Chap - 2 the Purpose of a Business

© The Institute of Chartered Accountants in England and Wales, March 2009 37

Contents

chapter 2

The purpose of a business

Introduction

Examination context

Topic List

1 The concept of mission

2 Organisational goals and objectives

3 Stakeholder goals and objectives

4 Corporate social responsibility and sustainability

5 Not-for-profit organisations

Summary and Self-test

Answers to Self-test

Answers to Interactive questions

Business strategy

38 © The Institute of Chartered Accountants in England and Wales, March 2009

Introduction

Learning objectives Tick off

Evaluate a business's purpose in terms of its stated mission and objectives

Identify the stakeholders of a business, their likely interests and the level of influence theyhave

Identify issues of Corporate Social Responsibility (CSR) and the strategies available todischarge and organisation's CSR

Evaluate the process of strategic objective setting in Not for Profit (NFP) organisations

Specific syllabus references for this chapter are 1a, 2i.

Practical significance

The practice of accountancy grew from the need for the users of capital to be accountable to the owners ofthe capital. Therefore the goals and interests of the owners had to be assessed before appropriatereporting systems could be developed.

Today's organisations need to be accountable, in varying degrees, to stakeholders. The interests of thesestakeholders set the goals and parameters of business strategy.

Stop and think

Assuming that businesses are in business to make money, is that a clear enough aim on which to base astrategy?

What about considerations of social responsibility or ethical issues that might get in the way of companiesdoing just what they like?

What sort of goals do not-for-profit organisations have?

Working context

As indicated above, accountants report to stakeholders on the matters that concern them. Increasinglyaccountants are required to assist in preparing or auditing reports that go beyond the narrow financialinterests of shareholders.

Syllabus links

Some coverage of business objectives was given in your Business and Finance paper.

THE PURPOSE OF A BUSINESS


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Examination context

Exam requirements

In the exam you may be required to create a mission statement or identify the inconsistencies andomissions in an existing one. You may also be asked to suggest appropriate goals and objectives. This willinvolve balancing the needs of different stakeholder groups, identifying possible conflicts of interest andrecognising the priorities for the organisation.

Business strategy


1 The concept of mission

Section overview

The purpose of an organisation may be communicated in a mission statement. The role and value ofsuch statements has been a matter of debate.

Considering the facets of corporate mission is a good starting point for improving our understandingof the purpose of a business.

1.1 Mission statements

Definition

Mission: the values and expectations of those who most strongly influence strategy about the scope andposture of the organisation (Johnson, Scholes and Whittington: Exploring Corporate Strategy).

Before setting about the preparation of a strategic plan, the management should consider the mission of anorganisation. Some have suggested that consideration and determination of the mission and its articulationinto a statement of corporate mission constitutes the first stage in the strategic planning process and thattherefore it is central to the whole planning process. Johnson and Scholes have suggested that 'the missionof an organisation is the most generalised type of objective and can be thought of as an expression of itsraison d'être.'

Hierarchically, missions and objectives can be shown as follows.

Mission

Objectives

Strategies

Action plans/Budget

The top level of management should be responsible for the preparation of a statement of corporatemission. Consequently, the mission statement should incorporate the broad aims of the executivemanagement.

1.2 Elements of mission

The definition given above expresses several significant features of mission:

It concerns the scope of the organisation, i.e. what it makes, where it operates.

It concerns the posture of the organisation, i.e. its values such as making money and corporate socialresponsibility and where in the market it stands.

It is determined by the relative power of those able to influence the strategy process, i.e.stakeholders

Each will be explored further in this chapter.



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The Ashridge College model of mission (Campbell et al A Sense of Mission 1992) links business strategy toculture and ethics by including four separate elements in an explanation of the features of a successfulmission.

(a) Purpose Why does the organisation exist? Who does it exist for?

– To create wealth for shareholders who take priority over all other stakeholders?

– To satisfy the needs of all stakeholders, including employees, for example?

– To reach some higher goal such as the advancement of society?

– To alleviate the poverty of the needy?

(b) Strategy: the competitive position and distinctive competence of the organisation

(c) Policies and standards of behaviour: the policies and behavioural patterns underpinning its work.

(d) Values: what the company believes in which is replicated in employees' personal values.

Worked example: Missions of easyJet and IBO

easyJet is a listed company offering a no-frills airline service between UK and other European airports.

easyJet mission statement

'To provide our customers with safe, good value, point-to-point air services. To effect and to offer aconsistent and reliable product and fares appealing to leisure and business markets on a range of Europeanroutes. To achieve this we will develop our people and establish lasting relationships with our suppliers.'

The International Baccalaureate Organisation (IBO) is a not-for-profit educational foundation that developsand examines internationally curricula for school-age pupils.

International Baccalaureate Organisation mission statement

'The International Baccalaureate Organisation aims to develop inquiring, knowledgeable and caring youngpeople who help to create a better and more peaceful world through intercultural understanding andrespect.

To this end the IBO works with schools, governments and international organizations to developchallenging programmes of international education and rigorous assessment.

These programmes encourage students across the world to become active, compassionate and lifelonglearners who understand that other people, with their differences, can also be right.'

1.3 The importance of mission to corporate strategy

The role of mission in strategy is determined by the approach to strategy formulation:

1 Rational approach: Mission is the starting-point of strategy formulation. Once it is decided then it isthe basis for the setting of strategic objectives and any strategy developed must be shown to beconsistent with the mission before it is adopted. The culture and values of the organisation must bemoulded to serve the strategy.

2 Strategic management approach: Mission is embedded in the culture of the organisation and usedto generate strategic initiatives.

The authors of the Ashridge model claim their model suits either view because, regardless of whetherstrategy is formulated bottom-up or top-down, all four elements will have to be in place andcongruent if the strategy is to be fully successful.

Business strategy


1.4 Mission statements

Mission statements are formal documents that state the organisation's mission. There is no standardformat, but the four element Ashridge model of mission is a good basis for writing a mission statement.Mission statements are published within organisations in order to promote desired behaviour: support forstrategy and purpose, adherence to values and adoption of policies and standards of behaviour.

Benefits claimed for mission statements are that they:

Provide a basis for the control of organisations, i.e. managerial and operational goals can be set on thebasis of them.

Communicate the nature of the organisation to stakeholders.

Help to instil core values in the organisation.

Some are suspicious of mission statements:

They are often public relations exercises rather than an accurate portrayal of the firm's actualvalues.

They can often be full of generalisations from which it is impossible to tie down specific strategicimplications or develop meaningful strategic objectives.

They may be ignored by the people responsible for formulating or implementing strategy.

Interactive question 1: Barnsfield Engineering Ltd [Difficulty level: Exam standard]

'It's a tall order, but I'm relying on you to do your best. Business planning is a new area to all of us here. Letme have your ideas by this evening. I'm meeting young Tim tomorrow ... maybe you should come too. We'llsee!' With that the senior partner had pushed the file across his desk as a signal the meeting was over.

All you know about Barnsfields is that its engineering works is on the Oadby Road, and it's the quick wayhome when the traffic isn't too bad. It has been a client of the firm for years. Bill Sawyer has looked afterthe account, but is not available to help.

You have the fax from Tim Sawbridgeworth from Barnsfield Engineering which triggered the meeting and ashort briefing note from the senior partner.

Requirement

Prepare a memorandum to brief the senior partner for his meeting with Tim Sawbridgeworth, covering:

(a) The importance of strategic planning

(b) Explaining the terms 'missions', 'objectives' and 'plans'

(c) An approach to the preparation of a strategic plan for Barnsfield Engineering Ltd. This section shouldcover the planning process and analytical tools available to managers. Whenever possible it should berelated to Barnsfield's current position.

EXHIBIT 1

Note from the senior partner

Barnsfield Engineering Ltd

Barnsfields was acquired by Joe Sawbridgeworth some fifty years ago, and we have been auditors ever since.That was before my time, but Joe had a reputation for being a shrewd businessman and this was a goodbargain. The business has made steady if not spectacular profits, though it has seemed to lost its way in thelast few years.

Joe handed over to his eldest son Lionel. As you can see from the accounts, turnover has grown rapidly toCU43m last year. Profits have not grown in proportion and sales have stuck at around CU40m for the lastfive years. Lionel Sawbridgeworth has never invested in new plant. He bought second hand or he made do.He did employ and kept some good people and the firm has a reputation for top quality work. The works



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management is good, if unimaginative, the administration side is well run and the accounts are immaculate –Bill Sawyer who manages the audit has made sure of that.

Lionel tended to stick to what he knew. He didn't really go after new business. Almost half the sales are toone customer, a firm it has been supplying for 40 years. Another three customers account for most of therest. Financially the business is in good shape. It has always made a profit and the balance sheet is strong.

Mr Timothy, as he is known in the works, has been a non-executive director of the firm for five years, buthe has never shown much interest. All I know about him is that he is in his mid-30s and qualified as a lawyerafter he left university.

EXHIBIT 2

Extract from a fax from Tim Sawbridgeworth

... Father's illness put me in the driving seat rather unexpectedly. I had no intention of joining the firm. I onlycame for six months, but father's doctors had advised against his returning to work. So it falls to me to dothe best I can.

We have received a tempting offer to sell out. Father thinks they're trying to steal the business. I don'tbelieve that but I suspect that, with better management, the firm could be much more prosperous.

I was shocked at the primitive equipment here, though I am delighted with the wonderful skills of thepeople. We have some really skilled craftsmen and it would be sad to see it all disappear. Father's cautionhas its advantages. We have substantial liquid assets, there is no overdraft to speak of, and we own thefreehold. So funds could be available for substantial investment.6

As I see it we have a choice between accepting the offer or devising our own plan for developing the firm.My preference is not to sell, but we shall need a lot of help if we are to prepare a plan for the future. Youhave been our accountants for as long as I can remember. Do you have anyone amongst your staff who canhelp us?

I must respond quickly to the potential buyer. Can we meet tomorrow?

2 Organisational goals and objectives

Section overview

We assume that 'businesses' seek to increase the wealth of their owners. This is often summarised asthe familiar assumption from economics that they seek to maximise profits.

Shareholder wealth maximisation may be more relevant than simply profit.

However in practice it seems likely that other factors may force management to offset profitabilitygoals against other objectives.

2.1 Purpose of the organisation

A basic division of organisational purpose is:

1. Profit seeking organisations: The primary goal of these is assumed to be to deliver economicvalue to their owners. Goals such as satisfying customers, building market share, cutting costs, anddemonstrating corporate social responsibility are secondary goals which enable economic value tobe delivered.

2. Not-for-profit organisations (NFP): The primary goals of these vary enormously and includemeeting members' needs, contributing to social well-being, pressing for political and social change.Secondary goals will include the economic goal of not going bankrupt and, in some cases, generating afinancial surplus to invest in research or give to the needy. Often the goals of NFP organisations will

Business strategy


reflect the need to maximise the benefit derived from limited resources, e.g. funds. Their objectivesmay be more heavily influenced by external stakeholders such as the government. This is discussedfurther in section 5.

2.2 Shareholder value maximisation

The simple assumption that firms seek to maximise profits is insufficient for our purposes. It:

Ignores the amount of capital used to generate the profit. By putting their wealth into the businessthe owners forego the alternative benefits their wealth could have given them.

Ignores the risks being suffered by the investors. If there is a high potential for losses occurring andeating away at the investors capital this would need to be compensated by higher profits.

Gives no indication of the time period over which the profit is to be measured.

Consequently it is assumed that profit-seeking organisations seek to maximise shareholder value.

You will be familiar with this concept from your Business and Finance studies. Measuring shareholderwealth is hard in practice. Some approaches are:

The increase in the value of a share over a period

Present value of forecast free cash flows when discounted by an appropriate risk-adjusted cost ofcapital (this value is assumed to be reflected in the share price)

Economic profit: the excess of actual profit in a given year over the minimum necessary to compensatethe shareholder for investing the funds in the business.

The concept of shareholder wealth maximisation is relied on in several ways:

As a decision-making criterion: techniques such as NPV and IRR assume this as the goal of the business

As a criterion to evaluate divisional managers: using performance measures such as Return on CapitalEmployed (ROCE or sometimes ROI) which should exceed cost of capital and rise from year to year

As the basis for financial incentives for managers. Bonuses may be based on improvements in theROCE, EPS or share price from year to year

As a benchmark against which to evaluate the board. Investment analysts and 'active value' investorsuse shareholder value measures to evaluate corporate performance and some newspapers publishleague tables to name and shame underperforming boards.

2.3 Limitations of shareholder value assumption

Shareholder wealth maximisation may not be an accurate description of managerial behaviour anddecisions because:

Corporate governance is too weak to give shareholders sufficient information or influence toensure management maximise shareholder wealth rather than, say, their own emoluments.

It ignores the non-financial goals of shareholders: Family firms, firms with ethical funds holdingshares, and firms with substantial shareholdings in the hands of governmental bodies will be alsorequired to satisfy non-economic objectives such as sustainability or employment.

It is impossible to verify: Seen in retrospect a board's decisions may be seen to have failed tomaximise shareholder wealth. Yet this is consistent with a board that wished to maximise shareholderwealth but whose decisions featured bounded rationality. Also to judge whether wealth wasmaximised it would be necessary for the researcher to know the outcomes of all the alternatives theboard ignored.



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It may not be a suitable prescription for management because it:

Ignores the nature of the financial return required: Shareholders receive their wealth fromdividends and from capital growth. They are assumed to be indifferent between the two, but inpractice they may not be due to present income needs and the different tax treatments of income andcapital growth.

Overlooks the power of stakeholders other than shareholders, e.g. increasing shareholder wealthat the expense of staff benefits may lead to loss of staff and industrial action.

Ignores corporate social responsibility (CSR): Many cultures take the view that profits should bebalanced against the good of society and the natural environment.

2.4 Setting business objectives

Hierarchies of objectives are normally constructed in the following way:

1. Mission

2. Main objectives

Statements of intent to particular stakeholders, e.g. shareholders or employees, such as the opencorporate objectives below.

3. Sub-objectives

These convert the main objectives into a series of targets for the business. These typically includeprofit or sales targets for immediate implementation. The closed business unit objective below is agood example. Sub-objectives can be passed further and further down the organisation resulting inshort-term objectives for particular departments, such as reducing costs by a given percentage orsigning up a particular level of customers each month.

There should be goal congruence, i.e. the mission and objectives set at each level should be consistent witheach other and not in conflict.

Quantifying objectives

Objectives must be capable of being quantified, otherwise progress towards them cannot be measured.

For a government agency or charity, for instance, to state its objective as 'to improve the welfare of old agepensioners' is not precise enough. It must state how it is going to measure the achievement – in termsperhaps of the number of places in old people's homes, the number of meals-on-wheels served, the numberof patients treated in geriatric wards – so that several targets may make up its overall objective.

In other words, for objectives to be of use in practice, they must have three components

Attribute chosen to be measured, e.g. profit, return on capital, output; Scale by which it is measured, e.g. CU, %, tonnes; Target, i.e. the level on the scale which it is hoped to achieve, e.g. CU1m, 8%, 200,000 tonnes.

One way of expressing the above is to say that objectives must be SMART, i.e.

Specific – unambiguous

Measurable – quantified

Achievable – within reach

Relevant – congruent with the mission

Timebound – with a completion date

For example, 'increase online revenues by 25% within one year'.

Objectives specified in this way are often referred to as 'closed' objectives.

Business strategy


Example of objectives

In practice objectives vary in attributes and in terms of the precision with which they are specified. Thefollowing gives some examples.

Corporate objective: open

Our primary aims are to provide a sound investment for our shareholders by increasing shareholdervalue and also worthwhile job prospects for our employees. Our objectives are customer satisfaction,real growth in earnings per share and a competitive return on capital employed.

Corporate objective: closed

The most important objective remains the achievement of a minimum return of 20% on average capitalemployed, with a target return of 25%.

Business unit objective: open

One of the main aims for one of the business areas in which the company is involved is to play aleading role in meeting the requirements of the widening and expanding home entertainmentsindustry.

Business unit objective: closed

In Bangladesh we are budgeting our house building unit to sell 2,500 homes next year – a figure thatwill put it among the top ten house builders. Ideally, existing performance statistics should be used tomeasure objectives; if a new system of data collection or processing has to be instituted in order tomeasure progress towards objectives, extra cost will be incurred.

Interactive question 2: Gooseberry Farm Ltd [Difficulty level: Exam standard]

The entire share capital of Gooseberry Farm Ltd is owned by Giles MacDonald and his wife. Its business isowning and running a 1,200 acre arable farm located five miles outside a small town not far from Bangkok.

A decline in farm income

In order to cut food surpluses, the basis for determining cereal support prices within Thailand is beingswitched from tonnes harvested to hectares cultivated. As a result Gooseberry Farm Ltd faces a sharpdecline in its annual trading profits, which in recent years have averaged CU90,000. Mr MacDonald istherefore considering using 200 acres to establish a new exclusive 18-hole golf course. Local businessmenregard this as feasible, since planning permission will readily be forthcoming and membership waiting lists atthe two existing clubs in the area exceed 350.

The golf club company

It is proposed that Gooseberry Farm Ltd will sign a 100-year lease with a new company, Millennium GolfClub Ltd, which will pay an annual rent of CU25,000 to Gooseberry Farm Ltd for use of the land. Theissued capital of the golf club company will be two CU1 shares, owned by Mr and Mrs MacDonald, and theremainder of its initial funding will be CU1 million in the form of 15% per annum irredeemable loan stock.Fifty local businessmen, including Mr MacDonald, have each agreed to purchase CU20,000 of this stock.

Of the funds thus raised CU225,000 will be spent on converting the arable land to become a landscapedgolf course. A further CU25,000 will provide working capital.

The club house company

The remaining CU750,000 will be used to purchase a 25% stake in a separate company, Century ClubHouse Ltd, to develop and operate a club house. This will have conference facilities, a sports hall, two barsand a restaurant. A local property company will subscribe the other 75% of the share capital of CenturyClub House Ltd. Millennium Golf Club Ltd will pay an annual rent of CU25,000 for the use of the clubhouse, but Century Club House Ltd will manage and run all facilities offered there, taking the profits thatwill be earned.

When ready to commence business in January 20X6, the new golf club will be much better appointed thanthe two existing local courses, and the only serious competition for comparable leisure facilities will comefrom three hotels in the nearest town.



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Budgets of the golf club company

Annual operating expenses of Millennium Golf Club Ltd are budgeted at CU450,000, comprising thefollowing.

CUSalaries, wages and professional's retainer 125,000Course maintenance 50,000Rent of land and club house 50,000Administration and other expenses 50,000Finance cost on debenture loan stock 150,000Depreciation 25,000

The terms of the debenture loan stock issue prohibit a dividend being paid on the two ordinary shares, sothat any surplus is applied for the benefit of the club and its members.134

On the revenue side, Millennium Golf Club Ltd's share of profits on the investment in Century Club HouseLtd is expected to total CU100,000 in 20X6, the first year of operations. Green fees, chargeable to non-members using the golf course, are expected to amount to an additional CU50,000 a year.

On the assumption that target membership levels are achieved, annual subscriptions are initially to be set atCU500 for each member. This will be CU100 less than for full membership at the two rival golf clubs in thearea. In addition, no joining fees will be payable in the first year of operation, but thereafter (as with theother two clubs) they will be equal to one year's subscription.

On this basis Mr MacDonald and his associates are sure that they will be able to recruit around 350 membersfrom the existing two clubs, including a good number of influential local businessmen and low handicap players.In addition, the new club expects to recruit most of those currently on the waiting lists at its two local rivals.

The policies of the club

The policy of the club will be to keep the annual subscription fee for members as low as possible whilemaintaining high quality facilities and helping to preserve the countryside. It is also intended to limitmembership to a maximum of 750 players in order to maintain the exclusive nature of the club.

The constitution of the club will put its overall management in the hands of a committee of 12 personselected by the membership, but with the proviso that two thirds must be debenture holders.

Requirements

You are an employee of the firm of accountants used by Mr MacDonald.

(a) Draft a mission statement that might be suitable for Millennium Golf Club Ltd and identify possible keyobjectives.

(b) Prepare a memorandum for Mr MacDonald which briefly explains the relationship between, on theone hand, a mission statement, and on the other, an organisation's objectives and its strategic, tacticaland operational plans.

(c) Prepare briefing notes for Mr MacDonald providing a critical analysis of the financial and operationalarrangements envisaged for the company.

The notes should deal only with the following matters.

Total demand projections (including a break-even calculation) Downside risk Upside potential Conclusions.

The conclusions should comprise a succinct summary of the major factors supporting yourrecommendations.

See Answer at the end of this chapter.

Business strategy


3 Stakeholder goals and objectives

Section overview

Profit, or shareholder wealth, maximisation assumes that management are motivated and free toadopt policies that serve the interests of just one social group: the owners of the business.

Stakeholder analysis suggests that management may seek to serve, or may be constrained by, a widergroup of interested parties.

3.1 Role of stakeholders

Definitions

Stakeholders: Groups or persons with an interest in what the organisation does.

Management theory rejects the assumption that firms seek shareholder wealth maximisation as toosimplistic. Instead it states that the goals of an organisation will reflect the power and interests of the mostpowerful stakeholder groups.

There are three broad types of stakeholder in an organisation, as follows:

Internal stakeholders (employees, management) Connected stakeholders (shareholders, customers, suppliers, financiers) External stakeholders (the community, government, pressure groups)

Interests of stakeholders

The interests (or expectations) of stakeholders may be in conflict. Which expectations determine theorganisation's objectives depends on the relative power of the stakeholder groups.

Stakeholders Conflict

Shareholders v managers/directors Profit v growth

Shareholders v employees Cost efficiency v jobs

Shareholders v managers/directors Growth via merger v independence

Customers v shareholders and managers/directors Service levels v profits and costs

Shareholders v bankers Profits v security (risk)

Power of stakeholders

Power is the means by which stakeholders can influence objectives. The different sources of power areshown below. Further aspects are considered in a later section on culture and governance.

Internal sources of power

Hierarchy: Formal power over others in the organisation, e.g. senior management/directors. It caninclude the number of staff under individuals.

Influence/reputation: Informal power from either charismatic leadership or group consensus on aparticular issue.

Relative pay

Control of strategic resources: e.g. trade unions when demand for output is high and labour isscarce, or size of budget allocation.

Knowledge/skills: Individuals deriving power from their specialist knowledge or skills.



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Environmental control: Finance and marketing staff may have a more detailed knowledge of theexternal environment than other functional staff, e.g. production.

Strategic implementation involvement: Many people are involved in implementing strategy, andthe use of personal discretion in decision making can give some element of power.

External sources of power

Control over strategic resources: Major suppliers, banks (finance) and shareholders (finance) canexert this form of power.

Involvement in implementation: Distribution outlets have greater knowledge of customerrequirements than manufacturers and can therefore dictate to manufacturers, rather than vice versa.

Knowledge and skills: Subcontractors can derive power if they perform vital activities for acompany.

External links: Public services often consult a wide variety of external stakeholders in decisionmaking and, therefore, these stakeholders have an informal influence over the organisation.

Social standing: For example ministers of religion.

Legal rights: For example government, planning authorities.

3.2 Internal stakeholders: employees and management

Because employees and management are so intimately connected with the company, their objectivesare likely to have a strong influence on how it is run. They are interested in the following issues:

(a) The organisation's continuation and growth. Management and employees have a special interestin the organisation's continued existence.

(b) Managers and employees have individual interests and goals which can be harnessed to the goals ofthe organisation.

Internal stakeholder Interests to defend Response risk

Managers and employees Jobs/careers

Money

Promotion

Benefits

Satisfaction

Pursuit of 'systems goals' ratherthan shareholder interests

Industrial action

Negative power to impedeimplementation

Refusal to relocate

Resignation

3.3 Connected stakeholders

Connected stakeholder Interests to defend Response risk

Shareholders (corporatestrategy)

Increase in shareholder wealth,measured by profitability, P/Eratios, market capitalisation,dividends and yield

Risk

Sell shares (e.g. to predator) orboot out management

Bankers (cash flows) Security of loan

Adherence to loan agreements

Denial of credit

Higher interest charges

Receivership

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Suppliers (purchasingstrategy)

Profitable sales

Payment for goods

Long-term relationship

Refusal of credit

Court action

Wind down relationships

Customers (productmarket strategy)

Goods as promised

Future benefits

Buy elsewhere

Sue

Worked example: Influence of shareholders

A survey of FTSE 100 companies conducted by the Financial Times in the UK asked what part leadingshareholders play in the running of companies and what top directors think of their investors.

Almost half of those surveyed felt that their main shareholders 'rarely or never' offered any usefulcomments about their business. 69% of respondents however felt that their major investors understoodtheir business well or very well. 89% did not feel hampered by shareholders in taking the correct long termstrategy.

Almost all directors felt their biggest shareholders were in it for the long term. This latter point probablyreflects the fact that the top ten fund managers own 36 per cent of the FTSE 100 – few fund managers canafford to move out of a FTSE 100 company altogether and therefore remain long term shareholderswhether the investment is liked or not.

There is a perceived trend towards greater involvement and communication. To quote one director:'Investors are much more sensitive to their responsibilities than in the past because they are looked on asthe guardians of the corporate conscience.'

3.4 External stakeholders

Connected stakeholders and external stakeholders are both outside the organisation. Their difference liesin the degree of connectedness.

Connected stakeholders supply resources to the organisation such as capital or sales revenue.

External stakeholders do not have this direct connection but rather influence the context in which theorganisation operates.

External stakeholder groups – the government, local authorities, pressure groups, the community at large,professional bodies – are likely to have quite diverse objectives.

External stakeholder Interests to defend Response risk

Government Jobs, training, tax Tax increases

Regulation

Legal action

Interest/pressure groups Pollution

Rights

Other

Publicity

Direct action

Sabotage

Pressure on government



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3.5 Dependency

A firm might depend on a stakeholder group at any particular time.

(a) A firm with persistent cash flow problems might depend on its bankers to provide it with money tostay in business at all.

(b) In the long term, any firm depends on its customers.

The degree of dependence or reliance can be analysed according to these criteria:

(a) Disruption: Can the stakeholder disrupt the organisation's plans (e.g. a bank withdrawing overdraftfacilities)?

(b) Replacement: Can the firm replace the relationship?

(c) Uncertainty: Does the stakeholder cause uncertainty in the firm's plans? A firm with healthy positivecash flows and large cash balances need not worry about its bank's attitude to a proposed investment.

The way in which the relationship between company and stakeholders is conducted is a function of theparties' relative bargaining strength and the philosophy underlying each party's objectives. This canbe shown by means of a spectrum:

3.6 Stakeholder mapping: power and interest

Mendelow suggests that stakeholders may be positioned on a matrix whose axes are power held and thelikelihood of showing an interest in the organisation's activities. These factors will help define the type ofrelationship the organisation should seek with its stakeholders.

A B

C D

Level of interest

Power

Low

Low

High

High

(a) Key players are found in segment D: strategy must be acceptable to them, at least. An examplewould be a major customer.

(b) Stakeholders in segment C must be treated with care. While often passive, they are capable of movingto segment D. They should, therefore be kept satisfied. Large institutional shareholders might fallinto segment C.

Business strategy


(c) Stakeholders in segment B do not have great ability to influence strategy, but their views can beimportant in influencing more powerful stakeholders, perhaps by lobbying. They should therefore bekept informed. Community representatives and charities might fall into segment B.

(d) Minimal effort is expended on segment A.

A single stakeholder map is unlikely to be appropriate for all circumstances. In particular, stakeholders maymove from quadrant to quadrant when different potential future strategies are considered. This aspect willbe returned to in Chapter 11 where we deal with the evaluation of strategic options.

Stakeholder mapping is used to assess the significance of stakeholder groups. This in turn has implicationsfor the organisation.

(a) The framework of corporate governance should recognise stakeholders' levels of interest andpower.

(b) It may be appropriate to seek to reposition certain stakeholders and discourage others fromrepositioning themselves, depending on their attitudes.

(c) Key blockers and backers of change must be identified.

Stakeholder mapping can also be used to establish political priorities. A map of the current position can becompared with a map of a desired future state. This will indicate critical shifts that must be pursued.

Interactive question 3: Supavac Ltd [Difficulty level: Exam standard]

Supavac Ltd ('Supavac') is a listed company which manufactures vacuum cleaners. Some 70% of its output issold to Avold Ltd ('Avold'), a major Dhaka-based chain of electrical stores. Vacuum cleaners are sold underAvold's own label and are regarded as being in the mid to upmarket range. Manufacturing takes place atSupavac's two factories, both of which are in Bangladesh and are of approximately equal size.

The workforce of Supavac is largely unskilled or semi-skilled and is not unionised.

Avold has been a major customer of Supavac for about 30 years, but a new management team recently tookover at Avold. It informed the board of Supavac that a new annual contract is to be arranged which wouldinvolve a major reduction in prices offered, and that the volumes purchased next year would be only 60% ofprevious years. It was also made clear that further price reductions would need to take place in future yearsif the contract were to be maintained at the new lower volumes.

As employees became aware of the increasingly competitive conditions, the possibility of factory closureemerged.

The board of Supavac identified two strategies:

Strategy 1. Close one factory and attempt to cut costs at the other by a policy of efficiency improvementsand redundancies.

Strategy 2. Close both Bangladesh factories and open a new factory in Laos where labour costs aresignificantly lower than in Bangladesh.

Requirement

Identify and justify the position of each of the following stakeholder groups in Mendelow's power-interestmatrix with respect to the two strategies.

(i) Bangladesh-based employees

(ii) Potential employees in Laos

(iii) Shareholders in Supavac

(iv) Avold




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4 Corporate social responsibility and sustainability

Section overview

Corporate Social Responsibility (CSR) is a business aim that may seem to cut across the notion thatfirm's seek only to make money for their owners.

This section reviews the many aspects of CSR and considers the strategies that may be adopted andthe extent to which they are congruent with delivering value to shareholders.

4.1 Social responsibility

If it is accepted that businesses do not bear the total social cost of their activities, it could be suggestedthat social responsibility might be a way of recognising this.

The scope of Corporate Social Responsibility (CSR) varies from business to business. Factors frequentlyincluded are:

Health and safety: This includes workplace injury, customer and supplier injury and harm to thirdparties

Environmental protection: Energy use, emissions (notably carbon dioxide), water use andpollution, impact of product on environment, recycling of materials and heat

Staff welfare: Issues such as stress at work, personal development, achieving work/life balancesthrough flexibility, equal opportunities for disadvantaged or minority groups

Customer welfare: Through content and description of products, non-exclusion of customergroups, fair dealing and treatment

Supply-chain management: Insisting that providers of bought-in supplies also have appropriateCSR policies, ethical trading, elimination of pollution and un-recycled packaging, eliminating exploitativelabour practices amongst contractors

Ethical conduct: Staff codes for interpersonal behaviour, prohibitions on uses of data and IT,management forbidden from offering bribes to win contracts, ensuring non-exploitation of staff

Engagement with social causes: This includes secondment of management and staff, charitabledonations, provision of free products to the needy, involvement in the local community, support foroutreach projects such as cultural improvement or education

Justifications offered for management seeking to demonstrate 'social responsibility' outside a business'snormal operations are:

'The public' is a stakeholder in the business. A business only succeeds because it is part of a widersociety

Self-regulation by the firm or industry now is likely to be more flexible and less costly than ignoringCSR and facing statutory regulation later

It attracts ethical investment funds and ethical customers

It improves relations with key external stakeholders such as regulators, government and legislators

Donations, sponsorship and community involvement are a useful medium of public relations and canreflect well on the business and its brands

Involving managers and staff in community activities develops them more fully

It helps create a value culture in the organisation and a sense of mission, which is good for motivation

In the long-term, upholding the community's values, responding constructively to criticism andcontributing towards community well-being might be good for business, as it promotes the widerenvironment in which businesses flourish

Business strategy


4.2 Strategies for social responsibility

Proactive strategy A strategy which a business follows where it is prepared to take full responsibilityfor its actions. A company which discovers a fault in a product and recalls theproduct without being forced to, before any injury or damage is caused, acts in aproactive way.

Reactive strategy This involves allowing a situation to continue unresolved until the public,government or consumer groups find out about it.

Defence strategy This involves minimising or attempting to avoid additional obligations arisingfrom a particular problem.

Accommodationstrategy

This approach involves taking responsibility for actions, probably when one ofthe following happens.

Encouragement from special interest groups

Perception that a failure to act will result in government intervention

4.3 Sustainable enterprise

The term 'sustainable development' originally appeared in literature on development economics, often as acontrast to the 'unsustainable development' of some countries that were receiving large inward investmentfrom multinational corporations. This was believed to be destroying the social and ecological infrastructureand hence hampering the future development of the countries.

Following the Rio 'Earth Summit' of 1992 and ensuing political support in the USA and at the World TradeOrganisation the need for 'sustainable development' has, amongst political initiatives, led to a focus on firmsdeveloping appropriate strategies and thereby becoming 'sustainable enterprises'. The focus has movedfrom just host developing countries to include impacts on mature home economies too.

Definitions

Sustainable development: Meeting the needs of the present without compromising the ability of futuregenerations to meet their own needs. (Brundtland Commission)

Sustainable enterprise: A company, institution or entity that generates continuously increasingstakeholder value through the application of sustainable practices through the entire base activity –products and services, workforce, workplace, functions/processes, and management/governance (Deloitte:Creating the Wholly Sustainable Enterprise)

Interpretations of the scope of sustainable development vary from a narrow interpretation which focuseson 'green issues' to broader interpretations which include concerns such as:

Increasing extremes of poverty and wealth Population growth Biodiversity loss Deteriorating air and water quality Climate change Human rights

Worked example: CSR at Shell

Shell is a global oil company. Acquiring, transporting and refining oil carries with it connotations for thelifestyle and settlement patterns of regions with oil reserves, political connotations, impacts on naturalenvironment from drilling, flaring and spillages, health and safety issues in production and transport, andeconomic impacts from the oil revenues generated in the host countries. Consumption of oil-derivedproducts created environmental pollution from emissions of carbon dioxide and particulates, whilst spent



2

oil is a bio-hazard and plastics create non-degradable landfill. The technologies the oil industry supports,such as cars and aircraft, also have adverse ecological impacts.

The following is taken from Shell's website.

Our sustainable development commitment at Shell

In 1997 we revised the Business Principles to include a commitment to contribute to sustainabledevelopment. For our business this is about engaging with our stakeholders to better understand andmanage the impacts, both positive and negative, that our operations and products have on society and theenvironment today, and to identify business opportunities for the future.

In the current version of our Business Principles (revised 2005) we state 'As part of the Business Principles, wecommit to contribute to sustainable development. This requires balancing short and long term interests, integratingeconomic, environmental and social considerations into business decision-making'.

By far our biggest contribution to sustainable development will come from finding environmentally andsocially responsible ways to meet the world's future energy needs. With energy demand set to double oreven triple by 2050, mainly because of exploding demand in the developing world, this is a dauntingchallenge. Read more in our Energy Challenge section.

Making sustainable development part of the way we work means learning to look at all aspects of ourbusiness through a new lens. This lens lets us see the world through the eyes of our stakeholders and helpsus to understand the many ways, good and bad, that our business activities affect and are affected by societyand the environment.

The business case for sustainable development

Contributing to sustainable development is not only the right thing to do, it makes good business sense.

Sustainable development helps us be a more competitive company and create value for our shareholders by:

Reducing our operational and financial risk

Delays, approval failures, or disruption to existing operations by concerned communities are significant risksto our business. Understanding what our stakeholders perceive as responsible behaviour, meeting theseexpectations and achieving recognition from financial institutions, investors and customers deliver obviousfinancial benefits.

Reducing costs through eco-efficiency

This is about producing more with less energy and materials. For example by adopting cleaner technologies,reducing emissions, recycling, reusing, minimising waste and even turning waste into saleable products.These activities improve the efficiency of our operations, help us reduce our costs, avoid current and futurecosts of emissions and even create new income streams.

http://www.shell.com/home/Framework?siteId=envandsoc-en&FC2=/envandsoc-en/html/iwgen/energy_challenge/zzz_lhn.html&FC3=/envandsoc-en/html/iwgen/energy_challenge/dir_energy_challenge_17032006.html

Business strategy


Influencing options and evolving portfolios

By anticipating new markets driven by societal and customer desires for a cleaner, safer, more sustainableworld, and evolving business portfolios and supply chain relationships to match, we can gain competitivepositions and enhance our 'licence to operate and grow'.

Influencing product and service innovation

Being aware of changes to customer life styles and values enables us to differentiate our products andprovide more services to customers that reflect and meet their demand.

Attracting more loyal customers and enhancing the brand

Providing products and services built on sustainability thinking create customer loyalty and market share.

Attracting and motivating top talent

Our commitment to sustainable development is an important factor in some people's decision to join andstay and that alignment between personal values of staff and corporate values is a powerful motivator.

Enhancing reputation

By being seen and being credible as a good corporate citizen whose performance matches its words, webecome the organisation of first choice for customers, staff, investors, suppliers, partners and thecommunities in which we operate.

Shell takes a very broad view of sustainable development. Its high-profile stance provides an example of theconsequences for strategy of 'making it happen'. Its 2005 Sustainability Report details:

Commitments and standards: documented principles written and approved by the Board and signed bydivisional managers. These standards were drawn up after detailed consultation with stakeholders;

Governance and structures: establishment of a Social Responsibility Committee of the Ltd Board, chairedby the CEO. This sets performance metrics, reviews progress and performance and appraises options.

Stronger controls and incentives: each line manager is required to write an Annual Assurance Letters,reviewed by the Board, outlining their division's compliance and progress on sustainable development.These are reviewed by the Audit Committee of the Board. All divisions are required to achieve relevantcertifications such as ISO 14001 (an environmental standard) and others such as on animal testing ifrelevant. A balanced scorecard contains measures for the elements and is used for performanceappraisal and pay.

Human resource development: creation of a management and leadership development programme toinclude SD issues. Project Management Academy trains in coping with these area too.

Extract from www.shell.com (2007)

Perspectives on sustainability include:

An essential consideration for which corporations must shoulder responsibility if the Earth is toavoid global tragedy

A fad pushed by elite political groups and which is now being alighted on by consultants and academicsto generate research and consultancy incomes

'Greenwash' that large corporations can use as rhetoric whilst underneath they continue to conducttheir usual disruptive activities.



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Interactive question 4: Being socially responsible [Difficulty level: Easy]

What are the implications in the

(a) Short term

(b) Long term

of a company acting in a socially responsible manner?


5 Not-for-profit organisations

Section overview

The number of not-for-profit organisations potentially outweighs the profit seeking ones if we includevoluntary sports clubs, interest groups and associations.

Understanding how strategy is developed in these is important. It is similar to strategy formulation inbusinesses but without the comfort of the assumption of a single overriding goal of profit.

5.1 Voluntary and not-for-profit sectors

The term not-for-profit organisation (NFP) encompasses many different organisations whose onlysimilarity is that they do not seek to make economic returns for their owners.

NFPs include:

Volunteer organisations: providing services such as neighbourhood improvement, assisting theelderly, providing opportunities for children and youth, visiting the sick.

NGOs: set up around clear objectives to achieve some cultural or social goal e.g.. education of theyoung, art and music.

Governmental bodies: These range from departments of central government down to localadministrative bodies. Obvious examples include Police services, armed forces and education services.

Mutually-owned public benefit corporations: These are effectively companies which do not issueshares to the public but rather whose capital is provided, and debts guaranteed to a certain limit, byothers. They are free to raise debt from third parties Their members are the stakeholder groups theyserve and they will have procedures to consult and report to them.

The taxation treatment of the incomes of NFPs is likely to be favourable because their surpluses are nottreated as profits. For this reason many NFPs have to work hard to defend their status against accusationsthat they are merely a tax avoidance device. To do this they need to demonstrate a genuine publicinterest.

Business strategy issues are just as relevant to a not-for-profit organisation as they are to a businessoperating with a profit motive. The tasks of setting objectives, developing strategies and controls for theirimplementation can all help in improving the performance of charities and NFPs.

Business strategy


5.2 Objectives

Objectives will not be based on profit achievement but rather on achieving a particular response fromvarious target stakeholders.

Here are some possible objectives for a NFP:

(a) Surplus maximisation (equivalent to profit maximisation)

(b) Revenue maximisation (as for a commercial business)

(c) Usage maximisation (as in leisure centre swimming pool usage)

(d) Usage targeting (matching the capacity available, as in the NHS)

(e) Full/partial cost recovery (minimising subsidy)

(f) Budget maximisation (maximising what is offered)

(g) Producer satisfaction maximisation (satisfying the wants of staff and volunteers)

(h) Client satisfaction maximisation (the police generating the support of the public)

There are no buyers in the NFP sector, but rather a number of different audiences (or stakeholders):

(a) A target public is a group of individuals who have an interest or concern about the charity.

(b) Those benefiting from the organisation's activities are known as the client public.

(c) Relationships are also vital with donors and volunteers from the general public.

(d) There may also be a need to lobby local and national government and businesses for support.

The objective setting process must balance the interests and concerns of these audiences, which mayresult in a range of objectives, rather than a single over-riding one. In order to allow for this balance to beachieved:

NFPs will typically feature wide participation in the objective setting process. Indeed it may be a legalcondition in their constitution and essential to maintaining their legal status.

Stakeholder power and interests are likely to be more obvious in NFPs than in profit-seeking organisations.

Interactive question 5: Foundry Theatre [Difficulty level: Exam standard]

The Foundry Theatre is a major regional theatre in Rangpur and was built seventy years ago. In 1976 theGovernment awarded the theatre a grant for the first time 'to allow the theatre to undertake moreprestigious productions than their own resources allow'. This grant (of CU5,000) was very significant in thatit marked the transition from commercial to subsidised theatre.

The theatre was refurbished extensively in 1986 with money from Rangpur City Council at a cost ofCU884,000. By 1987 the theatre was in difficulties and heading for considerable financial losses. In a reportpublished at the time the council's treasurer stated that the theatre should 'slash costs and attract biggeraudiences in order to improve its financial position'. In addition, the theatre was criticised for not stagingenough popular shows, for inadequate use of the building and for having a 'top heavy' managementstructure.

Again the council offered to step in with financial assistance providing the theatre cut its costs andimplemented a review of its management structure. The theatre administrator refused the council's terms,indicating that many of the council's proposed savings would severely compromise the theatre's artisticstandards.

Changes were eventually made and the theatre survived.

The objectives of the theatre were enshrined in the memorandum of association of the Foundry TheatreTrust as follows.



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To promote, maintain, improve and advance education, particularly by the production of educationalplays and the encouragement of the arts of drama, mime, dance, singing and music.

To receive, educate and train students in drama, dancing, music and other arts and to promote therecognition and encouragement of special merit in students.

The company (and the theatre) then enjoyed varying degrees of success between 1987 and 2003. Duringthis period attendances rose and fell in line with recession and boom periods in the economy (attendancefigures are given in Appendix I).

The current position

In a recent article in the Rangpur Gazette the following comment was made.

'The Artistic Director has resigned, attendances are down by 50%, productions planned for the new yearare cancelled, the company is heading for a CU250,000 deficit – but there is no crisis at the Foundry, saidStephen Appleyard, Chief Executive, Rangpur Theatres Committee.'

In carrying out an internal analysis for Rangpur Theatres Ltd the following comments have been made.

James Knowles-Cutler (newly-appointed Artistic director)

'The objective of the theatre is clear to me. We should aim to increase our audiences through aprogramme of challenging plays. Rehashing populist plays is not our role. We should attempt to attract well-known (in theatre terms) classical actors and seek to stimulate debate and interest in theatre through aprogramme of good classics (for example, The Caretaker by Pinter, Waiting for Godot by Beckett, etc) andchallenging modern plays. My ultimate objective is to establish ourselves as the leading 'serious' theatreoutside of Dhaka.'

Thomas Sutherland (Finance director)

'We are still dependent for a large amount of our funding on central government grants. The percentage ofour funding coming from this area looks to be about 50%. This is misleading because the actual amount ofthis funding has been growing very slowly. The fact that it represents up to 50% is due to a reducedproportion of revenue coming from box office receipts. Therefore, we really have one objective – to boostour sales or receipts from the box office. Our current revenue includes CU1,117,856 (2006) down from ahigh of CU1,596,245. Thus I estimate our ideal objective is to increase our box office receipts by 30% overthe next three years. I believe there are a number of ways we can achieve this.

(1) We can reduce the price of our 'Foundry Card'. This is a membership card which allows the holder toattend five peak performances (i.e. Saturday and Sunday) for the price of four performances. Byreducing the price we would encourage demand.

(2) We should also reduce our prices on an individual performance basis. I believe this would increaseattendances by such an amount as to increase total revenues overall.

(3) The restaurant/café side could be improved. The theatre occupies a first rate position in the city andhas an excellent atrium space in the entrance hall. This is already used at lunchtimes, etc, but could beprofitably used in the evenings for pre-theatre dinner.'

Brian Johnson (Rangpur City Council, appointed to board of trustees of the Foundry Theatre)

'The trustees for the theatre believe the objective is to broaden the audience. The current composition ofour audience is shown in Appendix II. Clearly the greater proportion of the audience comes from higherincome groups. We need to push more into other market segments. By boosting attendances in thismanner we can go some way to achieving increased revenue figures. We think focusing on the productionof highbrow theatre will only alienate a large group of the very people we are trying to attract.'

Business strategy


Requirements

You are part of a consultancy team appointed by the Rangpur Council to investigate the theatre's position.

(a) In the light of information provided in Appendix II discuss the use of price reductions as a means ofachieving the objectives as stated by the finance director.

(b) Draft a memorandum to the trustees of the theatre explaining the objectives of the theatre asexpressed by the artistic director, the finance director and the trustee. You should comment on theircompatibility and suggest a possible prioritisation of these objectives.

Appendix I

Attendances at Rangpur Theatre 1997 to 2006

Year Theatre Studio Total1997 159,700 16,600 176,3001998 168,800 12,900 181,7001999 167,900 8,000 175,9002000 167,700 18,000 185,7002001 210,300 21,200 231,5002002 206,869 14,902 221,7712003 175,064 16,533 191,5972004 159,966 13,491 173,4572005 175,435 4,903 180,3382006 100,807 9,510 110,317

Appendix II

Demographic characteristics of theatre-goers and local population

Total population inmetropolitan

county aroundRangpur

Foundry audiences Foundry mailinglist

2005

Foundry cardholders2005

(1) Social class(% A/B/C1)

29% 80% 50% 71%

(2) Education(% completing full-time education,age 19 or over)

3% 50% N/A N/A

(3) Age (% under 35) 37% Main theatre 55%Studio theatre 75%

25% 7%

(4) Sex (% females) 51% 50% apiece in maintheatre and studio

66% 64%

(5) Rangpur post code N/A 80% (estimated) 70% 91%

Appendix III

Revenues

Year Box office Government grantCU'000 CU'000

2000/01 1,144 9272001/02 1,306 1,0722002/03 1,330 1,0542003/04 1,446 1,0952004/05 1,596 1,0652005/06 1,117 1,1032006/07 1,172 1,157



2

Summary and Self-test

Summary

Business strategy


Self-test

Answer the following questions.

1 What are the four elements in the Ashridge definition of 'mission'?

P ........................................

S ........................................

P ........................................

V ........................................

2 Mission statements have a standard format.

True

False

3 Fill in the gaps: 'Most organisations set themselves quantified (1) ........................................ in order toenact the corporate (2) ........................................ . Many objectives are:

(3) S ........................................

(4) M ........................................

(5) A ........................................

(6) R ........................................

(7) T ........................................

4 Some objectives are more important than others. These are called ........................................ corporateobjectives.

5 (a) 'Increase the number of customers by 15%'

(b) 'Produce reports within three days of month end'

(c) 'Achieve 35% market share'

Are each of the above examples of unit objectives or corporate objectives?

6 There are three broad types of stakeholder:

(1) ........................................

(2) ........................................

(3) ........................................

7 How do questions of sustainability tie in with the short/long term debate?

8 Define an NFP.

Now, go back to the Learning Objective in the Introduction. If you are satisfied that you have achievedthese objectives, please tick them off.



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Answers to Self-test

1 Purpose

Strategy

Policies and standards of behaviour

Values

2 False

3 (1) objectives (2) mission (3) specific (4) measurable (5) achievable (6) relevant (7) time bound

4 Primary

5 (a) Unit

(b) Unit

(c) Corporate

6 (1) Internal

(2) Connected

(3) External

7 The short term/long term debate refers to the trade off management must make between decisionswith short-term impacts on the business and those with impacts on its longer term success. Here theassumption is that sustainability will have an adverse short-term impact on the business, for exampledue to the enhanced costs of compliance, but that it is essential to its long-term success in the face ofmounting social and legal pressure to improve ecological performance.

Some writers suggest that there may be short-term benefits from sustainability, such as reduced costsfrom using less energy and other resources or attracting customers who will place contracts or buythe offerings of firms with better sustainability postures (e.g. 'carbon free').

8 An organisation whose attainment of its prime goal is not assessed by economic measures. Their firstobjective is to be a non-loss operation in order to cover costs. Profits are made only as a means to anend, such as providing a service.

Business strategy


Answers to Interactive questions

Answer to Interactive question 1

Memorandum

To Senior partner

From Anne Accountant

Date Today

Subject Briefing notes for meeting with Tim Sawbridgeworth

Please find below the briefing notes you requested for your forthcoming meeting. I would be pleased todiscuss with you any areas needing further clarification.

1 The importance of strategic planning

Much of any manager's time is concerned with decision making. A strategic plan is the result of certaindecisions having been taken and provides a framework for future clear decision making.

The introduction of a strategic plan has the following benefits.

(i) Attention is focused on the long-term future of the business rather than getting bogged down inshort-term problems.

(ii) Activities of various sections of the business are coordinated.

(iii) Each manager will know what the firm is aiming to achieve and will have criteria for evaluatingvarious courses of action.

The more complex the organisation and the more volatile the environment it faces the moreimportant these benefits are likely to be.

2 Objectives and plans

Missions and objectives

A mission statement is a generalised type of objective and can be thought of as an organisation's raisond'être. It is a reflection of the values of those that have power in an organisation and external pressuresupon it.

Objectives are more specific than mission statements and spell out what the organisation hopes toachieve. Most organisations have hierarchies of objectives, major objectives setting targets for theoverall business and sub-objectives setting targets for individual divisions or departments.

Plans

Plans also exist in hierarchies.

Corporate strategy covers the entire organisation and is concerned with which types of business thefirm should be involved. It is a particular issue for conglomerate businesses which serve many differentmarkets.

Competitive strategy is about how to compete in each of the markets which the business serves.

Tactical and operational plans or strategies involve the acquisition of resources such as finance,manpower, plant and machinery, information technology, and their management and organisation.

At the moment I have little detail of Barnsfield's business but it appears to be a medium-sized firm andthere is likely to be little distinction between corporate and competitive strategy.



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3 Preparation of a strategic plan

Many formal approaches to strategy development have been suggested. Most authorities agree on thefactors to be considered, but many disagree on the order in which each stage should be carried out. Inreality the arguments are not of great importance, but it is vital that Barnsfield covers the followingareas in its development of a plan.

3.1 Environmental analysis

The direction of a firm's strategy is considerably influenced by what happens around it. Beingunresponsive to environmental change can easily lead to business failure. Barnsfield's operationsappear to have changed little in recent years and significant environmental threats could exist. Asa first stage I suggest it analyses its current environment and attempts to anticipate any likelychanges.

The analysis should cover

Economic factors such as growth in demand for services, levels of interest rates, availabilityof skilled manpower etc

Political factors such as the opening up of the single market of the Economic Communityand exposure to import competition

Social factors such as changes in cultural values, e.g. safety awareness

Legal factors including employment legislation consumer protection, and so on

Technological factors such as changes in manufacturing methods and technology employedby customers

Demographic factors such as trends in population, size, structure and location.

Of the above, technological factors are likely to be of immediate concern. The firm is currentlyoperating with very primitive equipment.

3.2 Competitive forces

Barnsfield must also consider the competitive structure of its industry before strategy can bedeveloped. Areas for analysis are

Threats from potential entrants

Threats caused by the power of its buyers

Threats due to the power of suppliers

Threats from substitute products

Threats from existing competitors.

Very few details are available on the firm's competitive position apart from its customers.

All of the output is taken by four customers, and virtually half by one customer. This leaves thecompany very exposed to loss of business and puts it in a difficult position when negotiatingprices. Any strategy should attempt to remove this over-reliance on a small number ofcustomers.

3.3 Internal analysis

Several techniques exist to analyse a firm's internal position. These include

The 5 Ms: analysis of strengths and weaknesses in terms of machines, men, money, marketsand materials

Ratios: trend analysis and comparisons with other firms in the same industry should becarried out

Value chains to identify cost drivers and value drivers.

Business strategy


3.4 Objectives

Mission statements and objectives establish the direction which the firm's plan will take.

Objectives should be clearly defined and be capable of measurement in order that progress canbe monitored.

Barnsfield is a private company and appears to be substantially family owned. Aspirations of thefamily, which are likely to involve shareholder returns and continued independence, willtherefore affect its objectives. Tim Sawbridgeworth needs to consider his own objectives for thebusiness. Specifically does he require growth in future earnings or is he happy to pursue a no-growth strategy and simply receive existing profit levels? It should not be assumed, however, thatexisting profit levels can be achieved by maintaining existing operations.

Other important stakeholders include the highly skilled workforce and the loyal customer baseboth of whose interests should be considered in formulating objectives. Remuneration, financialreturn and quality are likely to be of importance here.

3.5 Corporate appraisal

The final stage before developing a plan is to consider the firm's current and projected position.This should allow the firm to assess its chances of achieving its overall objectives and to identifythe need for new strategies to bridge any gap between projected and desired performance.

SWOT analysis: this involves the identification of a firm's

Strengths – things that it does well, e.g. management, operations, finance etc

Weaknesses – those areas in which performance is poor

Opportunities – environmental changes which can be exploited to the firm's advantage

Threats – environmental changes which may lead to a weakening of the company's position.

SWOT analysis is useful in generating future strategies. An ideal strategy is to exploitenvironmental opportunities by using the firm's strengths.

A brief analysis of the existing data on Barnsfield reveals the following.

Strengths – Reputation for quality

– Loyal customers

– Skilled workforce

– High level of financial resources

Weaknesses – Flat profits and stagnant sales

– Outdated plant

– Reliance on four customers

– Loss of chief executive

Opportunities – No details available apart from potential sale

Threats – No details available.

Gap analysis: this involves the identification of gaps between projected performance andobjectives.



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3.6 Strategy development

Strategy development is an area for creative thinking. It attempts to design strategies that willbridge the gaps identified under position analysis. Assuming the firm opts for a growth objective,the following matrix highlights possible strategies.

Existing product New product

Existing market Internal efficiency and marketpenetration

Product development

New market Market development Diversification

(i) Product development involves selling new products to existing customers and normallyrequires research and development expenditure.

(ii) Market development involves selling existing products to new customers and involvesinvestment in marketing.

(iii) Diversification can be vertical (backward or forward in the firm's existing production chain),horizontal (acquisition of competitors) or conglomerate (a move into a totally differentarea).

The above strategies can be implemented by acquisition or organic growth.

Internal efficiency and market penetration involve attempts to reduce cost or further penetrateexisting markets by taking market share from the competition. Cost reduction by theintroduction of modern machinery is one obvious possibility for Barnsfield. Another approachcould be differentiation of the firm from its competitors on a quality basis.

3.7 Internal strategies

Once a strategy has been selected tactical and operational plans need to be put in place.

These include plans for such items as acquisition of resources, capital investment, finance,manpower etc; plans also need to be made to optimise the use of existing resources, which willoften be expressed in the form of budgets.

3.8 Control

Finally, a feedback system is needed to measure actual results and compare them with plannedperformance. A budgetary control system would seem most appropriate in a firm the size ofBarnsfield.

4 Conclusion

By necessity this is a very brief summary of the strategic planning process. It is important that we donot oversimplify the problem. Strategic decisions are very complex and are made in the context ofgreat uncertainty. Nevertheless Barnsfield appears to have stagnated over the last few years and theabove issues must be addressed if it is to have a long-term future.

Business strategy



(a) Mission statement

The mission of this club is to provide high quality, value for money golfing and leisure facilities. Toachieve this the club will limit membership to a level compatible with ensuring that the course andleisure facilities will be well maintained, that the environment is protected and that membership feesare as low as possible.

Key objectives

(i) To commence business on 1 January 20X6

(ii) To achieve target membership of 750 by 31 December 20X6

(iii) To achieve green fees of CU50,000 in 20X6

(iv) To earn CU100,000 from Century Club House in 20X6.

(b) Memorandum

To Mr MacDonald

From Consultant

Date Today

Subject Mission, objectives, strategic tactical and operational plans

The relationship between the elements of planning can be shown in the following diagram.

Mission

The mission attempts to define the purpose of a business. It may include information about the valuesand methods. The mission must pay some attention to the environment and markets in which thebusiness operates. The information might show that the type of business being carried on has littlefuture. If so the nature of the business would have to change together with the mission statement.

Objectives

Objectives are normally quantifiable targets which are time limited. A statement such as 'We aim toincrease profits in the future' is not an objective, the profit increase has not been quantified nor has adeadline been set. A valid objective would be 'We aim to increase profits by 20% by 31 December20X6.'

Objectives can be long term, affecting the whole company. They can then be broken down intodepartmental and individual objectives allowing management by objective to be implemented. Ifeveryone achieves his individual objective, the group as a whole should meet its objectives. In practice,organisations will often have to cope with multiple and possibly conflicting objectives.

Strategic plans

Strategic plans are long-term plans setting out how the objectives can be met. Typically a strategic planwill be for a period longer than a year and will affect the whole group. For example, to meet theobjective quoted above, the strategic plan might be to gain a strong presence abroad, or it might be toacquire a competitor.

Tactical plans

Tactical plans are typically for a period of a year and represent detail as to how the strategy is to beachieved. For example, the tactics for achieving a strong presence abroad might be to approach foreigncompanies with a view to co-operation.



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Operational plans

Operational plans are very detailed short-run plans showing exactly what steps have to be carried out.Continuing the example from above, the operational plan would set out how and when goods are firstto be sold by our new trading partners, what prices will be charged, how the profits will be split.

(c) Briefing notes

To Mr MacDonald

From Consultant

Date Today

Subject The operational and financial arrangements envisaged for the Millennium Golf Club Ltd

1 Total demand projections

Members for the new club are expected to be recruited from two sources.

(i) Those currently waiting for membership of the two existing clubs (350).

(ii) Those who are already members of the two existing clubs (350 expected to changemembership).

CU50,000 of green fees and CU100,000 from the club house are also forecast, giving a break-even point as follows.

CUOperating expenses 450,000Century (100,000)

(50,000)Green fees300,000

Break-even =500CU

000,300CU= 600 members

The membership fees are substantially lower than those charged by competing clubs, and toencourage people to join in the first year of operation, no joining fee will be charged at that time.This, together with the high quality facilities that are to be offered, should mean that break-evenis achieved (600 members) and that the target membership of 750 is feasible.

To support the projections a market survey should be carried out to gauge the reaction ofmembers of the existing clubs and those on the waiting lists. It is important to assess totaldemand in the area and which of the clubs is potentially the weaker if cut-throat competitionresults.

2 Downside risk

The company is very highly geared, with an interest burden of CU125,000. To meet that amount250 members will have to be recruited. If a smaller than expected membership is recruited,income from the clubhouse will also fall. If the club fails, the receiver or liquidator will be able toavoid paying rent for the land and you will therefore have lost the use of the land, will not receiverent or interest and are likely to have lost the amount you invested in the debentures.

3 Upside potential

Some 200 acres of the farm are being leased to the new company on a 100-year term. Theincome you will receive from that will be CU25,000 rent and CU3,000 interest. Income from thefarm has been averaging CU90,000/1,200 = CU75 per acre per year, and this is expected to fall.The 200 acres rented to be leased to the golf club will earn a rent of CU125 per acre. Thereforethe current level of rent is attractive.

Another way of looking at the problem is that you will be earning an incremental annual return ofCU13,000 for an investment of CU20,000. The incremental return is likely to increase since rentsof agricultural land decline as the protection afforded from the CAP is gradually eroded.

Business strategy


In case agricultural rents should increase in the future, it would be an advantage to be able toadjust the golf club rent upwards in line with those.

4 Conclusions

If the club reaches its targets for membership (750), green fees and income from the club house,a profit of CU75,000 will be made. If membership is to be limited to 750, there is no greatpotential for increasing profits. All the profits are to be retained for the benefit of the club and itsmembers.

No dividends can be paid out to the shareholders.


UK employees

– Strategy 1 (-/+)

–

Eastern European employees

–

Strategy 2 (-/+)

Strategy 1 (-/+)


Shareholders


–

Avold

–

Strategy 2 (-/+)

Strategy 1 (-/+)


High

High

Low

Low

Interest

Power

(i) Bangladesh-based employees

The power of employees to stop or moderate any closure decision is limited. If the entire Bangladeshworkforce is united, then significant costs can arise from disruption. However, once the decision isannounced the employees at the site that is not to be closed have a much lower negative interest inthe decision. Indeed, from the perspective of self interest their employment might even be moresecure as a result of the closure of the other plant; hence they could develop a positive interest.

In general, however, existing employees would favour strategy 1 as there are fewer redundancies.

Perversely, if the redundancy payments are sufficiently high some employees may favour redundancy tocontinued employment and thus have a positive interest in strategy 2 (e.g. if they were going to leaveanyway).

(ii) Potential employees in Laos

Potential employees have probably not yet been specifically identified but they would have no powerto influence the decision in either case.

Clearly, once selected, they would have a strong positive interest in strategy 2, particularly if localunemployment is high and/or Supavac is offering better pay and conditions than local employers.

(iii) Shareholders in Supavac

The ability to maintain the Avold contract is essential to Supavac shareholders as it counts for 70% ofsales. The strategies under consideration appear necessary to reduce costs and thus maintain theAvold contract, even if not at volumes previously attained. The shareholders would favour the strategythat best achieves this, having regard to all other factors (such as quality, certainty of supply, transportcosts, labour costs).



2

The shareholders have the ultimate power to determine the direction of the company. While in theshort term the directors are empowered to make the relevant decisions, they can be displaced if theseare not in the interests of shareholders.

(iv) Avold

Given that Avold takes 70% of Supavac's sales, it has considerable power over Supavac and is likely tobe in a position to influence the decision of where production should take place. It will undoubtedlyneed assurances, if vacuum cleaners are to be manufactured overseas, as to quality and deliveryschedules. The ability of Supavac to cut costs will have an impact on its ability to deliver pricereductions.

Avold is interested in the reorganisation as vacuum cleaner manufacture is a competitive market, witha range of alternative suppliers available if Supavac fails to deliver cost reductions. (Alternatives arepossible as there is a element of judgement involved, given the information available.)


(a) Short term

Additional costs – using greener fuels, buying fairly traded products, rebuilding green areas,paying higher salaries

Reduced income – no sales to unethical purchasers

Distribution of wealth to non shareholders – giving to charity

Distorts focus – one more target for managers

(b) Long term

Avoids legislative imperative – will otherwise fall to Government to enforce and measures maybe more Draconian

May avoid financial penalties where behaviour is covered by legislation

Improves PR

Attracts ethical investors

Attracts ethical consumers

Improves staff morale


(a) Effectiveness of price reductions

The finance director has a stated objective of increasing sales revenue as far as possible and suggestsreducing prices to achieve this.

As a means of enhancing sales the following comments are relevant.

(i) Given the information on the population in Appendix II, 80% of the audience comes from socialgrouping A/B/C1.

It could be argued that going to the theatre represents a small amount of total expenditure forsuch groups, and therefore a rise in price may be possible to increase sales revenue.

Alternatively, in order to attract a wider audience (students, children, unemployed), pricereductions may help to raise sales revenues.

(ii) The pricing structure needs to be much more precise, i.e. it needs to take into account

Time of week and performance (students, cheap mid-week seats)

Ability of audience to pay and their income bracket.

Business strategy


(iii) It also assumes that the demand for theatre seats is driven largely by price. This is a very strongassumption. Non-price factors which would influence the demand would include the programmeof plays itself, actors involved, time of year, etc. The implicit assumption made by the financedirector is that, all other things being constant, reducing price will increase demand. One badlychosen programme of plays could reduce overall demand in a given season.

(b) Memorandum

To Members of the Rangpur Council

From ABC Consultants

Date Today

Subject The Foundry Theatre – Objectives and role

1 The nature of objectives

Objectives differ dramatically between organisations and in the way they are expressed. Themost obvious distinction is between open and closed objectives.

Open objectives contain no reference to a quantified target for the objective. For example, astatement such as 'we aim to increase our market share' is open. Thus there is no guidance on byhow much to increase the target of the objective nor over what timescale.

Closed objectives contain some quantified target value for the objective in question. Thefollowing is an example of a closed objective: 'Our objective is to increase our market share (byvolume) by 12% over the next three years.' This contains a criterion by which to assess thetarget volume. It gives a target (12%) and a timescale (three years).

The final point to be made about objectives is that as far as possible they must be consistent. It isimportant to have a principal objective in agreement with supporting objectives. It is the duty ofsenior management to ensure that objectives are consistent and avoid dysfunctional behaviour.

2 The objectives for the Foundry Theatre

2.1 Introduction

Examination of the objectives for the Foundry Theatre are best undertaken from a'stakeholder' viewpoint.

From the information given it can be seen that two of the objectives are 'open'. It is difficultto see how to assess the theatre against such open-ended objectives.

Clearly, in following the trust's objectives audience surveys could be carried out todetermine

Income bracket Residential area Frequency of attendance, etc

Thus, given the data in Appendix II on audience composition, this objective will be achievedif, all other things remaining constant, more C1/C2 males under 35 attend plays andconcerts.

The objective can thus be clarified and become closed.

2.2 Compatibility of objectives

Clearly the objectives put forward by the artistic director and the trust are mutuallyincompatible. If either objective is to be pursued to the exclusion of the other, stakeholderconflict is assured. If so, two possible (there may be more) outcomes become apparent.

The artistic director becomes disgruntled and resigns.

The trustees become disaffected and attempt to make changes at the theatre (in theabsence of more information on the memorandum of association of the trust, it isdifficult to say what power they have).



2

The next issue is to see whether the objective of the finance director is compatible with theother two.

The objective of increasing box office receipts is compatible with either of the other two.

(i) From the viewpoint of the artistic director, increasing audience figures (and thereforereceipts) will come from a small percentage of the metropolitan area's population (29%are A/B/C1) and these already provide 80% of the audiences of the Foundry Theatre.

(ii) Given the increased ability to pay of the A/B/C1 income groups, increasing theattendance price of tickets and a more challenging series of plays may satisfy both thefinance and artistic directors.

(iii) From the trust's viewpoint, putting on less 'difficult' plays and increasing the number ofpopular touring reviews/plays may well boost audiences. Therefore reducing price maywell enhance demand in volume terms, thus increasing box office receipts overall.

2.3 Prioritisation of objectives

There is an additional important element here and that is the amount of government grant.Appendix III shows the amount of government grant the theatre has received since2000/2001.

The percentage of revenue accounted for by government grants is less important than theamount. It can be seen to have grown very little (compound annual growth of just 1.5%between 2001/2002 and 2006/2007). In real terms this has almost certainly fallen.

A critical issue facing the theatre therefore is its role as a subsidised theatre.

The current government is not disposed towards subsidies. There appears little hope of thegrant increasing as a source of revenue.

The most important objective therefore is for the theatre to increase its box officerevenues. Failure to do so (given no growth in subsidy) will eventually diminish the theatre'sability to stage its own productions.

The reduced ability to stage its own productions means that the artistic director's objectivecannot be achieved.

3 Conclusions and recommendations

The main conclusions are as follows.

Increasing box office revenue is the primary objective for the theatre.

The finance director's assumptions on how this may be achieved are questionable.

Audience research should be carried out re frequency/preferences, etc. This will provideinformation as to programmes and willingness to pay.

The increased revenue appears likely from three principal sources.

– Increased prices to current A/B/C1 theatre-goers and a challenging programme.

– Lower prices to C1/C2/D income groups with a change in programme emphasis to'popular' plays/musicals.

– Perhaps a combination of both of these could work with plays/shows at varying pricesduring the week.

Using the atrium space to provide a restaurant/café would probably increase non-theatreaudience and thus provide an additional source of revenue.

Business strategy


Chap - 2 the Purpose of a Business

Documents

business strategy40

corporate strategy

sort of goals

appropriate goals

facets of corporate

objectives3 stakeholder

accountants report

stated mission