exercise to make stakeholder groups feel good about the organization
virtually impossible to analyze or disagree with

Communicating mission and vision statements is almost as important as establishing them. There is little point in identifying the central vision for a business and then not letting anyone else know about it. Businesses communicate their mission statements in a number of ways, for example in published accounts, communications to shareholders and the corporate plans of the business. Internal company newsletters and magazines may draw their title from part of the mission statement. Advertising slogans or posters are frequently based around the themes of the mission statements.

On their own, mission statements are insufficient for operational guidelines. They do not tell managers what decisions to take or how to manage the business. Their role is to provide direction for the future and an overall sense of purpose, and in public relations terms, at least, they can prove very worthwhile. It is important that both vision and mission statements are applicable to the business, understood by employees and convertible into strategic actions.

Learning Objective

I can analyze the potential conflicts between corporate objectives and why objectives might change over time.

Corporate Objectives

The aims and mission statements of a business share the same problems – they lack specific detail for operational decisions and they are rarely expressed in quantitative terms. Corporate or strategic objectives are much more specific. They are based upon the business’s central aim or mission, but they are expressed in terms that provide a clear guide for management action or strategy.

COMMON OBJECTIVES

Profit maximization

Profits are essential for rewarding investors in a business and for financing further growth, and are necessary to persuade business owners and entrepreneurs to take risks. Profit maximization means producing at the level of output where the greatest positive difference between total revenue and total costs is achieved.

Not to maximize profit is seen as a missed opportunity, but there are limitations with this corporate objective:

High short-term profits may lead competitors to enter the market.
Many businesses seek to maximize sales in order to secure the greatest market share possible, rather than maximize profits. The business would expect to make a target rate of profit from these sales.
Owners of smaller businesses may be more concerned with issues of independence and keeping control
Business performance is usually assessed through the rate of profit returned on each dollar invested in the business – rather than through total profit.
Other stakeholders prioritize other issues. Managers cannot ignore these. Concern over job security for the workforce and the environmental concerns of local residents may force profitable business decisions to be modified, resulting in lower profit levels.
It is difficult to assess whether the point of profit maximization has been reached, and constant changes to prices or output to attempt to achieve it may lead to negative consumer reactions.

Profit satisficing

This means aiming to achieve enough profit to keep the owners happy but not aiming to work only to make as much profit as possible. This is often the objective of owners of small businesses who wish to live comfortably but do not want to work very long hours in order to earn more profit. Once a ‘satisfactory’ level of profit has been achieved, the owners consider that other aims take priority, such as more leisure time.

Growth

The growth of a business has many potential benefits for the managers and owners. Larger firms will be less likely to be taken over and should be able to benefit from economies of scale -- reductions in a firm’s unit costs of production that result from an increase in the scale of operations. Managers may gain higher salaries and fringe benefits. Businesses that do not attempt to grow may cease to be competitive and, eventually, will lose their appeal to new investors. Business objectives based on growth have limitations:

Expanding too rapidly can lead to cash-flow problems.
Sales growth might be achieved at the expense of lower profit margins.
Larger businesses can experience diseconomies of scale -- factors that cause average costs of production to rise when the scale of operation is increased.
Using profits to finance growth can lead to lower short-term returns to shareholders.
Growth into new business areas can result in a loss of focus and direction for the whole organization.

Increasing market share

Linked to the overall growth of a business is the market share -- the percentage of sales in the total market sold by a business. Benefits resulting from being the brand leader with the highest market share include:

Retailers want to stock and promote the best-selling brand.
Profit margins offered to retailers may be lower than competing brands as the shops are so eager to stock it – this leaves more profit for the producer.
Effective promotional campaigns are often based on ‘buy our product with confidence – it is the brand leader’.

Survival

This is likely to be the key objective of most new business start-ups. The high failure rate of new businesses means that to survive for the first two years of trading is an important aim for entrepreneurs. Once the business has become firmly established, then other longer-term objectives can be established.

Corporate social responsibility (CSR)

Corporate social responsibility is a concept that applies to those businesses that consider the interests of society by taking responsibility for the impact of their decisions and activities on customers, employees, communities and the environment. Objectives that focus on meeting social responsibilities are increasingly important for most business organizations.

Maximizing short-term sales revenue

This could benefit managers and staff when salaries and bonuses are dependent on sales revenue levels. However, if increased sales are achieved by reducing prices, the actual profits of the business might fall.

Maximizing shareholder value

Management, especially in public limited companies, make decisions that aim to increase the company share price and dividends paid to shareholders. These targets might be achieved by pursuing the goal of profit maximization. The shareholder value objective puts the interests of shareholders above those of other stakeholders.

ISSUES RELATING TO CORPORATE OBJECTIVES

Some important issues relating to corporate objectives include the following:

They must be based on the corporate aim and should link in with it.
They should be achievable and measurable if they are to motivate employees.
They need to be communicated to employees and investors in the business.
They form the framework for more specific departmental or strategic objectives.
They should indicate a time scale for their achievement.

CONFLICTS BETWEEN CORPORATE OBJECTIVES

Conflicts between objectives can often occur. These conflicts need to be resolved by senior managers and decisions made based on the most significant objective for the next time period. Common conflicts that can occur are:

growth versus profit – achieving higher sales by raising promotional expenditure and by reducing prices will be likely to reduce short-term profits
short term versus long term – profits might be lower in the short term if managers decide to invest in new technology or development of new products that might lead to higher profits in the longer term
stakeholder conflicts

FACTORS DETERMINING CORPORATE OBJECTIVES

There are several reasons why firms have different objectives.

Corporate culture

This can be defined as the code of behavior and attitudes that influence the decision-making style of the managers and other employees of the business. Culture is a way of doing things that is shared by all those in the organization.

If directors are aggressive in pursuit of their aims, eager to take over rival businesses and care little about social or environmental factors, then the objectives of the business will be very different to those of a business owned and controlled by directors with a more ‘people’ or ‘social’ orientated culture.

Size and legal form of the business

Owners of small businesses may be concerned only with a satisficing level of profit. Larger businesses, controlled by directors rather than owners, such as most public limited companies, might be more concerned with rapid business growth in order to increase the status and power of the managers. Directors and managers may be more concerned about their bonuses, salaries and fringe benefits than on maximizing returns to shareholders.

Public sector or private sector businesses

State-owned organizations tend not to have profit as a major objective. When the service these organizations provide is not ‘charged for’, such as education, then a financial target would be inappropriate. Instead, quality of service measures are often used. Other businesses in the public sector, such as the postal service, may have among their objectives the target of maintaining services in non-profitable locations.

Well-established businesses

Newly formed businesses are likely to be driven by the desire to survive at all costs – the failure rate of new firms in the first year of operation is very high. Later, once well established, the business may pursue other objectives such as growth and profit.

Interrelated Objectives, Strategies and Tactics

Corporate objectives relate to the whole organization. They need to be broken down into specific tactical or operational objectives for separate divisions.

Divisional, operational objectives -- short- or medium-term goals or targets which must be achieved for an organization to attain its corporate objectives-- are set by senior managers to ensure:

co-ordination between all divisions – if they do not work together, the focus of the organization will appear confused to outsiders and there will be disagreements between departments
consistency with strategic corporate objectives
adequate resources are provided to allow for the successful achievement of the objectives.

Once divisional objectives have been established, these can be further divided into departmental objectives and finally budgets and targets for individual workers. This process is called management by objectives (MBO).

Changing Business Objectives

Businesses can change their objectives over time. These changes will be in response to internal factors, such as resource constraints, or external factors, such as changes in the social and economic environment. Some of the most significant reasons for businesses changing their objectives include:

A business may have satisfied the survival objective by operating for several years and now the owners wish to pursue objectives of growth or increased profit.
The external competitive and economic environment may change. The entry into the market of a powerful rival or an economic recession may lead a firm to switch from growth to survival as its main aim.
A short-term objective of growth in sales or market share might be replaced by a longer-term objective of maximizing profits from the higher level of sales.

Business objectives need to be flexible enough to be adapted to reflect internal and external changes, but they should not be changed too drastically or frequently. Before making a significant change to objectives, senior managers need to consider:

Is the internal or external change significant and long-lasting enough to make a change in objectives necessary?
What would be the risks of not adapting objectives to meet the new situation?
What would be the cost and other consequences of new business objectives for the business and its staff?
How can changed objectives, and strategies, be effectively managed within the business?

Ethical Objectives

Ethical objectives are targets based on a moral code for the business. The growing acceptance of corporate social responsibility has led to businesses adopting an ethical code to influence the way in which decisions are made.

Most decisions have an ethical or moral dimension. For example:

Is it acceptable to take bribes in order to place an order with another company?
Should a bank invest in a company that manufactures weapons or tests new chemicals on animals?
Do we accept lower profits in the short term by purchasing less-polluting production equipment?
Is it acceptable to close a factory to save costs and increase profit s even though many jobs w i l l be lost and workers may find it hard to get other jobs?
If legal controls and inspections are weak in a country, is it acceptable to pay very low wages for long hours of work as this policy will reduce the firm’s costs?
Should a business employ child labor to reduce costs compared with employing adults?
Should a business continue to produce potentially dangerous goods as long as ‘no one finds us out’?

These are all examples of ethical dilemmas. The way in which employees behave and take decisions in these cases should be covered and explained by a company’s ethical code of conduct. To what extent should businesses take ethics into consideration when making decisions? Many companies consider the ethical dimension of their actions – not just the impact they might have on profits.

Different people will have different answers to these dilemmas. Some managers will argue that any business decision that reduces costs and increases profits is acceptable as long as it is legal – and some might argue that even illegal actions could be justified too. Other managers will operate their business along strict ethical rules and will argue that, even if certain actions are not illegal, they are not right. Morally, they cannot be justified even if they might cut costs and increase sales.

EVALUATING ETHICAL OBJECTIVES

Adopting and keeping to a strict ethical code in decision-making can be expensive in the short term. For example:

Using ethical and Fairtrade suppliers can add to a business’s costs.
Not taking bribes to secure business contracts can mean losing out on significant sales.
Accepting that it is wrong to fix prices with competitors might lead to lower prices and profits.
Paying fair wages – even in very low-wage economies – raises costs and may reduce a firm’s competitiveness against businesses that exploit workers.

However, in the long term there could be substantial benefits from acting ethically. For example:

Avoiding bad publicity and potentially expensive court cases can reduce costs of fines.
Ethical policies may lead to good publicity and increased sales.
Ethical businesses attract ethical customers and, as world pressure grows for corporate social responsibility, this group of consumers is increasing.
Ethical businesses are more likely to be awarded government contracts.
Well-qualified staff may be attracted to work for companies that have ethical and socially responsible policies.

Corporate Social Responsibility

To whom is business answerable? Should business activity be solely concerned with making profits to meet the objectives of shareholders and investors or should business decisions also be influenced by the needs of other stakeholders? When a business accepts its legal and moral obligations to stakeholders other than investors, it is practicing corporate social responsibility.

One important measure of a business’s attitude to its social responsibility is the way in which it deals with environmental issues. Business activity can greatly affect our environment. Pollution from manufacturing processes, business expansion into previously undeveloped areas, emissions of gases that lead to global warming and the use of non-renewable natural resources are all environmental issues that are of increasing concern to people and governments all over the world. How should business managers react to these concerns? Should they respond by adopting environmentally sustainable policies, even if these are expensive, or should they take the cheapest option no matter what the consequences for the environment might be?

Other issues connected with the concept of corporate social responsibility cross over into ethical decisions. In fact, the two concepts are closely linked. Examples of recent developments include:

the growth of businesses that promote organic and vegetarian foods
increasing numbers of retailers emphasizing their use of recycled materials
businesses refusing to stock products tested on animals or genetically modified foods.

In these cases, is the action being taken because trade and reputation might be lost if it is not or because such action is increasingly profitable?

ENVIRONMENTAL AUDITS

An audit simply means an independent check. It is most commonly known in connection with the accounts of a company which have to be verified as a true and fair record by an external auditor. Accounts only measure the financial performance of a business. In recent years, some businesses have been using the auditing approach to evaluate their performance in other ways than just profit and loss.

Environmental factors are often difficult to measure in monetary terms and they do not, currently, have to be legally included in published accounts. An environmental audit would check the pollution levels, wastage levels, energy use, transport use and recycling rates of the business and compare them with previous years, preset targets and possibly other similar businesses. At present, these audits are entirely voluntary.

Those firms who undertake them and publish the results nearly always have a very good environmental record – that is why they are published. Firms with a poor reputation or record in this area are unlikely to carry out an audit unless it becomes compulsory.Those firms that do publish the results of environmental audits expect to gain something from the process. Favorable consumer reaction could lead to increased sales. Positive media coverage will give free publicity. Working towards the common aim of reducing harm to the environment could help to bring workers and managers together as a team.

SOCIAL AUDITS

A social audit is an independent report on the impact a business has on society. This can cover pollution levels, health and safety record, sources of supplies, customer satisfaction and contribution to the community. Social audits report on a business’s ‘social’ performance, that is the impact it has on society and how effectively its ethical behavior matches up to its ethical objectives. Social audits can include an environmental audit, but they give details of other impacts on society too. These include:

health and safety record, e.g. number of accidents and fatalities
contributions to local community events and charities
proportion of supplies that come from ethical sources
employee benefit schemes
feedback from customers and suppliers on how they perceive the ethical nature of the business’s activities.

The social audit will also contain annual targets to be reached to improve a firm’s level of social responsibility and details of the policies to be followed to achieve these aims. By researching and publishing these reports, firms are often able to identify potentially anti-social behavior and take steps to root this out of the company’s practices. Publishing detailed and independently verified social and environmental audits can improve a firm’s public image, increase consumer loyalty and give the business a clear direction for future improvements in its socially responsibility achievements.

Evaluation of audits

Until environmental and social audits are made compulsory and there is general agreement about what they should include and how the contents will be verified, many businesses will not take them seriously.
Companies have been accused of using them as a publicity stunt or to hide their true intentions and potentially damaging practices.
They can be very time consuming and expensive to produce and publish and this may make them of limited value to small businesses or those with very limited finance.

Changes in Corporate Responsibility

Attitudes towards corporate responsibility have changed over time. The standards that companies are expected to reach are determined by societal norms, and in many countries these now focus on stakeholders rather than shareholders.

The main reasons for changing corporate approaches to social responsibility include:

increasing publicity from international pressure groups
United Nations Millennium Development Goals which has forced many developing nations to insist that new company investment in their economy take environmental concerns into consideration
global concern over climate change and the impact this could have on social and economic development – this is forcing companies to confront the climatic consequences of their actions and their investments
legal changes at local, national and international level have forced businesses to refrain from certain practices. For example: In most countries, businesses can no longer pay workers very low wages or avoid legal responsibility for their products.

CHANGES IN CORPORATE STRATEGIES

The changing corporate strategies of the world’s mining companies are an excellent example of how firms may adopt different strategies towards their social responsibilities in response to pressure. In the 1970s and 1980s, many mining companies signed mineral extraction deals with undemocratic political regimes. Mining companies ignored environmental concerns and the interests of the local or indigenous peoples who were displaced by the mining operations. The Grasberg (West Papua) and Bougainville (Papua New Guinea) gold and copper mines are useful case studies.

In Bougainville, joint owners of the mine, RTZ and Freeport, allowed the government to use force to put down civil unrest caused by the displacement of people by the mine and its environmental damage. The company took a very tough line and military action took place next to the mine. Eventually, the company was forced to close it.
The Grasberg mine, which opened later than Bougain-ville, benefi ted from a very different objective by RTZ towards its social responsibilities as a result of the poor publicity over its policy in Papua New Guinea. A trust fund has been set up to spend 1% of total mine revenue to fund village development. In addition, one quarter of the total workforce is drawn from local communities.
RTZ went even further with the Jabiluka uranium mine in northern Australia. Publicity by the local Mirrar tribe and their supporters led to an unprecedented extraordinary general meeting of shareholders, which led to the mine being closed – it has never reopened.

1.3 Review