BER,Ppt6.ppt1 Media and Journalism Module Business and Economics For Reporters 6. How Business Works.

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Media and Journalism ModuleBusiness and Economics For Reporters

6. How Business Works

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This week’s lesson

• General look at how business works and where it fits into the economic models that we have already discussed.

• Different industry segments:• Primary segment (the primary production sector)

• Secondary segment (the manufacturing sector)• Tertiary segment (retail and service sector)

• ‘Big Ticket’ items that affect businesses:• Banking• Taxation• Labour and industrial relations• Competitive forces

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Industry Segments

• Week 2 - how an economy works and concepts of• Households• Businesses• Government• Foreign sector

• The business sector can be divided into various segments to define the proportion of the population engaged in the activity.

• For example:• type of activity conducted (e.g. manufacturing or primary production)

• products produced (e.g. footwear segment – regardless of whether these are manufactured, imported, etc).

• Traditional geographical model - distance from the natural environment to allocate segments

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Primary segment

• The primary segment of the economy extracts or harvests products from the earth, and usually includes production of raw material and basic foods.

• Activities include:• Agriculture (both subsistence and commercial)

• Mining and quarrying• Forestry• Farming• Grazing• Hunting and gathering• Fishing

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Primary segment

• The packaging and processing of the raw material is considered to be part of this segment. • A fishing operation that takes fresh fish and cleans and packages it, is considered a primary industry.

• In developed countries, a decreasing proportion of workers are involved in the primary segment.

• In the United States of America only three per cent of the labour force is employed in this segment.

• In Samoa two-thirds of the labour force are found in agriculture and are responsible for 90% of exports - coconut cream, coconut oil, and copra.

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Secondary Segment

• The secondary segment of the economy manufactures finished goods.

• All manufacturing, processing, and construction lies within the secondary segment - activities include:• Metal working and smelting• Car and vehicle production• Textile production• Chemical and engineering industries• Aerospace manufacturing• Energy utilities• Engineering• Breweries and bottlers• Construction• Shipbuilding

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Tertiary Segment

• The tertiary segment of the economy is the service industry.

• This segment provides services to the general population and to businesses - activities include:• retail and wholesale sales• transportation and distribution• entertainment (movies, television, radio, music,

theatre, cinema)• restaurants• clerical services• media• tourism• insurance• banking• healthcare• law.

• In most developed countries, a growing proportion of workers are devoted to the tertiary segment. http://www.vanuatutourism.com/vanuatu/cms/en/operators/evergreen_tours.html

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The role of banking

• A key industries in the tertiary segment is the banking industry - huge impact on business.

• Banks are privately-owned institutions that accept deposits and make loans.

• Deposits are money people leave in an institution with the understanding that they can get it back at any time or at an agreed future time.

• A loan is money lent out to a borrower which is generally paid back with interest.

• Most people and businesses pay their bills with bank accounts.

• Banks are the major source of consumer loans• loans for cars, houses, education• main lenders to businesses, especially small businesses.

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The role of banking and reserves

• Banks can't lend out all the deposits they collect, or they wouldn't have funds to pay out to depositors.

• Keep reserves• the level of the reserve is usually specified by legislation• ensures customer’s money is secure

• Reserves can include:• cash• deposits due from other banks• the reserves required by legislation• secondary reserves such as securities bought by banks, such as government bonds

• Any money a bank has after it meets its legislated reserve requirement is its excess reserves.

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Taxes

• In week 2 - the role of various sectors within an economy and how funds flow through the economy.

• An important flow is related to taxation payments - a huge impact on business.

• Tax is any sort of forced or coerced payments to government

• Unavoidable cost of doing business• Main reason the government sector collected taxes is to get the revenue needed to finance public goods and pay administrative expenses.

www.icbs.ca/taxes.shtml

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Taxes

• However, as journalists we should also recognise that taxes have other effects, including: • redirecting resources from one good to another• altering the total amount of production in the economy

• Taxes have been used to:• correct market failures• equalise income distribution• achieve efficiency• stabilise business cycles • promote economic growth

• Many different type of taxes• The affect on business cannot be over-estimated• Many businesses will make production and distribution decisions based on the favourable or unfavourable tax structure of a particular location.www.suzannesutton.com/6-8.htm

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Tools for journalists

• A valuable source of information is the World Bank’s country by country analysis of the cost of doing business.

• A common list of business costs and prepares comparison data.

• For the taxation component the World Bank estimates the tax that a medium-size company must pay or withhold in a given year, as well as measures of the administrative burden in paying taxes: • the number of payments an entrepreneur must make• the number of hours spent preparing, filing, and paying

• the percentage of their profits they must pay in taxes.

www.suzannesutton.com/6-8.htm

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Common taxes

• The most common taxes you will find in business reporting include:• Customs duty, or import tax, - collected specifically to raise revenue for a country, but can also be used as an import trade barrier

• Sales tax –although sales tax is paid by consumers it will ultimately impact on business as the cost influences the overall price of a product, and thus the willingness of consumers to purchase a product

• Payroll-related taxes - most legislation employers are liable for payroll tax when their total wages exceed a certain level called the ‘exemption threshold’. Exemption thresholds vary between - based on the total wages paid to all employees

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Common taxes

• Value-Added Taxes (VAT) – a tax assessed on the increase in the value of goods from each stage of production. VAT tax can also be called Goods and Services Tax (GST). Paying VAT/GST requires businesses to maintain detailed records and account keeping procedures, so the cost of doing business increases to ensure compliance with the tax. It is interesting to note that not all countries have adopted this tax, and countries such as Niue use the absence of this tax to attract businesses.

• Income tax – businesses pay income tax based on corporate annual income minus allowable business deductions and tax credits

• Tax structures in the host country may be a reason why businesses consider operations in another country

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Tax havens

• Tax haven - a country where little or no tax is paid• attractive to many companies• Famous examples:

• Switzerland• Bahamas

• Recent years countries such as Vanuatu, the Cook Islands and Samoa have established favourable tax structures for business and are being increasingly seen as providing tax havens.

• The downside:• country can attract illegal and harmful activities, such as money laundering.

• 2000 the OECD cited the Pacific countries of Vanuatu, the Cook Islands and Samoa for operating “harmful tax havens”

• these countries are now changing their taxation systems.

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Minimum wages and labour conditions

• Costs in running a businesses - labour and minimum wages

• Important issue to the business journalist:• companies seeking to lower production costs can take illegal or unethical shortcuts

• use cheap labour. • Two major international businesses, Nike and Gap, for example, suffered enormously damaging publicity when it was revealed by a BBC documentary that child labour was used by the organisation which supplied the companies. Nike and Gap were forced to seriously review the contracts with the company employing the child labour, as pressure about unacceptable working practices was so severe it substantially threatened their sales.

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Minimum wages and labour conditions

• Developed countries have legislation that determines the minimum wages and the conditions under which employees can work.

• Labour laws usually cover:• Minimum wage levels• Employment discrimination issues • Working hours• Sickness, maternity benefits• Conditions of employment and termination requirements• Management-labour issues• Worker health and safety

• Some countries do not have these structures and a business must consider the issue carefully before determining how to structure worker payment in such countries.

• Where written labour laws and workplace laws exist there are fewer conflicts between management and the workforce.

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Competitive forces

• Concept of competition and competitive forces• Terms often used incorrectly and interchangeably.

• Competition defined as the action of two or more rivals who are both pursuing the same objective• come across this term when looking at businesses which are competing against each other• Either selling goods to buyers or • buying goods from sellers.

• Competition comes in two varieties:• competition among the few - which is when there is a market with a small number of sellers (or buyers), so that each seller (or buyer) has some degree of market control

• competition among the many - which is when there is a market with so many buyers and sellers that none is able to influence the market price or quantity exchanged.

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Michael Porter

• Famous Harvard economist, Michael Porter

• “Competitive Strategy - Techniques for Analysing Industries and Competitors” (1980) contains major analysis that can be used to explain the term competitive factors.

• Five competitive forces that determine industry attractiveness and long-run industry profitability:• Threat of entry of new

competitors (new entrants)• Threat of substitutes• Bargaining power of buyers• Bargaining power of suppliers• Degree of rivalry between

existing competitors.http://www.bized.co.uk/educators/16-19/business/marketing/activity/assetled.htm

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Threat of new entrants

• New entrants can raise the level of competition, and make it less profitable for those already running a business in that industry.• For example, one entrepreneur sets up an eco-resort on a remote

Pacific Island – tourists flock because it is a unique and exciting concept. Suddenly, other tourist operators decide that eco-tourism is a great idea and want to setup a rival operation, which will take customers from the first resort.

• Barriers to entry - what may prevent others entering:• Economies of scale• Capital / investment needed to start• Customer switching costs and regulations• Access to industry distribution channels• The likelihood of retaliation from existing industry players.

• Extremely high entry barriers exist in some industries• shipbuilding requires huge capital investment• organic farming requires a lengthy period of operation before

it can be certified as organic• Other industries are very easy to enter (e.g. estate

agency, mail-order business).

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Threat of substitutes

• Some companies make a totally unique product that cannot be replicated

• Most cases possible for a rival firm to produce a product that can compete with an existing product

• If there are substitute products profitability can be lowered

• Product substitution depends on:• Buyers’ willingness to substitute• The relative price and performance of substitutes• The costs of switching to substitutes.

• Substitutes can be used if:• Major cost changes or trends that affect buyer loyalty

to a particular product• Health concerns have prompted many consumers to switch

from sugar products to artificial sweeteners - impacted the sugar industry

• Environmental concerns over aerosol products has seen many consumers move to products that don’t use spray can technology

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Bargaining power of suppliers

• Every business requires inputs:• labour, • parts, • raw materials, and • services.

• The cost of items can have a significant impact on profitability.

• Where suppliers dominate buyers the industry can be less profitable:• Many buyers and few dominant suppliers (if there’s

only one engine manufacturer supplying all boat builders, the supplier has substantial power)

• There are undifferentiated, highly valued products• Suppliers threaten to integrate forward into the industry (e.g. a supplier could set up their own retail outlets)

• The industry is not a key customer group to the suppliers

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Bargaining power of buyers

• Customers may make decisions based on knowledge of a full range of prices and products available.

• The bargaining power of buyers is greatest when:• Few dominant buyers and many sellers in the industry• Products are standardised• The industry is not a key supplying group for buyers.

• The intensity of rivalry in an industry depends on:• The structure of competition

• rivalry more intense where many small or equally sized competitors – Coles and Woolworths in Australia

• rivalry is less when an industry has a clear market leader – Morris Hedstroms and New World supermarkets in the Pacific

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Bargaining power of buyers

• The structure of industry costs• industries with high fixed costs encourage

competitors to fill unused capacity by price cutting• The Australian airline industry exemplifies this. It

is very expensive to fly a plane below capacity so when Virgin Blue or Qantas announce a sale, the other immediately matches the offer.

• Degree of differentiation • industries where products are commodities (e.g.

steel, coal) have greater rivalry - Fiji Gas and Blue Gas

• industries where competitors can differentiate their products have less rivalry- mobile phones

• Switching costs• rivalry reduced where buyers have high switching

costs – i.e. there is a significant cost associated with the decision to buy a product from an alternative supplier e.g. buying equipment from a new supplier may make the existing spare parts redundant. There would also be a switching cost associated with training staff on usage and maintenance.

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Bargaining power of buyers

• Strategic objectives• when competitors pursue aggressive growth strategies, rivalry is more intense

• when competitors are ‘milking’ profits in a mature industry, the degree of rivalry is less

• Exit barriers• when barriers to leaving an industry are high (e.g. the cost of closing down factories) then competitors tend to have greater rivalry.

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Summary

• Understanding of business and it’s role in an economy continued

• Different industry segments and determined a way to categorise them based on the activity performed:• Primary segment (the primary production sector)

• Secondary segment (the manufacturing sector)• Tertiary segment (retail and service sector)

• Major impacts on business - the big issues facing all businesses, including:• Taxation• Labour and industrial relations.• Competitive forces

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Coming up!

• Internal operations of companies• understand what might be happening in a particular company.

• We are going to consider:• The basic concepts of companies, including discussion of various forms of management, private vs. public, incorporates sole proprietors, partnerships, etc

• What company structure and strategic planning mean and how they are used in contemporary companies

• SWOT analysis – what is it and how companies use it and how you can apply the tactics for analysing performance and understanding motivations behind company actions.

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