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Chapter 1
Business Objectives, Resources and Accountability
Contents

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Introduction

A. Business Objectives
Corporate Aims
Corporate Objectives
Objectives, Growth and the Business Life Cycle
Corporate Strategy

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B. Business Resources
Land
Labour
Capital
Entreprenuership or Management Skills
Suppliers and Customers

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6
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C. Accountability
Stakeholders
The Interests of Stakeholders
Conflicts of Interest
Stakeholder Influence
Ethics

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Business Objectives, Resources and Accountability

INTRODUCTION
What is business all about?
This is a very broad and difficult question to answer quickly. In this manual we shall explore a
number of different aspects which should start to help you understand the nature of
business. We start here with a look at some basic concepts which underpin the way in which
business is conducted.

A. BUSINESS OBJECTIVES
All businesses have some sort of aim or objective. The first one you would probably think of is
to make money. People don't go into business purely for pleasure - they have to invest time
and money into the business enterprise, and expect to get something back for that
investment. Except in very exceptional circumstances, where very rich people carry out
activities for which they want no return, or where the activities are carried out in the public sector
for the "good of the public", business is conducted by private individuals seeking to at least
make enough money for them to live.
However, that is a very simplistic answer and masks a number of other considerations we need
to take into account. For example, it may not be possible for a new business to make money
from the very start. So, its objective will be survival - to get and keep a toehold in the market
from which it may build and make money in the future.
Straight away, we have identified two slightly different objectives and these will apply at
different stages in the development of the business. In fact, there are many different
objectives which different types of organisation may pursue and indeed an organisation may try
to achieve different ones at various times. These evolve and change in priority as
businesses develop and grow.
What is not in doubt is that all businesses have some sort of aim or objective. This may be
clearly identified, and even written down and published, or never properly clarified but just
understood by those involved with the business. If the business has no objective, then it
becomes impossible to determine what to do - a business is set up for a purpose and its
objectives will relate to that purpose. And if the business loses sight of its objective, or fails to
achieve it, then it is very likely to close.

Corporate Aims
A corporate aim is simply an intention of what a particular business is trying to achieve and how
it seeks to develop in the long term. It is intended as a shared vision that all
stakeholders in an organisation will agree with and work together to achieve. We shall
consider stakeholders later in the chapter, but for now we can assume them to be all people
and other organisations which have an interest in the business.
So, corporate aims can benefit a business in that they help create a team spirit and a
commitment to that business. They are, though, also vital if the business is to succeed in the
market place, whether that be a local high street or the regional, national or international
market. This is because they will dictate what the business actually does. All the activities of the
business will be carried out to achieve the overall aims. Without these stated intentions, the
business will lack direction and their can be no clear purpose for its actions.
Many businesses do, in fact, spend a great deal of time considering exactly what their aims
are and then carefully write them down so that all their stakeholders are fully aware of the
vision for the business. However, it can often be difficult to create a specific set of aims for a
business, particularly for a large, well established organisation, which encompass all that it

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wants to achieve. As a consequence, many others do not spell them out in any detail - for
example, small businesses - and rely on them being generally understood.
The aims of the business need to be more than words written down on company letter
heads, though. If they are to have any real purpose, they need to be put into practice as the
basis for action. The way in which this happens is through the objectives which are derived
from them.

Corporate Objectives
Corporate objectives are, in effect, the intermediate targets that a business must meet if it is to
achieve its longer term corporate aims.
An objective is a specific target that is sought after. Just like you and I will have our own
targets of, for example, losing weight and getting fit, securing a well paid job, or passing the
ABE examination, all successful businesses have objectives which they will organise their
activities to achieve.
However, as a business increases in size, the more complex and difficult it is to ensure its
actions are directed towards achieving its common goal.
In effect, the corporate objectives of a business are the long term direction that the owners
want the firm to work towards. This should be communicated on a regular basis to the
workforce so that all workers work together. It is important is that these objectives should be
understood informally rather than simply written down. For a business to succeed, objectives
need to be more than just a series of words; they need to mean the same thing to all staff.
Whilst each business will adopt its own unique and individual corporate objectives, many are
common and can change through the life of a business. Typical objectives include: survival,
break even, growth, profit maximisation, market share and diversification.

Objectives, Growth and the Business Life Cycle

Some businesses will set objectives for different time periods: short term objectives for the first
year of trading - medium term for those targets set from year two up to perhaps years 4 and 5,
and long term targets for years 6 and beyond. Not surprisingly, targets will often
change over the life of the business. For instance, the short term targets will often be
specific, such as survival. In the medium term, targets will often relate to the size of the
business and how it will grow, for example, by increasing sales turnover by 25%. In the
longer term, the targets will be less specific, reflecting the difficultly of long term planning
through such objectives as product diversification.

Survival is the first objective of a business, that is, to reach a sustainable sales level
that allows the firm to break-even. When many businesses first begin trading they
have many costs that need to be recovered - loans, advertising, etc. Therefore, before
a firm can begin to make profit to reward its owners, it needs to recover these costs.
Break-even is the point at where Total Cost = Total Revenue. Unless a business can
achieve this objective it will close as soon as its initial capital is exhausted. Once a firm
has reached a sustainable level of sales it might change its objective to one of profit
maximisation. Often, though, the main objective of a business is to remain in
operation. New businesses are risky and most of those that fail, do so in the first year
of trading. This is often because the owner may lack experience and it takes time to
build up a customer base. Survival might also be an objective if the business is
suffering from low sales during a recession.

Profitability is essential if enterprises are to continue in business in the longer term.

The level of profit is important to those stakeholders who depend on the organisation
for an income - it must be sufficient to make it worthwhile to retain the assets in that
line of business. Economic theory says that businesses should have the overriding
goal of profit maximisation. This is because it is a measurable objective that can be

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applied to all types of business. In practice, firms are unlikely to try for it all the time;
they will seek to achieve some accounting measure like a level of return on capital
employed (ROCE) or income per share.

Market penetration is an important short-term objective when a firm enters a new

market and wants to achieve a viable level of sales. For example, a firm may set a
target of 15% of the market, to be able to earn enough profit to cover the cost of entry.

Market share is often a longer term objective. The larger the share of a market the
more dominant a business can become, for example by setting price levels. This is
linked to competitive advantage whereby a firm attempts to achieve and maintain its
position in the market.

Sales maximisation is an objective which appeals to managers who are paid bonuses
linked to increases in revenue. Managers can often pursue their own objectives so
long as they make enough profit to keep the shareholders happy.

Business growth. By increasing in size, a business can find it easier to survive.

For example, by diversifying into different products and markets, a firm can take
advantage of economies of scale thereby increasing both the size and the profits of the
organisation. Some people believe that business growth can help protect the business
from unwanted takeover bids.

Revenue maximisation can be the prime objective of organisations like bus

companies that are paid a subsidy by a local authority to run rural services.
The subsidy covers the cost of providing the service after allowing for a certain number of
ticket sales and any additional revenue is a bonus for the firm; there may be all sorts of
special offers to get more people to travel. It is also the objective of charities subject to
minimum costs.

Diversification. To reduce the risk it faces, a business may seek to produce different
products in different markets. Therefore, if one of its products fails to achieve its sales, the
business has sufficient other products to ensure that the business continues to trade and
not go out of business.

Satisficing is likely to be the realistic objective of large organisations with several

divisions or subsidiaries. It is impossible for the enterprise to pursue one single
objective. Because all the parts of the firm may have different goals, a minimum level
of achievement is set for the organisation as a whole. It is said to "satisfice" instead of
maximise. Setting an overall minimum avoids conflict between the parts of the
organisation.

Level of service is the objective of organisations in the public sector and in not-forprofit areas. They may aim at the highest possible level of service or at the best
attainable service for a given cost. The Health Service is an example. Business firms also
have a high standard of service to customers as an objective. It is an increasingly
important method of competing.

Technical excellence is an objective of research organisations and engineering firms.

Innovation and technological advances may be seen as more important than sales or
profit maximisation. The pursuit of excellence may bring the kind of reputation that
builds sales and profit in the longer term, Rolls Royce cars are a good example.

Organisations may have other objectives like environmental protection and staff
development. Whatever objectives they try to achieve, singly or together, the ultimate aim is
survival.

Corporate Strategy
Once objectives have been established the owners of a business need to ensure that they
have, in place, a plan to ensure that these objectives are achieved. This is, in effect, their

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corporate strategy. It is a plan of action for a business once it has agreed upon its corporate
objectives. At a basic level, a corporate strategy would consider major issues such as which
industries the business should operate within.
An effective corporate strategy details the steps needed to achieve its goals whilst taking into
account any consequences for the human, financial and production resources of the
business. So, next we must consider what resources a business needs to operate.

B. BUSINESS RESOURCES
For a business to be able to produce goods and services, it needs access to resources.
Resources are the inputs into processes which turn out products - goods and services which can be provided for consumers, usually for a price,
There are a number of ways in which resources can be categorised. One common one,
used by economists, is to consider three "factors of production":

Land
Labour

Capital.

In recent years, many economists have argued that there is a fourth factor entrepreneurship. This is the particular ability of certain individuals to use the first three
factors in innovative ways which enables businesses to start up and flourish. It could also be
thought of as management ability, a particular skill in getting the best out of the other factors at
the disposal of the business to help it achieve its objectives.
Whilst these cover the main resources, though, they are not sufficient in themselves to
enable an enterprise to carry out business. There has to be a market within which the
business can operate - a place where goods and services may be traded, usually for money.
This can be a physical market, as in one with stalls or a high street of shops, or the network
of connections which enables the flow of goods and services between businesses and their
customers (which may be other businesses). In other words, there has to be suppliers and
customers.

Land
This is used in two senses:
(a)

the space occupied to carry out any production process, such as the space for a
factory or office

(b) the basic resources within land, sea or air which can be extracted for productive use,
such as metal ores, coal and oil.
Land is often referred to as a natural resource, but it does not come without a cost. Land is
invariably owned by someone and that person or persons will want a price for its use - in terms
of rent - or for its sale. The extraction of materials from the land (or the sea or the air) also
incurs a cost - in mining coal, for example.
In addition, you need to remember that land is a finite resource. There are two important
consequences to this:

There is only a limited amount of it and, once used up, it cannot be replaced (or at least
not easily). Thus, there is increasing concern with the potential for over-exploitation
and over-usage.

Where land is scarce, there is great competition for access to it and this drives the
price up - think of the price of housing or office space in the most crowded cities in the

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world, such as London or Mumbai. This also applies to the availability of the raw
materials extracted from land and is reflected in, for example, the price of oil.

Labour
Labour covers any mental or physical effort by humans used in a production process. Some
economists see labour as the ultimate production factor since nothing happens without the
intervention of labour. Even the most advanced computer owes its powers ultimately to some
human programmer or group of programmers.
Every economy has a workforce - i.e. the total number of people who are available to work, for
gain, to produce goods and services. In the UK this is approaching 29 million people. A
workforce has a number of characteristics which define it:

Its physical characteristics, not just simply in terms of the overall numbers, but men and
women, age range (proportion of younger or older workers), etc. which are important in
defining the types of jobs which may be done.

The skills of the workforce. Businesses need people with particular abilities in order to
carry out the work required. Some jobs require only a bare minimum of skill, but others
are very highly skilled, which usually means that only a relatively few people are able to
do them.

The availability for work - full time, part time or temporary. We could consider the
hours for which they are available, which may be significant for shift work. There is
also the question as to how many are already in work and, therefore, not currently
available (in the short term).

The geographical location - where they are (locally, regionally, nationally and even
internationally).

No business is able to achieve its corporate objectives without maximising the human
resources at its disposal. It is increasingly accepted that the workers are the most important
resource in any organisation. Indeed, by carefully selecting the right employees, monitoring
their performance and rewarding their achievements, the business achieves its corporate
objectives.
Note that, again, labour is often scarce - and getting the right people for the business comes at a
price. People demand a return on their labour - a reward in the form of money (wages, etc.) and
perhaps other things in terms of the working conditions or the job itself. And the more scarce the
right people are - those with the physical characteristics, skills and
availability required - the more they cost.

Capital
This is also used in several senses, and again we can identify two main categories:
(a) Real capital consists of the tools, equipment and human skills employed in
production. It can be either physical capital, e.g. factory buildings, machines or
equipment, or human capital - the accumulated skill, knowledge and experience
without which physical capital cannot achieve its full productive potential.
(b)

Financial capital is the fund of money which, in a modern society, is usually

needed to acquire and develop real capital, both physical and human.

Throughout its life, a business will need finance as a resource. At the outset, a business
requires finance to pay for the assets it needs to survive. It needs to ensure that it has
sufficient money flowing into the business as revenue from selling goods and services to at
least match the expenditure required to pay for items such as wages, raw materials and so
on. If it cannot do this for a prolonged period of time then it is likely to fail and cease trading.

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Furthermore, a business needs finance to grow by purchasing the additional assets needed for
expansion.

Entrepreneurship or Management Skills

For a business to become established, grow and become successful, management skills are
vital.
In the first instance, most businesses need someone to take a risk and have the necessary flair
and skills to set up and run a business. They need to see an opportunity to create a business
in a particular market - which may or may not already exist - and have ability to bring together
the necessary resources (land, labour and capital) to exploit that opportunity. Examples of
successful entrepreneurs include:

Sir Richard Branson, who created the Virgin companies, starting from a small record
business and developing the brand into a number of other markets as diverse as air
travel and banking

Lakshmi Mittal, who built up a multinational steel business from very humble
beginnings in India by seeing the opportunity to acquire poorly performing steel making
plants and making them profitable

Bill Gates, who founded Microsoft and exploited the opportunity of creating a
standardised, efficient and effective operating system (Windows) for personal
computers based on IBM's initial work on a system called MS-DOS (which it did not
see the potential in).

Seeing the initial opportunity and having the ability to exploit it, is not the end of the story.
For a business to be successful, it requires the ability continually to use the other resources
to maximise achievement of objectives over time, as those objectives change and become
more diverse. This is less dependent upon that one individual - the entrepreneur - although
the business still needs to be able to spot opportunities and exploit them. As the business
grows, it needs increasing numbers of people who can motivate, inspire and lead teams of
workers, acquire the financial and land resources at an economic price, and develop
relationships with the suppliers and customers in the market, all to enable the business to
move forward. These are the managers of the business who plan, organise, direct and
monitor its activities on a day-to-day or year-by-year basis, ensuring that it continually has
the right objectives to meet the corporate aims, the right strategy to enable the objectives to be
met, and carrying out the right activities in the right way to achieve those objectives. This is the
essence of management.

Suppliers and Customers

Very few businesses have all the resources they need in order to carry out the activities
needed to achieve their objectives. They need the support of other businesses to provide
them with access to the resources they need - intermediaries who, themselves, are in
business to supply those resources. Thus, there are businesses which exist to supply
financial capital - the banks and other financial institutions - and others who supply the raw
materials extracted from land. Yet others supply access to land needed to carry on the
business (estate agents providing access to office space or factory space) or to labour, such
as recruitment agencies.
But firms do not just need raw materials extracted from the land. The resources they need
are refinements of those natural resources - steel made from iron ore and other materials, or
steel shaped into particular forms which the business can use, or wheat refined into bread, or
cotton and wool made into particular forms of clothing, or plastics made from oil and
processed into particular shapes for the bodies of mobile phones, etc., etc. Thus, all
businesses have a "supply chain" which provides them with the resources they need to
produce the goods and services they specialise in, and they need to develop relationships

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with the businesses which produce the items within that supply chain, so that they can
acquire them at the right price and at the right time for their own needs.
The relationships inherent in this are themselves part of the market and subject to the forces of
supply and demand which push prices up or lower them according to their scarcity. As
markets develop and become more complex, this can lead to some suppliers having a great deal
of "market power" which they can exploit by charging higher prices. As a result, a
business will seek to adopt a number of strategies to minimise this threat - for example,
undertaking some of the supply operations themselves (often by purchasing a supplying firm) in a
process of backward vertical integration, or buying from a range of possible suppliers to reduce
its reliance on any one supplier.
Supply of resources into the business is, again, only part of the whole story. The business
has to get its products out to its customers and that involves identifying who their customers
are, alerting them to the availability of the goods and services produced, and getting them to
purchase those goods and services from the particular firm, as opposed to from a competitor.
This is the essence of marketing which we shall look at in detail later in the manual.

C. ACCOUNTABILITY
Accountability is the process by which a person or persons is required to report to others on
(held to account for) the exercise of responsibilities given to them those others. It is an
important concept in business where it is the mechanism for ensuring that information is
provided by a firm's management to the owners, and others, about progress in achieving the
firm's objectives. It also applies to different levels of management, where subordinates need to
report to their own senior management about what they are doing and how successful
they are in meeting their objectives.
Thus, management will provide reports on the various objectives given to them by the
owners of a business and for which they have the responsibility for achieving - for example,
such financial objectives as profits, cost reductions, sales volumes, etc. and other objectives
such as market share, product development, impact of marketing campaigns, etc.
We noted above that the accountability of managers is to the owners and others. Who are
those others?
Whilst the owners are clearly those who are most directly concerned with the success of a
firm, there are many others with an interest in its performance. For example, its employees
will be concerned that it remains financially sound so that their jobs are safe, and the
government will want to know how it is doing so that it can levy the right level of taxes. We
have also seen that corporate objectives extend beyond simply those concerned with
financial measures, such as level of service or technical excellence. There will be people
with an interest in the firm's achievements in these areas, such as customers and suppliers.
In fact, there are very many people, apart from the owners and employees, who have an
interest in the success or otherwise of a business's performance. We call these people
"stakeholders" - because they have a stake in what a firm is doing - and all businesses now
need to take their responsibilities to these stakeholders seriously.

Stakeholders
Perhaps the most obvious definition of a stakeholder is anyone with an interest in the
success of a business. The importance of the stake depends on their relation to the
organisation.
The conventional view is that the managers of a business are accountable to the owners of
the organisation i.e. the shareholders. As a result, the managers must ensure that their dayto-day actions are based upon what they believe is in the best interests of the owners. In

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recent years, an alternative view has developed, based upon the idea that managers are
also accountable to other stakeholders, such as employees and the community.
Stakeholder analysis presents a different perspective on the environment of business.
Here, we are concerned with the immediate relationship between the business and all those who
have an interest in it. What is crucial to this is what this interest is and what influence the holder
of that interest may be able to exert on the organisation. The interests themselves are not
necessarily financial, but can encompass social, ethical and moral issues.

The Interests of Stakeholders

The key stakeholders and their interests can be seen as follows.
(a)

Owners
The owners of a large business will be the shareholders and some of these are likely to be
institutional investors from major investment organisations such as pension and insurance
funds, investment and unit trusts. These institutional shareholders may well have large
blocks of shares and take a more active and informed interest in the
business than a typical private shareholder might.
The key interest for the owners of any business is going to be profit. For shareholders,
that is likely to be just as clearly focused on dividend payments, but they will also have
an interest in overall business performance, especially as it could affect share prices.

(b)

Workforce
The workforce encompasses both managers and workers and it has to be recognised
that they often have different interests, although usually centred on jobs and pay.
At one extreme, there are the directors, a group of individuals elected by the
shareholders and responsible for formulating overall company objectives and strategies for
the business. This is with the interests of the shareholders in mind, so the success or
failure of those objectives and strategies will be judged by such indices as share
price of the company, profitability, dividend, market share, etc. Their own remuneration will
very often be linked to this, reinforcing the requirement to act in the sole pursuit of those
objectives and strategies. The directors are accountable to shareholders for the
performance of the business and will not wish to provoke any adverse stakeholder
reaction which may jeopardise their positions.
The directors will be supported by a team of managers who are, in general, salaried
employees. They are likely to working to specific targets and will have an obvious
interest in how successfully these have been achieved. The outcomes will have effects on
management job security and promotion prospects, as well as their remuneration
packages. In general, then, they will have an interest in the success of the business
overall, but will be more particularly concerned with objectives closer to their division or
section and level of authority and responsibility.
Members of the general workforce and, possibly, their representatives in the form of
trade unions, are likely to be primarily interested in jobs and pay, - for example,
protecting jobs, job security, job satisfaction, improving current pay levels, pensions, etc.
To some extent, their ability to do this, and also the ability of their unions, will be linked to
the overall success of the business.

(c)

Customers
Customers are external to the business and their interests reflect this. We would
expect them to be concerned with issues such as price, product, quality and customer
service levels. Customers may well have an ambivalent attitude to profit, recognising
that firms need to make profit, but also realising that large profits can result from

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customer exploitation. There may also be an interest in the continued existence of the
business. After all, customers might want to buy again.
(d)

Suppliers
Suppliers look for lasting business relationships and fair treatment. The continued
survival of the business is important in relation to future orders. However, suppliers
also have a clear interest in the ability of the business to meet its obligations.
Most large businesses have a range of suppliers who have supplied products and
services on credit terms. These creditors need to be assured that payments will be
made. This extends to lenders as well, who will want guarantees about interest
payments and the eventual repayment of the loan.

(e)

Creditors
Creditors have a direct stake in private sector businesses. These are the banks and
other financial institutions that lend money to businesses. They want the businesses to
succeed so that the loans and interest charged are paid on time. If a business does
not repay its loan, the bank may sell the businesss assets to get its money back.

(f)

Competitors
In recent years in many industries there has been a growing interest in what the
competition is doing. Overall business performance, as evidenced by sales,
profitability, growth and innovation, is important to competitors. It is increasingly
common practice for businesses to establish benchmarks based on various
performance indicators of other companies, especially companies in the same industry,
which can be used to help shape their own strategies and policies.

(g)

The State
The State should be taken to include local government as well as central government.
The State's immediate interest is in the ability of the business to meet its tax and social
security obligations. In the short term, this is a question of cash flows of individual
businesses. However, there is also a longer term interest in relation to overall
employment levels and the contribution to general prosperity, which the businesses in
general and occasionally particular business organisations, could deliver.

(h)

The Community
The term "community" can be taken to include all those with whom an organisation has a
relationship that is not a direct business relationship.
This will include local
communities in which businesses operate, as well as a range of pressure and interest
groups of various kinds, concerned with the particular type of business or the impact of its
activities on the environment in general.
In the local community, there will be interest in the overall business performance of
organisations as it affects local employment and prosperity. The success of many
small local businesses is likely to be linked to the continued presence and success of
big local businesses. However, there may be other issues related to the quality of life,
such as land use, pollution, traffic flows, etc. which affect the local community.

Conflicts of Interest
By recognising the needs of different stakeholder groups, incorporating them into their own
objectives and taking action to meet them, a business can reap many benefits such as
attracting new customers, retaining and recruiting high quality employees. This can, in turn,
increase the likelihood of it achieving its owner's prime objectives of growth and profit
maximisation.
However, there are a range of stakeholders with a range of interests and their different views
and perspectives will all have an influence on the decisions taken by a business. It takes

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11

only a cursory examination to see that, while all have an interest in the success of a
particular business, there is plenty of scope for conflicts between them. It is highly unlikely that a
business can satisfy all its stakeholders at the same time (balancing the need for
increasing the wages of workers against the shareholders desire to maximise profits) and so,
conflicts can and do occur.
To examine some of these issues of conflict we can consider a scenario that is not all that
uncommon. A company decides to outsource the supply of a major component, for example, a
car producer in the UK may decide to have its car seats manufactured in Eastern Europe instead
of at its UK plant.
The underlying reasons for the action are likely to be to reduce costs and boost profits; a
decision taken by the directors in the interests of the shareholders. The impact on other
stakeholders might be along the following lines:

The workforce is going to see job losses. They may also see that this move could
mean further outsourcing in the future, which threatens job security. Middle and junior
management staff may also face redundancy.

UK suppliers will be possible losers as they see supply contracts ended.

The State will lose out in lost tax and social security contributions and will also face
increased spending on unemployment benefits and other social support. There will
also be the impact on the country's balance of payments position as imports rise.

The local community will also experience losses, as local incomes and spending fall, as
well as possible falls in local land values. This will obviously affect retail and leisure
operations and there may be further secondary local job losses.

It is possible to see that there might be scope for some compromise in this situation.
For example, the workforce or the trade unions might offer to accept pay cuts and/or changes to
working practices, to deliver cost savings to the company. Company management might be
prepared to postpone the implementation of the policy, in an effort to show willingness to
compromise. The State might offer the business some level of subsidy in return for an
undertaking not to move the business overseas.
The key point here is that in any situation where stakeholder interests conflict, there can be
scope for resolving the problem or for some form of compromise.
Another dimension to conflicts of interest is that their intensity can change over time and in
response to changing circumstances. A significant factor is the impact of the economic
business cycle. This cycle affects market economies over time and results in a cycle of
recession, recovery, boom and then downturn to the next recession. The general level of
activity in the economy is affected, in particular, spending levels, output volumes,
employment and profits.
As an economy slides into recession after a boom, competition becomes more intense as the
same number of businesses competes for a shrinking level of spending. In this environment,
conflicts between stakeholder interests will be sharpened, as businesses take action to
protect sales and profits by a range of policies involving cost cuts and laying off workers.
Consumers may appear to benefit from lower prices, but then some consumers may also find
their purchasing power reduced by unemployment. Business failure rate will accelerate
leaving problems for trade and financial creditors.
As recovery leads to boom, conflicts of interest tend to be lessened. In an environment
where most firms are experiencing rising sales and improved profit margins, output levels are
also likely to be rising as well as employment rewards. It is going to be much simpler to meet the
interests of the various stakeholders as, if the cake is getting bigger, it is possible for
everyone to have a larger slice.

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Business Objectives, Resources and Accountability

Stakeholder Influence
Up to now, we have considered stakeholders as reactive, responding to events that affect
their interests. In practice, some stakeholder groups tend to take a more proactive approach
by trying to influence and shape policies and events in ways which further their interests.
We can see this by examining the ways in which stakeholders act in their interests.

Amongst owners, perhaps the key shareholders are large institutional investors, such
as investment and unit trusts, pension funds and insurance company life funds.
These investors will have very substantial funds to invest and professional fund
managers seeking the best possible returns. These fund managers will try to exercise
their very powerful influence on boards of directors to produce profits and dividends in
line with the funds' expectations. These influences can be very strong in shaping
business objectives and strategy towards the interests of shareholders. The impact of
these policies may be less beneficial to other stakeholders such as workers and
consumers.

Financial creditors, particularly the banks, may also seek to influence the ways in which
businesses are run. The chief interests of these stakeholders are likely to be interest
payments and the eventual repayment of loans. Even if loans are secured on company
assets, these creditors would rather see loans repaid by a viable business than have to
recover their investment by having to sell off the business' assets. These creditors may
seek to influence business policy to protect their interests.

The workforce may decide to make their interests more prominent, usually in an
organised way, operating through trade unions. Trade unions can take a range of
actions to promote the interests of their members for improved pay and conditions and job
security. Action can include strike action, working to rule and overtime bans.
Establishing the interests of the workforce as dominant at a particular time is likely to have
an effect on other stakeholders - for example, a business may concede a pay claim if it
feels it can pass on the higher costs to customers.

Customers themselves can also exert influence. In general, consumers are much less
organised than workers or management and consequently their pressure tends to be
less focused. However, customers can exert their interest through what they choose to
buy, or not to buy. Where there is a general consumer movement, as in concerns
about food quality and growth in demand for organic foods, changes in consumer
spending can impact significantly on company profits and force businesses to change
policy. This can be seen in the increasing demand for particular levels of quality in the
delivery of services or the standards of products. Similar effects can result from
straightforward changes in consumer tastes and preferences and in concerns for the
environment, which could affect business in issues as diverse as packaging policy,
labelling and control of emissions.

Companies, acting as customers themselves, expect their suppliers to meet stringent

quality standards and this is especially important when just-in-time production methods are
used. Firms are aware that their customers judge them on the quality of their
products. If a component supplied by another company fails, the customer blames the
maker not the supplier of the faulty component. This is why Jaguar instituted a quality
programme for its suppliers and worked with them to improve standards - the aim was
100% reliability and Jaguar insisted that if any part failed, no matter how small, the
supplier of it would pay all the costs of repair and of providing the customer with a
replacement vehicle. Companies like Marks and Spencer have their own quality
control inspectors working in their suppliers' factories.

In the public sector, quality standards have often been incorporated in customer
charters and performance is examined to see if standards have been met.
For example, the Inland Revenue has guidelines for the maximum times to respond to

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13

taxpayers' queries on different matters and for making refunds of overpaid tax.
Railways have standards for punctuality and regularity, and if trains do not meet
published targets in these areas, customers should be compensated. Not all of these
schemes are yet working well, but there is a continuing effort to respond to the interests of
customers and raise standards of performance.

Consumers can also exert influence by bringing pressure to bear on the State to enact
legislation that furthers their interests, such as the Trade Descriptions Act or the Sale of
Goods Act. In this way, one group of stakeholders may seek to gain influence through
other stakeholders. This can also be seen in the practices of some pressure groups
acting on behalf of the environment in seeking to influence both government policy and
shareholders.

The State can exercise obvious influence through the tax and spend system or through
interest rate or exchange rate policy. These polices have general effects - for
example, an increase in interest rates will raise the costs of business in general with an
on-going impact on a range of stakeholder interests. In some cases, the effects are
more specific in that they affect individual firms and industries - for example, tax
policies on tobacco or oil products.

The influence of government can also be seen in relation to its own spending priorities.
If the Government decides to switch spending from defence to health services, this will
have effects on a range of businesses in both industries. It may also offer subsidies to
support particular businesses where their success will further the governments policies,
such as in regional regeneration.

Overall, the various stakeholders will seek to use whatever influence they may have to
strengthen their interests. It should also be clear that some stakeholders are in a better
position to do this than others.
There is concern about the primacy of shareholder and director interests and increasingly,
enterprises are judged by their customers and others, on their behaviour as much as on price
and product. One impact of this is that organisations have developed policies which deal
with business ethics.

Ethics
An ethical code of conduct that seeks to prevent directors and other senior managers
exploiting their position would cover the following areas:

The duty of managers to take account of the interests of all stakeholders in the
organisation, including the general public, as well as to make a profit.

The need to have regard to the safety of workers and users of products.

Avoidance of bribery and corruption and of giving excessively large gifts or generous
contract terms, even in countries where these practices are accepted.

The principle that managers should not misuse their authority for personal gain.

The need to respect confidentiality of customer and supplier information.

Making every effort to comply with good business practices, such as paying on time
according to terms.

Many businesses now adopt policies that attempt to recognise and take account of a
much wider range of stakeholder interests. This is often referred to as satisficing (a
combination of the words 'satisfy' and 'suffice') and reflects a strategy based on
compromise between objectives rather than maximisation of just a narrow range.