Professional Documents
Culture Documents
Contents
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
Introduction
Practical significance
The practice of accountancy grew from the need for the users of capital to be accountable to the owners of
the capital. Therefore the goals and interests of the owners had to be assessed before appropriate
reporting systems could be developed.
Today's organisations need to be accountable, in varying degrees, to stakeholders. The interests of these
stakeholders set the goals and parameters of business strategy.
Working context
As indicated above, accountants report to stakeholders on the matters that concern them. Increasingly
accountants are required to assist in preparing or auditing reports that go beyond the narrow financial
interests of shareholders.
Syllabus links
Some coverage of business objectives was given in your Business and Finance paper.
Examination context
Exam requirements
In the exam you may be required to create a mission statement or identify the inconsistencies and
omissions in an existing one. You may also be asked to suggest appropriate goals and objectives. This will
involve balancing the needs of different stakeholder groups, identifying possible conflicts of interest and
recognising the priorities for the organisation.
Section overview
The purpose of an organisation may be communicated in a mission statement. The role and value of
such statements has been a matter of debate.
Considering the facets of corporate mission is a good starting point for improving our understanding
of the purpose of a business.
Definition
Mission: the values and expectations of those who most strongly influence strategy about the scope and
posture 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 an
organisation. Some have suggested that consideration and determination of the mission and its articulation
into a statement of corporate mission constitutes the first stage in the strategic planning process and that
therefore it is central to the whole planning process. Johnson and Scholes have suggested that 'the mission
of an organisation is the most generalised type of objective and can be thought of as an expression of its
raison 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 corporate
mission. Consequently, the mission statement should incorporate the broad aims of the executive
management.
The Ashridge College model of mission (Campbell et al A Sense of Mission 1992) links business strategy to
culture and ethics by including four separate elements in an explanation of the features of a successful
mission.
(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.
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 to
one customer, a firm it has been supplying for 40 years. Another three customers account for most of the
rest. 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, but
he has never shown much interest. All I know about him is that he is in his mid-30s and qualified as a lawyer
after 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 only
came for six months, but father's doctors had advised against his returning to work. So it falls to me to do
the best I can.
We have received a tempting offer to sell out. Father thinks they're trying to steal the business. I don't
believe 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 the
people. We have some really skilled craftsmen and it would be sad to see it all disappear. Father's caution
has its advantages. We have substantial liquid assets, there is no overdraft to speak of, and we own the
freehold. 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. You
have been our accountants for as long as I can remember. Do you have anyone amongst your staff who can
help us?
I must respond quickly to the potential buyer. Can we meet tomorrow?
Section overview
We assume that 'businesses' seek to increase the wealth of their owners. This is often summarised as
the 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 profitability
goals against other objectives.
reflect the need to maximise the benefit derived from limited resources, e.g. funds. Their objectives
may be more heavily influenced by external stakeholders such as the government. This is discussed
further in section 5.
Example of objectives
In practice objectives vary in attributes and in terms of the precision with which they are specified. The
following gives some examples.
Corporate objective: open
Our primary aims are to provide a sound investment for our shareholders by increasing shareholder
value 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 capital
employed, 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 a
leading role in meeting the requirements of the widening and expanding home entertainments
industry.
Business unit objective: closed
In Bangladesh we are budgeting our house building unit to sell 2,500 homes next year –a figure that
will put it among the top ten house builders. Ideally, existing performance statistics should be used to
measure objectives; if a new system of data collection or processing has to be instituted in order to
measure progress towards objectives, extra cost will be incurred.
Section overview
Profit, or shareholder wealth, maximisation assumes that management are motivated and free to
adopt 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 wider
group of interested parties.
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 too
simplistic. Instead it states that the goals of an organisation will reflect the power and interests of the most
powerful 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 the
organisation's objectives depends on the relative power of the stakeholder groups.
Stakeholders Conflict
Power of stakeholders
Power is the means by which stakeholders can influence objectives. The different sources of power are
shown 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 can
include the number of staff under individuals.
Influence/reputation: Informal power from either charismatic leadership or group consensus on a
particular issue.
Relative pay
Control of strategic resources: e.g. trade unions when demand for output is high and labour is
scarce, or size of budget allocation.
Knowledge/skills: Individuals deriving power from their specialist knowledge or skills.
Environmental control: Finance and marketing staff may have a more detailed knowledge of the
external environment than other functional staff, e.g. production.
Strategic implementation involvement: Many people are involved in implementing strategy, and
the 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) can
exert this form of power.
Involvement in implementation: Distribution outlets have greater knowledge of customer
requirements 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 a
company.
External links: Public services often consult a wide variety of external stakeholders in decision
making 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.
3.5 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 to
stay 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 overdraft
facilities)?
(b) Replacement: Can the firm replace the relationship?
(c) Uncertainty: Does the stakeholder cause uncertainty in the firm's plans? A firm with healthy positive
cash 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 the
parties' relative bargaining strength and the philosophy underlying each party's objectives. This can
be shown by means of a spectrum:
Level of interest
Low High
Low
A B
Power
C D
High
(a) Key players are found in segment D: strategy must be acceptable to them, at least. An example
would be a major customer.
(b) Stakeholders in segment C must be treated with care. While often passive, they are capable of moving
to segment D. They should, therefore be kept satisfied. Large institutional shareholders might fall
into segment C.
(c) Stakeholders in segment B do not have great ability to influence strategy, but their views can be
important in influencing more powerful stakeholders, perhaps by lobbying. They should therefore be
kept 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 may
move from quadrant to quadrant when different potential future strategies are considered. This aspect will
be 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 implications
for the organisation.
(a) The framework of corporate governance should recognise stakeholders' levels of interest and
power.
(b) It may be appropriate to seek to reposition certain stakeholders and discourage others from
repositioning 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 be
compared with a map of a desired future state. This will indicate critical shifts that must be pursued.
Section overview
Corporate Social Responsibility (CSR) is a business aim that may seem to cut across the notion that
firm'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 and
the extent to which they are congruent with delivering value to shareholders.
Definitions
Sustainable development: Meeting the needs of the present without compromising the ability of future
generations to meet their own needs. (Brundtland Commission)
Sustainable enterprise: A company, institution or entity that generates continuously increasing
stakeholder 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 focuses
on '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
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.
5 Not-for-profit organisations
Section overview
The number of not-for-profit organisations potentially outweighs the profit seeking ones if we include
voluntary sports clubs, interest groups and associations.
Understanding how strategy is developed in these is important. It is similar to strategy formulation in
businesses but without the comfort of the assumption of a single overriding goal of profit.
5.2 Objectives
Objectives will not be based on profit achievement but rather on achieving a particular response from
various 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 may
result in a range of objectives, rather than a single over-riding one. In order to allow for this balance to be
achieved:
NFPs will typically feature wide participation in the objective setting process. Indeed it may be a legal
condition 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.
To promote, maintain, improve and advance education, particularly by the production of educational
plays 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 the
recognition and encouragement of special merit in students.
The company (and the theatre) then enjoyed varying degrees of success between 1987 and 2003. During
this period attendances rose and fell in line with recession and boom periods in the economy (attendance
figures 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 year
are cancelled, the company is heading for a CU250,000 deficit –but there is no crisis at the Foundry, said
Stephen 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 a
programme 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 a
programme of good classics (for example, The Caretaker by Pinter, Waiting for Godot by Beckett, etc) and
challenging modern plays. My ultimate objective is to establish ourselves as the leading 'serious' theatre
outside of Dhaka.'
Thomas Sutherland (Finance director)
'We are still dependent for a large amount of our funding on central government grants. The percentage of
our funding coming from this area looks to be about 50%. This is misleading because the actual amount of
this funding has been growing very slowly. The fact that it represents up to 50% is due to a reduced
proportion of revenue coming from box office receipts. Therefore, we really have one objective –to boost
our sales or receipts from the box office. Our current revenue includes CU1,117,856 (2006) down from a
high of CU1,596,245. Thus I estimate our ideal objective is to increase our box office receipts by 30% over
the 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 to
attend five peak performances (i.e. Saturday and Sunday) for the price of four performances. By
reducing the price we would encourage demand.
(2) We should also reduce our prices on an individual performance basis. I believe this would increase
attendances 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 and
has an excellent atrium space in the entrance hall. This is already used at lunchtimes, etc, but could be
profitably 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 of
our audience is shown in Appendix II. Clearly the greater proportion of the audience comes from higher
income groups. We need to push more into other market segments. By boosting attendances in this
manner we can go some way to achieving increased revenue figures. We think focusing on the production
of highbrow theatre will only alienate a large group of the very people we are trying to attract.'
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 of
achieving the objectives as stated by the finance director.
(b) Draft a memorandum to the trustees of the theatre explaining the objectives of the theatre as
expressed by the artistic director, the finance director and the trustee. You should comment on their
compatibility and suggest a possible prioritisation of these objectives.
Appendix I
Attendances at Rangpur Theatre 1997 to 2006
Year Theatre Studio Total
1997 159,700 16,600 176,300
1998 168,800 12,900 181,700
1999 167,900 8,000 175,900
2000 167,700 18,000 185,700
2001 210,300 21,200 231,500
2002 206,869 14,902 221,771
2003 175,064 16,533 191,597
2004 159,966 13,491 173,457
2005 175,435 4,903 180,338
2006 100,807 9,510 110,317
Appendix II
Demographic characteristics of theatre-goers and local population
Total population in Foundry audiences Foundry mailing Foundry card
metropolitan list holders
county around 2005 2005
Rangpur
(1) Social class 29% 80% 50% 71%
(% A/B/C1)
(2) Education 3% 50% N/A N/A
(% completing full-
time education,
age 19 or over)
(3) Age (% under 35) 37% Main theatre 55% 25% 7%
Studio theatre 75%
(4) Sex (% females) 51% 50% apiece in main 66% 64%
theatre and studio
(5) Rangpur post code N/A 80% (estimated) 70% 91%
Appendix III
Revenues
Year Box office Government grant
CU'000 CU'000
2000/01 1,144 927
2001/02 1,306 1,072
2002/03 1,330 1,054
2003/04 1,446 1,095
2004/05 1,596 1,065
2005/06 1,117 1,103
2006/07 1,172 1,157
Summary
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 to
enact 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 ........................................ corporate
objectives.
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 achieved
these objectives, please tick them off.
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 decisions
with short-term impacts on the business and those with impacts on its longer term success. Here the
assumption is that sustainability will have an adverse short-term impact on the business, for example
due to the enhanced costs of compliance, but that it is essential to its long-term success in the face of
mounting social and legal pressure to improve ecological performance.
Some writers suggest that there may be short-term benefits from sustainability, such as reduced costs
from using less energy and other resources or attracting customers who will place contracts or buy
the 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 first
objective is to be a non-loss operation in order to cover costs. Profits are made only as a means to an
end, such as providing a service.
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 can
be monitored.
Barnsfield is a private company and appears to be substantially family owned. Aspirations of the
family, which are likely to involve shareholder returns and continued independence, will
therefore affect its objectives. Tim Sawbridgeworth needs to consider his own objectives for the
business. 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, that
existing profit levels can be achieved by maintaining existing operations.
Other important stakeholders include the highly skilled workforce and the loyal customer base
both of whose interests should be considered in formulating objectives. Remuneration, financial
return 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 identify
the 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 exploit
environmental 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 and
objectives.
(i) Product development involves selling new products to existing customers and normally
requires research and development expenditure.
(ii) Market development involves selling existing products to new customers and involves
investment 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 different
area).
The above strategies can be implemented by acquisition or organic growth.
Internal efficiency and market penetration involve attempts to reduce cost or further penetrate
existing markets by taking market share from the competition. Cost reduction by the
introduction of modern machinery is one obvious possibility for Barnsfield. Another approach
could 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 will
often be expressed in the form of budgets.
3.8 Control
Finally, a feedback system is needed to measure actual results and compare them with planned
performance. A budgetary control system would seem most appropriate in a firm the size of
Barnsfield.
4 Conclusion
By necessity this is a very brief summary of the strategic planning process. It is important that we do
not oversimplify the problem. Strategic decisions are very complex and are made in the context of
great uncertainty. Nevertheless Barnsfield appears to have stagnated over the last few years and the
above issues must be addressed if it is to have a long-term future.
Mission
The mission attempts to define the purpose of a business. It may include information about the values
and methods. The mission must pay some attention to the environment and markets in which the
business operates. The information might show that the type of business being carried on has little
future. 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 to
increase profits in the future' is not an objective, the profit increase has not been quantified nor has a
deadline been set. A valid objective would be 'We aim to increase profits by 20% by 31 December
20X6.'
Objectives can be long term, affecting the whole company. They can then be broken down into
departmental and individual objectives allowing management by objective to be implemented. If
everyone 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 plan
will be for a period longer than a year and will affect the whole group. For example, to meet the
objective quoted above, the strategic plan might be to gain a strong presence abroad, or it might be to
acquire a competitor.
Tactical plans
Tactical plans are typically for a period of a year and represent detail as to how the strategy is to be
achieved. For example, the tactics for achieving a strong presence abroad might be to approach foreign
companies with a view to co-operation.
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 first
to 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 change
membership).
CU50,000 of green fees and CU100,000 from the club house are also forecast, giving a break-
even point as follows.
CU
Operating expenses 450,000
Century (100,000)
Green fees (50,000)
300,000
CU300,000
Break-even = = 600 members
CU500
The membership fees are substantially lower than those charged by competing clubs, and to
encourage 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-even
is 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 of
members of the existing clubs and those on the waiting lists. It is important to assess total
demand in the area and which of the clubs is potentially the weaker if cut-throat competition
results.
2 Downside risk
The company is very highly geared, with an interest burden of CU125,000. To meet that amount
250 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 to
avoid paying rent for the land and you will therefore have lost the use of the land, will not receive
rent 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. The
income you will receive from that will be CU25,000 rent and CU3,000 interest. Income from the
farm 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. Therefore
the current level of rent is attractive.
Another way of looking at the problem is that you will be earning an incremental annual return of
CU13,000 for an investment of CU20,000. The incremental return is likely to increase since rents
of agricultural land decline as the protection afforded from the CAP is gradually eroded.
In case agricultural rents should increase in the future, it would be an advantage to be able to
adjust 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 great
potential for increasing profits. All the profits are to be retained for the benefit of the club and its
members.
No dividends can be paid out to the shareholders.
UK employees
– Strategy 1 (-/+)
– Strategy 2 (-/+)
Low
Eastern European employees
– Strategy 1 (-/+)
– Strategy 2 (-/+)
Power
Shareholders
– Strategy 1 (-/+)
– Strategy 2 (-/+)
High
Avold
– Strategy 1 (-/+)
– Strategy 2 (-/+)
The shareholders have the ultimate power to determine the direction of the company. While in the
short term the directors are empowered to make the relevant decisions, they can be displaced if these
are 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 to
be in a position to influence the decision of where production should take place. It will undoubtedly
need assurances, if vacuum cleaners are to be manufactured overseas, as to quality and delivery
schedules. The ability of Supavac to cut costs will have an impact on its ability to deliver price
reductions.
Avold is interested in the reorganisation as vacuum cleaner manufacture is a competitive market, with
a range of alternative suppliers available if Supavac fails to deliver cost reductions. (Alternatives are
possible as there is a element of judgement involved, given the information available.)
(iii) It also assumes that the demand for theatre seats is driven largely by price. This is a very strong
assumption. Non-price factors which would influence the demand would include the programme
of plays itself, actors involved, time of year, etc. The implicit assumption made by the finance
director is that, all other things being constant, reducing price will increase demand. One badly
chosen 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. The
most obvious distinction is between open and closed objectives.
Open objectives contain no reference to a quantified target for the objective. For example, a
statement such as 'we aim to increase our market share' is open. Thus there is no guidance on by
how much to increase the target of the objective nor over what timescale.
Closed objectives contain some quantified target value for the objective in question. The
following is an example of a closed objective: 'Our objective is to increase our market share (by
volume) by 12% over the next three years.' This contains a criterion by which to assess the
target 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 is
important to have a principal objective in agreement with supporting objectives. It is the duty of
senior 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 difficult
to see how to assess the theatre against such open-ended objectives.
Clearly, in following the trust's objectives audience surveys could be carried out to
determine
Income bracket
Residential area
Frequency of attendance, etc
Thus, given the data in Appendix II on audience composition, this objective will be achieved
if, all other things remaining constant, more C1/C2 males under 35 attend plays and
concerts.
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 mutually
incompatible. If either objective is to be pursued to the exclusion of the other, stakeholder
conflict 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 the
absence of more information on the memorandum of association of the trust, it is
difficult to say what power they have).
The next issue is to see whether the objective of the finance director is compatible with the
other 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 therefore
receipts) 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 the
attendance price of tickets and a more challenging series of plays may satisfy both the
finance and artistic directors.
(iii) From the trust's viewpoint, putting on less 'difficult' plays and increasing the number of
popular touring reviews/plays may well boost audiences. Therefore reducing price may
well 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 since
2000/2001.
The percentage of revenue accounted for by government grants is less important than the
amount. 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 the
grant increasing as a source of revenue.
The most important objective therefore is for the theatre to increase its box office
revenues. Failure to do so (given no growth in subsidy) will eventually diminish the theatre's
ability to stage its own productions.
The reduced ability to stage its own productions means that the artistic director's objective
cannot 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 provide
information 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 prices
during the week.
Using the atrium space to provide a restaurant/café would probably increase non-theatre
audience and thus provide an additional source of revenue.