Monday morning at Lena's Bakery Ltd: Lena's Bakery Ltd now has three shops. At the Monday meeting Marco says, 'We should do better at lunchtime.'
Lena asks three questions
- Better by how much?
- By when?
- And how will we know?
Marco's sentence is a wish. Lena is asking him to turn it into an objective.
The vision and mission from 1.3.1 say where the bakery is heading and why it exists. They do not say what to do by June.
That is the job of a business objective: a target the business sets itself, saying what it wants to reach, how much, and by when. Objectives turn the direction into something the owners and staff can aim at and check.
| Marco's wish | The objective Lena writes | |
|---|---|---|
| What | Do better at lunchtime | Sell more lunches at the Station Road shop |
| How much | Not said | From 90 to 150 lunches a day |
| By when | Not said | By the end of June |
| Can we tell if it worked? | No: any week can be called 'better' | Yes: count the lunches in the last week of June |
A quick test for a good objective: Many businesses check an objective against five words (SMART): specific (it names one thing), measurable (it has a number), achievable (the staff and money exist to reach it), relevant (it moves the business towards its vision) and time-bound (it has a date).
Lena's lunch target passes all five. Marco's wish passes none.
Why a business bothers to set objectives
- Everyone aims at the same thing. The Station Road staff know the target is 150 lunches, not 'more'.
- Progress can be checked. In April the shop sells 110 a day: halfway there, with two months left.
- Decisions get easier. A second sandwich counter helps reach 150; a new cake range does not.
- People can see what they achieved. Hitting a clear number in June is something the team can feel, and be thanked for.
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In her first year Lena had one objective: to still be open next year. Staying in business is an objective too (survival).
The cash ran out in week three of every month (1.1.6), and nothing else mattered until that stopped. Three shops later, the bakery's targets are different. Most businesses chase some mix of the three below.
Survival
- Stay open: pay every bill as it falls due
- Measured by: cash in the bank, months still able to pay the bills
- Suits a new business, or any business in a bad year
Growth
- Get bigger: more sales, more shops, more customers
- Measured by: sales revenue, number of shops or staff, share of the market
- Suits a business with customers queuing and room to expand
Profit
- Widen the gap between the money coming in and the money going out
- Measured by: profit, in dollars, for the year
- Suits owners who want a reward, or money to reinvest
Growth and profit are measured differently, so they are easy to mix up. Growth is about size. The share of all the bread sold in town that Lena sells (market share) is one measure of size; sales revenue and the number of shops are others.
Profit is what is left of the sales revenue once the costs are paid.
Profit = sales revenue − total costs
| Lena's Bakery Ltd | Two years ago | This year | What it shows |
|---|---|---|---|
| Shops | 1 | 3 | Growth: the business is bigger |
| Share of the bread sold in town | 5% | 12% | Growth: more of the town buys from Lena |
| Sales revenue | $200,000 | $600,000 | Growth: three times as much money coming in |
| Total costs | $170,000 | $540,000 | Costs grew with the shops |
| Profit | $200,000 − $170,000 = $30,000 | $600,000 − $540,000 = $60,000 | Profit doubled while sales tripled |
Making as much profit as possible: When the owners want the largest profit they can get, the objective is profit maximisation. Profit is the owners' reward for the risk they took, and the money a business keeps from its profit (retained profit) pays for the next oven or the next shop.
In practice, a target: Few businesses know exactly where the maximum is. The objective is usually written as a target: 'raise profit from $60,000 to $80,000 next year'.
Lena's objectives as the bakery grew
Year 1: survive
One shop, savings on the line, bills every Friday. The target was to pay every bill and still be trading at the end of the year.
Years 2 and 3: grow
Queues every morning, so Lena and Marco formed Lena's Bakery Ltd (1.2.3) and opened two more shops. The targets were shops and sales revenue.
Next: profit
With three shops trading well, the owners want a bigger return on what they put in. The new target is profit: $80,000 next year.
Growth is not the same as profit: Sales can triple while profit only doubles, as the table shows. A business can grow and make no more profit, or make more profit without growing at all.
Read the figures in a case before you name its objective. More shops and more customers point to growth; a wider gap between sales revenue and costs points to profit.
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Goldcrust's worst morning: At eight o'clock Goldcrust plc, the national chain of 400 bakeries from 1.2.3, announces that this year's profit will be lower than expected.
By lunchtime its share price on the stock exchange has fallen from $4.00 to $3.00. Nothing in the bakeries has changed. But the thousands of people who own Goldcrust shares are $10 million poorer.
What the owners of a company get from holding its shares is its value to them (shareholder value). It comes in two ways: the dividends the company pays out of its profit (1.2.3), and the price their shares would sell for.
Keeping that value safe and rising is an objective in its own right (protecting shareholder value). For a publicly held company with thousands of shareholders, it is often the objective the board is judged on.
| Goldcrust plc | Before the announcement | After |
|---|---|---|
| Number of shares | 10 million | 10 million |
| Share price | $4.00 | $3.00 |
| What all the shares are worth | 10 million × $4.00 = $40 million | 10 million × $3.00 = $30 million |
| Change for the shareholders | $10 million of their value gone in one morning |
How Goldcrust protects shareholder value
Steady, rising profits
Shareholders pay more for shares in a company whose profit grows every year. A surprise drop, like this morning's, is what pushes the price down.
A reliable dividend
Many shareholders hold Goldcrust for the dividend each year. Cutting it, or paying it late, tells them the company is in trouble.
Care with big risks
A plan that could lose $50 million, such as opening in a country Goldcrust does not know, must be worth that risk to the owners, not just exciting for the managers.
Telling the owners the truth
Goldcrust publishes its accounts every year (1.2.3). Clear, honest figures keep shareholders' trust; a nasty surprise loses it.
Why a publicly held company guards its share price
- Owners can leave any morning. Goldcrust's shareholders can sell on the stock exchange at any time. If enough of them sell, the price falls further.
- Raising money gets harder. When Goldcrust next sells new shares, a lower price means less money for each share.
- A cheap company is easier to buy. At $3.00 a rival can collect more than half the shares for less, the hostile takeover from 1.2.3.
Lena's Bakery Ltd has shareholders too: Lena, Marco and Marco's cousin. But they are the people who run it, their shares are not traded, and nobody checks a share price each morning. Protecting shareholder value matters most where the owners and the managers are different people.
At the start of the year Lena and Marco write one sentence on the office wall: 'Eight shops within five years.'
Under it, Marco pins a list for this year
- Open the Station Road shop by September.
- Train two more bakers by March.
- Sell 150 lunches a day at Station Road by June.
The sentence on the wall and the list under it are two different kinds of objective.
Two kinds of objective: A strategic objective is a long-term target for the whole business, usually several years ahead, set by the owners or the directors. It says where the business is going.
A tactical objective is a shorter-term target, usually a year or less, for one part of the business, set by its managers. It is a step towards a strategic objective.
One strategic objective, broken into this year's steps
Strategic: eight shops within five years
Set by Lena and Marco for the whole company. Every other target this year exists to move the bakery towards it.
Tactical: open Station Road by September
Marco's target. The lease, the fit-out and the opening date are his to deliver.
Tactical: two more bakers trained by March
The head baker's target. A fourth shop needs bread before it opens, and bread needs bakers.
Tactical: 150 lunches a day at Station Road by June
The shop manager's target. A shop that pays its way is proof that shop five is worth opening.
| Strategic objective | Tactical objective | |
|---|---|---|
| How far ahead | Long term: several years | Short to medium term: usually a year or less |
| How much of the business | The whole business | One shop, one department, one team |
| Who sets it | The owners or the directors | Managers of that part of the business |
| How detailed | Broad: the destination | Detailed: a number, a place and a date |
| At Lena's Bakery Ltd | Eight shops within five years | Two more bakers trained by March |
| At Goldcrust plc | The country's largest bakery chain within ten years | Raise sales at its northern shops by 5% this year |
A strategic objective on its own
- Too big to act on: nobody can 'open eight shops' on a Monday.
Tactical objectives on their own
- No direction: 150 lunches a day matters because shop five depends on it.
Why a business needs both: The tactical objectives turn the strategic one into steps each manager can take and check this year. When the year changes, the tactical steps can change; the strategic objective usually stays.
To tell the two apart in a case, ask two questions. How far ahead is it? How much of the business does it cover? Years and the whole business make it strategic. Months and one part make it tactical.
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How this comes up: Short questions tied to a case, worth two to four marks. These are the usual ones.
The usual questions
- Define a term such as strategic objective or shareholder value: two marks.
- State two common business objectives: two marks.
- Explain one strategic objective and one tactical objective for the business in the case: four marks.
- Explain one reason why a company protects its shareholder value: two marks.
The four-mark pattern
- Name a strategic objective. A long-term target for the whole business: eight shops within five years.
- Show it in the case. Queues at all three shops and a second site already found show there is room to grow, so the owners set the direction for the next five years.
- Name a tactical objective. A shorter step for one part of the business: two more bakers trained by March.
- Show it in the case. A new shop cannot open without bread, so the head baker's target is one step towards the eight shops.
The trap: two targets of the same kind: 'Open the Station Road shop by September' is about growth, but it is a tactical objective: one shop, this year. Offered as the strategic objective, it leaves that half of the question unanswered.
Give each objective a time and a scope: Years and the whole business for the strategic one. Months and one part of the business for the tactical one.
Explain one strategic objective and one tactical objective for Lena's Bakery Ltd.
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