Nature of Business

At a glance

Understanding the basic structures, organisation, and key forces is important for the survival and success of a business.

In a fast-changing environment, change is the only constant. Businesses that understand the functioning of major variables influencing their growth and profitability will succeed in the long-run.

This chapter will focus on key elements for understanding the nature of business such as:

• Purpose - profit and not-for-profit
• Vision, mission, goals and objectives
• Factors of production
• Stakeholders – internal and external

1. Understanding the nature of business

1.1 The nature of business

Businesses meet consumer needs by providing household essentials, clothing, medical care, transportation, banking, communication, and many other goods and services.

Businesses also sell products or provide services to other organisations, such as hospitals, retailers, and governments, by supplying machinery, goods for resale, computers, and thousands of other items.

Thus, businesses create the goods and services that form the basis of our standard of living. The standard of living in any country is measured by the quantity of goods and services that people can purchase with the money they have. This also provides a basis for comparing standards of living among different countries.

Businesses play a key role in determining our quality of life by providing jobs, goods and services to society. Quality of life refers to the overall level of human well-being, measured through factors such as life expectancy, education, health, sanitation, and leisure time. Building a high quality of life is a combined effort of businesses, government, and not-for-profit organisations (explained later). Different regions and countries are ranked and compared based on these quality-of-life standards.

The profitability of a business is measured by key factors such as revenue, costs, and profit.

For example, some of the Microsoft’s costs in developing its software include salaries, facilities, and advertising. If money remains after covering all costs, the company earns a profit.

Conversely, when a company’s costs exceed its revenues, it incurs a loss. There is always a risk of loss if a business fails to achieve its goals due to inefficient use of resources and/or ineffective business strategies in responding to market competition.

When a company, such as Microsoft uses its resources intelligently, it can increase sales, hold costs down, and earn a profit. Not all companies earn profits, but that is the inherent risk of being in business. There is a direct relationship between risks and profit: the greater the risks, the greater the potential for profit (or loss).

Not-for-Profit Organisations

Examples may include charities, hospitals, educational institutes, social service organisations, non-governmental organisations (NGOs), civic groups, and religious bodies.

Like their for-profit counterparts, these groups set goals and require resources to achieve them. However, their goals are not centered on profits. For example, a not-for-profit organisation’s goal might be feeding the poor, preserving the environment or advocating for the rights of an underprivileged community.

1.2 Purpose of a business

The primary goal of any business is to earn a profit. Businesses have the right to retain and use their profits as they choose, within legal limits, because profit is the reward for the risks they assume in providing products (i.e. goods and services). Profits benefit society by generating employment, which in turn provides income that is reinvested in the economy. Moreover, profits should be earned in an ethical and socially responsible manner.

To earn a profit, businesses need management skills to plan and organise operations, marketing expertise to identify consumer needs, and financial resources to fund and expand their activities. They must also comply with laws, act ethically, and adapt to changing circumstances. Not-for-profit organisations also engage in similar practices.

To remain profitable, businesses must produce quality products, operate efficiently, and act in a socially and ethically responsible manner towards stakeholders such as customers, employees, and investors. Many businesses are also concerned about the environmental impact of their products.

As part of a strategic review, management should regularly re-consider the purpose of the entity they manage and what it is trying to achieve. In the strategic planning process, goals, objectives and strategies should be formulated with the aim of fulfilling the entity’s purpose. A business entity should maintain a hierarchy of aims and plans. A useful way of presenting this is shown below.

An important aspect of managing a business is establishing its purpose and providing clear communication to stakeholders. This can be achieved through the creation of a mission statement and a vision statement.

Vision and Vision Statement

The vision should avoid describing the current state and instead focus on future aspirations, ensuring it is clear, optimistic, and realistic. An unrealistic vision, such as a small store claiming it will become the largest retailer in a short period, would not be effective. A strong vision statement should be brief, simple, specific to the business, and free from ambiguity.

Mission and Mission Statement

A mission statement describes an organisation's core function in society, outlining the products and services it provides to customers. It focuses on the present, detailing how a company plans to achieve its objectives and why it is doing so, while communicating this to employees, shareholders, and other stakeholders. Although small businesses may sometimes overlook it, large organisations invest significant time and resources in crafting their mission statement. This is particularly important for growing businesses, especially where the owner cannot personally convey the company's mission to all stakeholders. A good mission statement should be clear and concise, answering key questions such as: What is our business? What value do we offer customers? What will our business be? What should our business be? Some mission statements may also include the role of employees or address ethical considerations.

Commercial entities often emphasize the ethical aspects of their mission, sometimes as a way to motivate employees.

The relevance of the mission statement

A mission statement can serve several different purposes:

• to provide a basis for consistent strategic planning decisions
• to assist in translating broad intentions and purposes into corporate objectives
• to provide a common purpose for all groups and individuals within the organisation
• to inspire employees
• to establish goals and ethical standards for the organisation
• to enhance the understanding of and support for the organisation among external stakeholders and the public.

A company might have a goal of maximizing the wealth of its shareholders. Its objective, therefore, could be to double the share price within the next ten years.

Objectives can be expressed as a hierarchy of corporate and strategic objectives:

• A corporate objective might be to double the share price within the next ten years. This represents the overall objective for the organisation.

Some strategic objectives are more important than others, forming a hierarchy of strategic objectives. However, the main strategic objectives are often identified as critical success factors, each with corresponding key performance indicators.

Goals and objectives can therefore be used to translate an entity’s mission into specific strategies with strategic targets for achievement within a strategic planning period.

Who decides mission, goals and objectives?

When an entity defines its mission in a mission statement, the statement is issued by the leaders of the organisation. In a company, this responsibility typically lies with the board of directors. Similarly, the formal goals and objectives of an organisation are determined by its leaders.

However, a board of directors’ decisions regarding the goals and objectives of an organisation are influenced by the company’s governance structure and the expectations of its stakeholders.

How to set effective goals

Techniques for setting effective goals include:

• Participating in the goal-setting process
• Ensuring that the goals involve intrinsically motivating work
• Establishing a system that provides feedback on the achievement of goals
• Ensuring that goals are SMART (see above)
• Aligning personal and commercial goals
• Stating goals positively when recording them
• Setting priorities

Examples of Goals and Objectives

1.3 Core Values for a Business Organisation

At their core, values provide clarity on ‘what the business stands for’ beyond profit-making. They guide employees in day-to-day work, strengthen the brand’s identity in the market, and create alignment between strategy and behavior.

Common Core Values in Business Organisations

Although the exact set of values may differ depending on the nature and vision of an organisation, some widely emphasized core values include:

1. Integrity and Honesty: Conducting business in a truthful, fair, and transparent manner. Integrity builds trust with customers, employees, and partners.
2. Accountability and Responsibility: Taking ownership of actions and decisions, both individually and collectively, and accepting responsibility for outcomes.
3. Customer Focus: Placing customer needs at the center of operations by delivering quality products, services, and experiences.
4. Excellence and Innovation: Striving for continuous improvement, creativity, and the pursuit of high standards in all aspects of work.
5. Respect and Fairness: Valuing diversity, treating people with dignity, and ensuring fairness in policies and practices.
6. Teamwork and Collaboration: Encouraging cooperation and mutual support within and across teams to achieve shared goals.
7. Sustainability and Social Responsibility: Ensuring that operations are environmentally sustainable & socially responsible and contribute positively to the community.

Importance of Core Values for a Business Organisation

1. To Provide direction and purpose: Core values give meaning to the mission and vision of an organisation. They act as a guiding light in a rapidly changing business environment and ensure that decisions are consistent with principles rather than being driven only by short-term gains. This consistency builds confidence both within the organisation and among external stakeholders.
2. To Shape Organisational Culture: Values establish ‘how things are done’ and influence employee behavior, communication, and teamwork. A strong culture based on shared values nurtures unity, motivates staff, and creates an environment where people feel proud to belong. This enhances employee engagement and reduces turnover, as individuals prefer to work in organisations where their own values are respected.
3. To Build Trust and Reputation: By upholding values such as fairness, transparency, and accountability, organisations earn the confidence of customers, employees, regulators, and society at large. Trust is difficult to build but easy to lose; therefore, values provide a foundation for long-term credibility and strong relationships with stakeholders.
4. To Support Ethical Decision Making: In many situations, the most profitable option may not be the most ethical one. Core values ensure that decisions are made responsibly and help prevent unethical practices such as exploitation, dishonesty, or corruption. This minimizes risks and protects the organisation from reputational or legal damage.
5. To Ensure Sustainability and Long Term Success: Organisations driven purely by profit may succeed in the short run but struggle to sustain themselves over time. Core values encourage a balance between profitability, social responsibility, & environmental stewardship and ensure resilience & long-term growth.

1.4 Key Stakeholders in a Business

Understanding Stakeholders

Stakeholders can be individuals, groups, or organisations. Their interests and involvement can either influence the business or be influenced by the business’s decisions and activities. Stakeholders are essential to a company’s success and must be carefully considered when making strategic decisions.

Categories of Stakeholders

Stakeholders can be classified into three main categories based on their relationship with the business:

1. Internal Stakeholders

Internal stakeholders are directly involved in the company’s day-to-day operations. They are individuals who work within the organisation and whose interests are closely tied to its success or failure.

Examples of Internal Stakeholders:

• Employees
  Employees are directly involved in the day-to-day operations of the business. Their stake is tied to job security, fair wages, good working conditions, and opportunities for career progression. Their performance directly affects the productivity and profitability of the business.
• Managers / Directors
  Managers oversee the daily activities and decision-making processes of the business. Their stake lies in ensuring smooth operations, achieving business goals, and maintaining efficiency. Success can lead to rewards such as bonuses and promotions, while failure can impact their career progression.

2. Connected Stakeholders

Connected stakeholders are those who have a direct financial relationship with the business but are not part of its daily operations. They interact with the business through transactions and exchanges, and their interests are closely linked to the business’s performance.

Examples of Connected Stakeholders:

• Shareholders/Owners
  Shareholders, often the owners of the business, invest capital into the company and expect a return on their investment. Their primary stake is profitability, as they rely on the company’s success to increase the value of their shares and receive dividends. Shareholders can influence major business decisions through voting rights.

• Customers
  Customers purchase goods and services from the business. Their stake is to receive quality products at fair prices. They expect good service, reliability, and value for their money. Satisfied customers are more likely to become loyal, which in turn increases business revenue.
• Suppliers
  Suppliers provide the raw materials, goods, or services necessary for the business to operate. Their stake lies in maintaining a stable business relationship, receiving timely payments, and securing long-term contracts. A reliable partnership benefits both the supplier and the company.
• Creditors
  Creditors lend money or extend credit to the business. Their stake is to receive timely payments with interest and to ensure the company is financially stable enough to repay its debts. Creditors closely monitor the financial health of the business.
• Labour Unions
  Labour unions represent the collective interests of employees. Their stake is to ensure fair wages, safe working conditions, and secure benefits for their members. They may negotiate on behalf of employees and influence business policies related to workforce treatment.

3. External Stakeholders

External stakeholders are not directly connected to the business through employment or financial transactions, but they are still impacted by or have an interest in the company’s operations. Their relationship with the business is often indirect, but their influence can still be significant.

Examples of External Stakeholders:

• Government
  The government regulates businesses through laws, policies, and taxation. It has a stake in ensuring companies comply with legal requirements, pay taxes, and contribute to the country’s economy. Governments also focus on promoting ethical behavior and minimizing negative environmental impacts.

The government has an interest in all business organisations, for a wide range of reasons.

1. Businesses pay tax on profits, so government has an interest in company profitability.
2. The government want to create and maintain a strong economy. This depends partly (or largely) on new investments by businesses. Government may therefore encourage business investments.
3. The government seeks low levels of unemployment and businesses are major employers.
4. The government regulates many different aspects of business activity: employment law, environmental law, health and safety regulations and company law are just a few examples.

• Community/Public
  The community where the business operates is affected by its presence. The local community has a stake in the business creating jobs, supporting local economies, and ensuring that it operates responsibly without causing environmental harm. A positive relationship with the community can enhance the company’s reputation.
• Environmental Groups
  Environmental groups advocate for the protection of natural resources and ecosystems. Their stake lies in ensuring that businesses operate sustainably, reduce pollution, and minimize environmental damage. Businesses that engage in responsible environmental practices can build trust with these groups and avoid negative publicity.

Stakeholder Interests and Business Balance

Balancing the needs of all stakeholders is one of the most challenging aspects of running a business. Different stakeholders often have conflicting interests. For instance, shareholders may prioritize profitability, which could mean cutting costs, but employees and labour unions might demand better wages and working conditions. Effective stakeholder management ensures that the business addresses these diverse interests while remaining profitable and ethical.

Why Managing Stakeholders is Important

Understanding stakeholders is essential because:

• It helps identify those who can influence the business’s success.
• It allows the company to allocate resources efficiently.
• It fosters strong relationships and trust between the business and its stakeholders.
• It ensures that the business operates ethically and responsibly.

Conclusion

Stakeholders play a crucial role in shaping the direction and success of a business. Their interests, influence, and relationship with the company can significantly impact decision-making and strategy. Understanding the interest and power of various stakeholders helps businesses prioritize actions and resources effectively.

This is where Mendelow's Matrix becomes an essential tool, as it helps categorize stakeholders based on their level of interest and level of power, enabling companies to manage stakeholder relationships strategically for better outcomes.