Business, Technology & Finance

FINANCIAL ANALYSIS DISCIPLINE

ACADEMY OF FINANCE
Chapter 1: Introduction to business
Nguyen Huu Tan, PhD, CFA
 LEARNING OUTCOMES
- State the general objectives of business
- State the general objectives of strategic management and specify the
strategic management process and interrelationship between a business’s
vision, mission and strategic objectives
- Specify the nature of ethics, business ethics, sustainability and corporate
responsibility

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 TOPIC LIST

1. What is an organization?
2. What is a business?
3. Stakeholders in a business
4. What are the business’s objectives?
5. Mission, goals, plans and standards

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 1. WHAT IS AN ORGANISATIONS?
1.1. Introduction to organisations
Example of organisations
Profit-oriented organisations Not-for-profit organisations
- A multinational car manufacture (eg, Ford) - A charity (eg, UNICEF)
- A accountancy firm (eg, KPMG) - A trade union
- A local authority
- An army
- A club

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 Because they:

-
-
-
-
-
Let people specialize in what they do best
1.2. Why do an organisations exist?
- Overcome people’s individual limitation, whether physical or intellectual

Save time, because people can work together or do two aspects of a different task at the same time
Accumulate and share knowledge
Let people pool their expertise
Enable synergy: the combined output of two or more individuals working together exceeds their individual output
In brief, organisations enable people to be more productive

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 1.3. What do organisations have in common?
Definition of organisations:

A social arrangement for the controlled performance of collective goals,

which has a boundary separating it from its environment.

Example of organisations:

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 1.4. How do organisations differ?
Organisations differ in many ways.

- Ownership

- Control

- Activity

- Size

- Legal status

- Sources of finance

- …
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 2. WHAT IS A BUSINESS?
2.1. Profit vs non-profit orientation
Profit-oriented organisation Not-for-profit organisation

Owners Public beneficiaries

Primary
objective Maximise profit/dividend/wealth Provision of goods/services

Profit Output (Goods, services)

Output of goods/services Revenue from goods/services Minimise cost of primary goal
Secondary
objective Inputs (Materials, labour, finance) Costs Inputs (Materials, labour, finance)

Revenue (taxation)

Figure 1.1: Profit-oriented and not-for-profit organisations

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- Businesses aim to make profits while for non-businesses there is a different
primary focus or objectives.

- Profit-oriented organisations are generally referred to as businesses.

- Not-for-profit organisations are frequently structured and run like a business.

They do not aim to maximise profit or the wealth of their owners, but instead are
focused on providing goods and services to their beneficiaries at minimised
costs. Example: Charities, trade unions, governmental agencies, hospitals,
schools, universities.

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2.2. Definition of a business

Business: An organisation that is oriented towards making a profit for its

owners so as to maximise their wealth and that can be regarded as an entity
separate from its owners.

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 3. Stakeholders in the business
Definition of stakeholders

Stakeholder: Literally a person or group of persons who has a stake in the

organisation. This means that they have an interest to protect in respect of
what the organisation does and how it performs.

- A company’s primary stakeholders are its shareholders.

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 3.1. Natural capital, sustainability and corporate responsibility

Definitions:

- Natural capital is therefore everything that the planet provides humans and
business organisations to use in order to live. Some resources, such as food, air
and water are renewable. However, others such as oil and gas, which are
processed into materials such as plastic and energy to power our homes and
transport systems, are non-renewable. (Ethical Corporation, n.d.)

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- Sustainability concerns the use of both of the following: Tangible
resources (natural capital and energy) and Intangible resources
(human/intellectual capital and relationship with stakeholders)

- Corporate responsibility concerns the organisation’s ideas and values on

how to use resources, such as natural capital, promoting the positive
impacts of their use and reducing the impact of nay negative impacts

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 3.2. UN global goal for sustainable development
- The UN established 17 Global Goals for Sustainable Development that
aim to improve the world for everyone. In 2015, world leaders signed up
to them. (Global Goals.org, 2015)

- The key sustainability Goals for business include:

 Decent work and economic growth

 Industry, innovation and infrastructure

 Responsible consumption and production

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 4.What are the business’s objectives?
4.1. The hierarchy of objectives

- For a profit-oriented business, its objective is to make as much profit as

possible so as to increase shareholder wealth.

- In fact, there is a hierarchy of objectives, with one primary objective and a

series of secondary objectives, which should combine to ensure the
achievement of the primary objective.

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4.1.1. Primary objective

For a business the primary objective is financial: making as much profit as possible
(profit maximisation) so as to increase the shareholder wealth.

- Profit measures how the business create value by making sure the cost of inputs is
less than the output.( Profit = Revenue – Costs)

- Shareholder wealth can only be maximised if profit is earned at an acceptable level

of risk.

- Profit cannot be pursued at any cost. Any business is subject to the laws and
regulations of the country in which it operates, and it also has social responsibilities.
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4.1.2. Secondary objective

- Secondary objectives support the primary objectives.

- Examples of secondary objectives:

- Market position.
- Product development
- Technology
- Employees and management

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 - Market position: achieve a particular market share of each market that the
business operates in, avoid reliance on a single customer for too big a proportion of
total sales, enter or leave markets when the time is right.
- Product development: Bring in new products, develop a product range.
- Technology: Improve how much is produced form the resources available, reduce
cost per unit of output, develop or exploit appropriate technology
- Employees and management: Train employees in necessary skills, create an
innovative, flexible culture, employ high quality leaders.

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 4.2. Is wealth maximisation always the primary objectives?

4.2.1. Profit satisficing

- Decisions might be taken by managers with their own managerial

objectives in mind rather than the aim of wealth maximisation.

The owners’ the managers’

objectives VS objectives

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4.2.2. Revenue maximisation

- A business may act to maximise revenue in order to maintain or increase

its market share, ensure survival, and discourage competition.

- Managers benefit personally from following this objective because of the

prestige of running a large company, and also because salaries and other
benefits may be higher in bigger companies than in smaller ones.

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4.2.3. Multiple objectives

- “To manage a business is to balance a variety of need and goals…The very

nature of business enterprise requires multiple objectives”. (Peter Drucker).

- Objectives are needed in eight key areas:

 Market standing
 Innovation
 Productivity
 Physical and financial resources
 Profitability
 Manager performance and development
 Worker performance and attitude
 Corporate responsibility

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4.2.4. Constraints theory

- According to Herbert Simon, decisions for some business areas are taken
without reference to the wealth objective at all. Because profit is not the
most important constraint in their business.

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 5. Mission, goals, plans and standards
5.1. Planning and control system
Comparison of On target. No
Plans and Actual
Objectives performance with corrective
standards performance
plans/standards action required

Control action? Control action?

Deviations
identified

Figure 1.2: Planning and control system

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Businesses need to direct their activities by:

- Deciding what they want to do to achieve their primary objective.

- Deciding how and when to do it and who is to do it (setting plans and

standards)

- Checking that they achieve what they want, by measuring and monitoring
what has been done and comparing it with the plan

- Taking control action to correct any deviation

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5.2. Mission

- Definition of mission: ‘The business’s basic function in society’ expressed in terms of how it
satisfies its various stakeholder.

- Elements of mission:
Purpose Strategy Policies and standards of behaviour Value

What is the What does the

Why does the
operational logic of What do our people organisation believe
organisation exist
the organisation: actually do and how do to be important –
and for whose
- What do we do? they behave? what are its core
benefit?
- How do we do it? principle?

- Vision: some businesses also have a vision of the future state of the industry or business which
determines what its mission should be.
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5.3. Goals: aims and objectives

- Goal: ‘A desired end result’

- There are two types of goal:

 Non-operational aims (qualitative goals)

 Operational objectives (quantitative goals), operational objectives should be

Specific Measurable Achievable Relevant Time-bound
SMART:

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- The purpose of setting operational objectives in a business:

‘Objectives are needed in every area where performance and results directly and vitally
affect the survival and prosperity of the business’ (Peter Drucker). Objectives in these key
areas should enable management to:
- Implement the mission
- Publicise the direction of the organisation to managers and staff
- Appraise whether decisions are valid
- Assess and control actual performance

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5.4. Plans and standards

- Plans: State what should be done to achieve the operational objectives.

Standards and targets specify a desired level of performance.

- The desired level of performance for what is done can be expressed as a

standard to be met, in terms of:
- Physical standards
- Cost standards
- Quality standards

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5.5. How are plans set?

The strategic planning process sets the overall mission, goals, plans and
standards that the business will try to achieve.

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