Unit 4a Making Business Decisions

Edexcel Business Studies A level Unit 4a Revision Pack

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How to revise1. Use your own notes as your basis for revision. 2. I have used a number of examples in this pack

that you would not be expected to know about. The syllabus does not require that you learn any specific examples.

3. If you don’t understand any of the concepts, use your own notes, or textbooks, or teachers, or friends to improve your understanding.

4. Don’t forget that knowledge of the concepts is only part of what you are tested on. Application, Analysis and Evaluation are all equally important. The comments given in this pack provide some examples of how the basic content might be extended to provide application and analysis.

4.3.1a Corporate objectives & strategyThis section of Unit 4a looks at how businesses

arrive at their targets (i.e. their objectives), and how the ways in which they operate and their broad strategies help them to achieve those targets. The specification covers the following sub-sections:

1. Corporate objectives 2. Shareholder influences on corporate

objectives 3. Corporate culture 4. Corporate strategy

4.3.1a(1) Corporate objectivesQ1: What is a corporation? A: Another name for a limited company or

large public sector organisation. Comment: For example, the tax paid by

limited companies on their profits is known as ‘corporation tax’. And local governments are sometimes referred to as corporations e.g. City of London Corporation.

4.3.1a(1) Corporate objectives

Q2: What is a mission statement? A: A brief explanation of the ultimate purpose of

a company. Comment: The use of the term ‘mission

statement’ is an example of businesses using the language of religion. Simply making money is not enough to keep most people motivated, so businesses seek to convey a higher purpose.

4.3.1a(1) Corporate objectives

Q3: How are mission statements (or vision statements) constructed?

A: Normally by focussing on the customer and the values lying behind the product range.

Comment: E.g. Starbucks, “to inspire and nurture the human spirit – one person, one cup and one neighbourhood at a time.” Google aims to “organise the world’s information, and make it universally accessible & useful.”

4.3.1a(1) Corporate objectivesQ.4 What makes a good mission statement? A: One that focuses on the ultimate values of

the company rather than product details. Comment: For example, the previous

Starbucks mission statement concentrates on community and the possibility of uplifting social occasions in their stores, rather than the coffee itself.

4.3.1a(1) Corporate objectivesQ5: How long should a mission statement be?

A: The core statement is often better if it is very short, perhaps 30 words as a maximum.

Comment: Expanded versions often explain a handful of core values too, such as the way the company intends to treat its stakeholders.

4.3.1a(1) Corporate objectivesQ6: What are corporate objectives? A: These are the targets which a company will set itself, and which will help it fulfil its mission

statement. Comment: Typically, a company will have a whole range of corporate objectives. Some will be

made public, and others will be kept confidential so as not to give an advantage to competitors.

4.3.1a(1) Corporate objectivesQ7: What sort of target is normally mentioned in a corporate objective? A: Financial targets, such as growth in profits or turnover, or physical targets such as

growth in market share, diversification, or penetration of new markets. Comment: While increased profit is normally the ultimate financial aim, sometimes

the best way of achieving this is to concentrate on intermediate aims.

4.3.1a(1) Corporate objectivesQ8: Over what time period are corporate

objectives normally set? A: Most commonly a year. However,

depending on the objective, time periods of up to five years or down to three months, or even a month, are also used.

Comment: The usual way to achieve any objective is to break it down into a raft of smaller objectives.

4.3.1a(1) Corporate objectivesQ9: Are ‘corporate aims’ more like mission

statements or corporate objectives? A: Confusingly, the phrase ‘corporate aim’ is

used in many different ways, either to mean ‘mission statement’ or to mean ‘corporate objective’ or to mean ‘longer-term corporate objective’. In this specification, it is identified with mission statements.

Comment: Words with many similar meanings are normally best avoided in examinations.

4.3.1a(2) Stakeholder influences on corporate objectives Q 10: Who are the main groups of

stakeholders in a company? A: Shareholders, employees (including

managers & directors), customers, suppliers and the wider community.

Comment: The ‘wider community’ includes both the immediate locality, and also more generally the government and the taxpayer, as the company will generate tax revenue for the government.

4.3.1a(2) Stakeholder influences on corporate objectives

Q11. Why do shareholders have the last word in the setting of corporate objectives?

A: Because they are the owners of the company and therefore have the ultimate rights over it, to keep it open or to close it, and to develop it how they wish.

Comment: In the case of large companies, this power is exercised through the right of shareholders to appoint the company directors at the Annual General Meeting (AGM). The directors then set the major corporate objectives.

4.3.1a(2) Stakeholder influences on corporate objectives

Q12: Do employees and suppliers share the common corporate objective of greater turnover?

A: Generally, yes. Greater turnover leads to more orders from suppliers, more jobs and more promotion prospects.

Comment: However, small suppliers may be discarded in favour of bigger rivals if the companies they supply grow fast, and equally employees may find outsiders promoted over their heads.

4.3.1a(2) Stakeholder influences on corporate objectives Q13: Do employees and suppliers share the

common corporate objective of greater profit?

A: Generally, yes. A proportion of profits are often reinvested in the company, leading to greater turnover.

Comment: However, there is a direct conflict of interest if greater profits are achieved by cutting the prices paid to suppliers, or the wages paid to employees.

4.3.1a(2) Stakeholder influences on corporate objectives Q14: Why might directors and other senior

managers be more interested in increased turnover rather than increased profit?

A: Because of the prestige associated with running a large company.

Comment: The remuneration package of directors is often deliberately tied to profit (or to the company share price, which reflects expected future profit) to give them an incentive to focus on profit too.

4.3.1a(2) Stakeholder influences on corporate objectives Q15: Why might the wider community share

in the common objectives of increased turnover and profit?

A: This will lead to greater tax revenue in the form of VAT on sales, income tax on wages and corporation tax on profits.

Comment: Additionally, local businesses will benefit as those wages (and perhaps profits) are spent in local shops and on local services.

4.3.1a(2) Stakeholder influences on corporate objectives

Q16: In what circumstances might the interests of the wider community conflict with those of a company?

A: If increased turnover led to external costs (i.e. adverse consequences), such as greater traffic congestion, noise or pollution.

Comment: In other cases, a local community might prefer to keep a large variety of smaller, more expensive shops rather than see them replaced by a larger, cheaper supermarket.

4.3.1a(2) Stakeholder influences on corporate objectives Q17: Give examples of unethical behaviour

that may increase profit in the short-term. A: 1. making false claims about, or concealing

defects in, a product 2. Paying suppliers later than agreed 3. Bribing employees in other companies to

win contracts 4. Secretly agreeing with competitors to

increase prices 5. Treating employees badly 6. Polluting the environment

4.3.1a(2) Stakeholder influences on corporate objectives

Q18: Which of the above only increase profit until you are discovered?

A: All of them, except the last one. Even then, it wouldn’t pay if effective legal or social pressure could be brought to bear.

Comment: Successful economies have mechanisms in place to ensure that wholesale, systematic cheating does not flourish.

4.3.1a(2) Stakeholder influences on corporate objectives

Q19: What sorts of businesses are most likely to attract companies that are prepared to be unethical?

A: Businesses that do not rely on repeat purchases, and can therefore conceal unethical behaviour from prospective purchasers more easily.

Comment: This includes car sales, builders, and some internet-based companies.

4.3.1a(2) Stakeholder influences on corporate objectives

Q20: Why are multinationals particularly likely to be accused of unethical behaviour in poor countries?

A: They may be held to account in rich countries with higher business standards, while operating in countries where certain unethical business practices (such as bribery to win contracts) is considered normal practice.

Comment: Multinationals face a real dilemma if operating in locations where it is impossible to make a profit without behaving in ways that are illegal (or considered unethical) back in their home country.

4.3.1a(2) Stakeholder influences on corporate objectives

Q21: What is meant by Corporate Social Responsibility (CSR)?

A: CSR is a form of self-regulation by companies, whereby they seek to act in an ethical way, having regard for the interests of all their stakeholders.

Comment: CSR is also known as ‘corporate citizenship’ and ‘sustainable business’.

4.3.1a(2) Stakeholder influences on corporate objectives Q22: What are some of the typical company

activities associated with CSR? A: 1. Donations to good causes, often associated

with the business e.g. Water Aid for water companies

2. Purchases from ethical sources e.g. Fair Trade 3. Offering customers the opportunity to buy

‘carbon offsets’ e.g. for air travel 4. Various ‘green’ commitments e.g. reduction in

the use of plastic bags 5. Membership of ethical pressure groups such as

Ethical Trading Initiative (ETI)

4.3.1a(2) Stakeholder influences on corporate objectives

Q23: Does adopting a CSR approach increase profits? A: Probably. The image (i.e. reputation) of companies is very important to their sales. Comment: Almost all major UK companies feel obliged to go along with CSR, regardless of the true depth of their

commitment to the concept.

4.3.1a(2) Stakeholder influences on corporate objectives

Q24: What is the main criticism made of a CSR approach?

A: The main obligation of a company is to generate profits for their shareholders. It should – so the argument goes – focus exclusively on this. If their shareholders then want to give away some of their dividends, that is up to them.

Comment: These criticisms are commonly made by those with a ‘free market’ approach to business.

4.3.1a(3) Corporate culture

Q25: What is organisational culture (= business culture)?

A: The collective behaviour of people who are part of the same organisation, based on a shared set of assumptions about the world.

Comment: Large organisations may also have many different ‘sub-cultures’ in different workplaces and countries.

4.3.1a(3) Corporate culture Q26: What is a strong culture? A: A culture where employees identify

wholeheartedly with the company culture. In any situation, they know instinctively how their company would like them to respond.

Comment: Such a company is likely to run smoothly, with minimum need for monitoring and supervision.

4.3.1a(3) Corporate culture

Q27: What is a weak culture? A: A culture where employees, by and large,

have not identified with the company values. Comment: They are likely to do their own thing

in new situations, so there is a greater need for supervision and control.