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Business Activity
INPUT - a.k.afactors ofprodution
1. Land - includes land andall natural
renewable/unrenewablesresources
2.Capital - anythingthat is owned by a
bss & used to makeprodution easier &
more efficient
3.Labour -workforce of a
business
4.Enterpreneur -willing to takerisks (loss and
profit)
3.Labour -management,
skilled workers,manual workers
4.Enterpreneur -someone who
organizes otherinputs to initiate theprocess of prodution
PROCESS - convertsresoures to goodsand services
1.Form - change
physical to usefulgoods
2.Place - send tothe right place
(transportation)
3.Time - sellduring high
demand
4.Possession -promotion &
advertisement (willlead to possession
by the consumes)
OUTPUT
1. Goods andservices -
physical andtangible goodsnon tangible
products sold topublic
2. Wastage
1.1 NATURE OF BUSINESS ACTIVITY
(A)BUSINESS ACTIVITY
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(B) BUSINESS FUNCTION
Production/operation makes the product/ deliver
the services
Marketing selling the business goods & services,
positioning them within the market
Finance financial reporting and control. Rising of the
capital necessary to run the business.
Human resources/personnel hiring, firing and
payroll.
(c)TYPES OF PRODUcTION
TYPES OFPRODUCTION
PRIMARY SECTOR -
including that extracts &uses the natural
resources of the Earth
eg:mining gold
SECONDARY SECTOR -including that manufactures
goods using the raw materialsprovided by the primary
sector
eg:rocket making, textile,biotech TERTIARY SECTOR -
provides services toconsumers & the other
sectors of industry
eg:insurance,transportation,entertainment
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1.2 TYPES OF ORGANIZATION
(A) PRIVATE SECTOR AND PUBLIC SECTOR
PRIVATE SECTOR PUBLIC SECTOR
FEATURES Organization owned by private individuals or
private of people
Have a clear aim of seeking profit for their owner
Organization owned by and
controlled by the government
Objective is to provide service
rather than profit for owners
Run essentially for the benefit
of community
DIVISION
Unincorperated bss
Bss-no legal differnece between the owners and the
bss
Tend to be small,owned either by one person or a
few partners
Incorperated bssSeparated legal identity from its owners
Bss can be sued,can be teken over and can be
liqiudity
Most are classed as the non-
market sector: goods and
services provided free to
consumers and are financed
out of taxation
Some (i.e.post office) are in
the market sector as
consumers are required to
pay for the services.
Some public sector bss havebeen transferred from the
public to the private sector
Pivate sectorbusiness
organisation
Unincorperatedbss
sole trader partnership
Incorperated bss
private limitedcompany
public limitedcompany
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Reasons forsetting up a
business
Independence
want to have afull control overthe business andprefer to maketheir owndecision.
To gain morereward.
by doing business,they will gainextra profitcompared to
profit gained bybeing employed.
Redundancy
employees whoare maderedundant bytheir employerdue to economicsituation andthese employeesbeingunemployed.
Extend hobbies
a passion of doingbusiness will leadto a businessactivity. eg :Mofaz
Cannot findemployment
an individual mightdidi not manage tofind any job,therefore theychoose to run abusiness.
Commitment to a
product
An individual mightbeing so comitted toa product until theywill feel like theywant to inovate theproduct as they wishit would be.
Satisfy creative needs.
an individual that are verycreative may channel theircreativity throughbusiness. ex. a person that
can create a beautifulsouveneir can sell it to thetourists.
eason for setting up ausiness.
it has been explained inthe previous page.
Business idea
it can come from manyplaces like the existingskills when doing another
job, adaptation of anexisting product, marketsearch, idea from collegue
etc.
Consider success of a business
The factors
the basic business idea.
finding out about the market.
marketing and promotion
people
finance
the product or service offered
Planning
a statement that outlines the waythat the business will achieve itsaims and objectives.
functions:
a clear idea of its direction andoperation.
to show the bank or otherinstitutions its likely position andability to pay back a loan.
identify the problems earlier
highlight its strenghths andweaknesses
Starting a business
influenced by:
Finance
sources of funds:
personal savings or past earnings
funds from partners or investors.
by paying the machinery that has been bought at a later date.bank or other financial institutions.
etc.
Getting advice.
in the form of:
a telephone number, email or internet site of a specialist.
a detailed discussion or interview
training videos or seminars
sources:
individuals
banks
enterprise agencies
others.
(B) STARTING A BUSINESS
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Possible problemsfaced by start-ups
Entrepeneur.
an individual might has lake ofskills, experience. vision, ambitionand motivation. Therefore amistake can be done when makingimportant decision.
Basic ideas.
the fresh product must beappealing enough to the marketin order to get profit ang beingrecognized.
The funding.
inadequate initialfunding can cause aproblem to the starts-up.
Promotion.
method of sales andpromotion is notappropiate. Plus, there
may be no unique sellingpoint.
High competition.
a new business may have to survivein a market that is full ofcompetition.
Planning
a new entrpeneur may have anon-proper business planningin terms of marketing,advertising, finance and others.
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(C) PROFIT-BASED ORGANIZATIONS
TYPES SOLE TRADER PARTNERSHIP
FEATURES
- Owned by just one person- The owner runs the business and mayemploy any number of people to help.- Retain full control of the business.- Owner enjoys all the profits.- He/she personally liable for all the debts
and all the decision made.
- Setting up is very straightforward. No legalformalities needed.
- Some types of business need to obtainspecial permission before landing
Once turnover reaches a certainlevel sole trader must register for
VAT
Must pay income tax andNational Insurance contributions. Some types of business need a
license such as alcohol, supplying
taxi service or public transport.
Must comply with legislationaimed at business practice. E.g
they must provide healthy and
safe working conditions for their
employees.
- A partnership has more than oneowner.
- It is usual for partner to specialize- There are no legal formalities to
complete when a partnership is
formed. However partners may draw
up a DEED OF PARTNERSHIP.
This is legal document which states
partner rights. It cover issues such as :
How much capital eachpartner will contributes.
How much profits and losseswill be shared
Procedure for endingpartnership
How much control eachpartner will have.
Rules for taking new partners
ADVANTAG
ES
- Freedom and flexibility ( can choose thehour he/she want to work or holiday.)
- Enjoyment of all the profits- Absence of legal formalities- The owner is in complete control and is
free to make decisions without
interference.
- No legal formalities when setting upbusiness
- Each partner can specialize- More finance can be raised due to
have more than one owner
- Can share the workload- Sharing of losses
DISADVANTAGES
- Sole trader have UNLIMITEDLIABILITY.
- Illness can stop the business activity.- The owner can be sued by the customers in
the event of dispute due to it isunincorporated business.
- If the person loses interest or die, then thebusiness will cease.
- Limited scope for economic of scales.
- Profits need to be shared amongstmore owners.
- Partners may disagree when making adecision
- The partnership can be end when oneof the partner die
- Any decision made by one partner onbehalf of the company is legally
binding on all other partner.
- Can be sued by customers
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FEATURES of companies :
Limited companied have separate legal identity from their own owner. They can own assets, form contracts, employ people, sue and be sued in their own right. The owners have LIMITED LIABILITY. The capital of limited company id divided into shares. Limited company runs by a director appointed by the shareholders. The board of Director is accountable to shareholders and should run the company as the shareholders wish. If they do not perform well, they can be voted out at an Annual General Meeting (AGM) Companies pay corporation tax. A limited company must have minimum of 2 members up to no upper limit
FORMING A LIMITED COMPANY :
2 DOCUMENTSMemorandum of Association & Articles of Association The memorandum gives detail about the company. The Articles of Association deal with the internal running of the company. The two documents will be sent to the Registrar of Companies with the names of director If they are acceptable, The Certificate of Incorporation will be awarded to allow them to trade. They also must submit a copy of its annual accounts to the Registrar each year.
TYPES PRIVATE LIMITED PUBLIC LIMITED
FEATURES- The business must ends in Limited or
Ltd.
- Shares must only be transferredprivately and all the shareholders must
agree with the transfer.
- Shares are not advertised for generalsale.
- Often as family business owned bymembers of family or closed friends.
- Ends with Plc.- The shares of the company can be bought and
sold by the public on the stock exchange
ADVANTAGES- Shareholders have limited liability.- More capital can be raised as there are
no limit on the number of the
shareholders.
- Control of the company cannot be lost tothe outsiders.
- Business will be continued even if oneof the owner dies
- Shareholders have limited liability- More power can be enjoyed due to their large
size
- Huge amount of money can be raised from thsale of shares to the public
- Production costs may be lower as firm maygain economies of scale
- Easier to raised finance since financialinstitution are more willing to lend to plc.
DISADVANTAGES- -Profits have to be shared amongst large
number of shareholders.
- There are legal procedures to form up abusiness
- Firm does not allow to sell shares topublic, This will restricts the amount of
capital can be raised
- - Financial information filed with theRegistrar can be inspected by public.
Competitor could use this advantage.
- The setting up cost can be very expensive- It is possible for an outside to take control of
the company since everyone can buy their
shares.- All of the companys account can be inspecte
by members of the public.
- Because of their size, they are not able to deawith the customers in personal.
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NON PROFIT ORGANIZATIONS
An organization that supports an issue or matter of private interest or public concern for non-commercial
purposes, without concern for monetary profit.
Characteristics
- Do not operate to generate profit.- May accept, hold or disburse money and other things of value.- May legally and ethically trade at profit.- Typically funded by donations- Have tax exempt status- Operated by volunteers or paid positions.- Can have members but many do not.
Issues faced by NPOs
- Unreliable funding.- Long hours + Low pay = Employee burnout.
- Founders syndrome dynamic founders try to retain control of the project.PRESSURE GROUPS
A group doing advocacy: to encourage or prevent changes in public policy without trying to be elected.
Characteristics
- Sometimes referred to groups within a society that has similar opinion on issues.- The effectiveness of a pressure group depends on: number of members, public support, resources and influence
on media and politicians.
- Activities of pressure group includes: boycotting products, media campaign, lobbying the government,demonstrations and petitions.
NON GOVERNMENTAL ORGANIZATIONS
A private institution that is independent of the government.
Characteristics
- Usually use public relations to meet their goals.- People working for NGOs are volunteers and paid staff. Paid staffs typically receive lower pay than in other
sectors.
- Volunteers are not purely altruistic. They may have their individual interests such as skills, experience andcontacts.
- Sources of funds include membership fees, sale of goods and services, private donations and grants frominternational institutions or government.
- NGOs are not legal entities under international law (except the Red Cross).
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IMPORTANCEof
ORGANIZATIONALOBJECTIVES
Determine therole of theemployees
Determine thestrategy to be
done.
Provide shareholderswith a clear idea of
the business in whichthey have invested.
Provide asense of
direction forthe business.
Provide abasis fordecision-making.
Measurementof
Achievement.
CHARITIES
A trust, company or incorporated association establishes for charitable purposes only.
Characteristics- Usually non-profit organizations.- Sometimes referred to as foundations.- Normally subjected to some form of supervision by the government to prevent charity fraud and to allow the
government to influence the scope and agenda of charities.
- Generally enjoy tax exemptions for their income and donors generally enjoy tax relief for gifts for charities.
1.3 ORGANIZATIONAL OBJECTIVES
(A)THE IMPORTANCE OF OBJECTIVES
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SSpecific MMeasurable AAgreed R TRealistic Time-specific
Content & Natureof Objectives
Used to asessthe business'performance.
SMARTStates thegoal of thebusiness
What should amission statement
has?
Boundaries forthe organization
A vision of whatthe organization
wants to be
A statement of thefundamental purposeof he organization so
as to inspire thosewho work for it.
Guidance fordecision-making
A statement ofvalues to guide
individualbehaviour.
A statement of thecharacter of the
organization and thecustomers it seeks to
serve.
(B) STATEMENTS
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Characteristicsof a well-producedmission-
statement.
Provide informationand inspiration totheir employees
Outlines clearly theway ahead for the
organization.
Provides adefinition ofsuccess.
Provides a livingstatement that can be
translated into goalsand objectives at eachlevel of organization.
Provides informationand inspiration to their
employees
IMPORTANT TERMS TO BE REMEMBERED
TERM(S) MEANING(S)
Mission Statement
A statement of the business core aims, phrased in a way to motivate
employees and to stimulate interest by outside groups.
Vision/AimA statement of the purpose of the business, usually not specific and
mainly to attract stakeholders
Objective A goal that an organization or individual wants to achieve.
Strategic objectives
What the organization wants to achieve to remain competitive & ensure
its long-term sustainability
Example: To enlarge market share
Tactical objectivesMore to short-term departmental performance to obtain strategic
objectives.
Operational Objectives Low-level objectives which are addresed to individuals or small groups.
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AIM
CORPORATEOBJECTIVES
DIVISIONALOBJECTIVES
DEPARTMENTALOBJECTIVES
INDIVIDUAL OBJECTIVES
AIM To maximise shareholders value
CORPORATE
OBJECTIVES
To gain profit of all divisions by 10% ayear
DIVISIONAL
OBJECTIV
ES
To increase market share by 10%
DEPARTMENT
OBJECTIVES
MARKETING: To increase salesrevenue by 10%
INDIVIDUALOBJECTIVES
Introduce 5 more clients about the businesseach year.
BusinessEthics
Ethics:
A set of values &beliefs whichinfluences how
individuals, groups &society behave
Business Ethics:
Concern with howsuch values & beliefs
operate in a bss.
Help firms to decide whataction are right or wrongin certain circumstances
(C) AIMS AND OBJECTIVES
(D) ETHICAL OBJECTIVES
HIERARCHY OF OBJECTIVES EXAMPLES
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Forced to turn down cheaper suppliers who test onanimals
Increasing cost
Forced to turn down profitable business
Loss of Profits
Alter the way it approaches business matters.
Business Practice
Shareholders may object if by being ethical, theirinvestments is harmed.
Profit vs Ethics
Some suppliers only supply products of business thatis ethical.
Relation with Suppliers
Increasing no. of customersare taking into account afirm's behaviour whenbuying their products
Increase in sale
Consumer'sViews
Improvements in the
recruitment and retentionstaffs.
More able to recruit wellqualified & motivated staff.
Employees
Employees with highmotivation due to the goodname of the firm.
Employee'sMotivation
BENEFITS OF ETHICAL BEHAVIOUR EFFECTS OF ETHICAL BEHAVIOUR
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aligning a company's activities with the social, economic and environmental of its stakeholders.
organizations consider the interests of society by taking responsibility for the impact of their activities on customers,employees, shareholders, communities and the environmentin all aspects of their operations.
CORPORATE SOCIAL RESPONSIBILITY (CSR)
BARRIERS TOCORPORATE
RESPONSIBILITY
Cost and profit> may raise the cost
> profit will decrease
Informationavailable toconsumers,
governments andpressure groups
> without it, it isdifficult to monitorthe bss activities.
Value and beliefs
> value and beliefs ofmanagers and
employees of a bss maynot correspond withwhat the majority ofothers in a society
regard as responsible.
SOCIAL AUDITING- Defined as: A check to make sure the financial performance of
bss is accurately shown in its accounts.
- Process by which a bss org attempts to assess the impact ofentire range of its activities on stakeholders.
- To evaluate its performance against a set of non-financialcriteria (its effect on environment, its attempts to meet social
obligation to employees.
- May involve:oIndentifying the social obj and ethical values of the org.oDefining the stakeholders of bss.oEstablishing social performance indicators.oMeasuring performance, keeping records & preparing social
accounts.
oSubmitting the accounts to an independent audit andpublishing results.
- May include:oThe salary difference between the highest and lowest paid
employee.
oHealth and safety information.oThe extent to which employees feel valued.oThe view of consumers about whether the bss is living up to its
Benefits of social auditing:
Provide valuable information to pressure groups & consumersabout corp responsibility of a bss.
Allow the managers of a bss to gain a complete picture of theimpact of the bsss activities.
Preventing future criticism of its activities. Able to identify the extent to which it is meeting some of its non-
financial activities.
Shareholders can use it to raise questions about bsss activities atannual shareholder meetings.
Gov can use social audit of a range of bss in particular industry toassess the need of legislation or regulation of bss in the industry.
Bss might have to change:
The aims and objectives of bss Operating methods, this might lead to
increasing costs.
The relationship with employees whichinvolve changing work practices.
The relationship with otherstakeholders, including suppliers and
people in the local community.
Changing the organization of bss. Taking into account the needs of
consumers when making marketing
decisions.
Providing help to bodies andorganization outside of bss.
intervene directly so that
consequences for it behaviours.
gov create legislation which bss must
adhere to.
some prob may occur:
o bss can obey the 'letter of the law'rather than the 'spirit of the law'.
o legislation which only applieswithin national boundaries may
not effect bss in other countries.
Gov work with particularindustries & bss sectors to
encourage the creation of
regulatory bodies which help to
control the activity of bss.
Voluntary org tend to monitor thebehavior of relevant firms.
Gov by threatening legislation ifthe self-regulatory bodies are not
seen to be working
Free market will act effectively to
police less responsible bss.
Consumer behaviour will force
irresponsible bss to act with greater
accountability.
This is likely to happen when the
consumers have sufficient
Campaign from some of pressuregroups (animal welfare, etc) may
affect the bss.
If they fail, they called for greaterdemocracy in corporate
behaviour which involved the
stakeholders of the company.
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Areas ofcorporate social
objectives:
Theenvironment
Energy
Fair businesspractice
Humanresource
Communityinvolvement
Products
ENVIRONMENTAL AUDIT
A systematic review of the interactionbetween an organization and the physicalenvironment.
Looks at the orgs compliance withenvironmental regulations and its
environmental policy, the environmental
risks to which it is exposed, waste
management and recycling.
Aims of environmental audit:
- Verify compliance with environmental, health andsafety legislation.
- Verify compliance with the orgs own policy.- Minimize human exposure to risk and ensure that
health and safety provisions are adequate.
- Identify corporate risk from potential environmentalfailure.
- Increase the workforces awareness of companysenvironmental policy.
- Identify ways to further reduce waste and energyusage.
- Satisfy external pressure from customers, insures,ethical investment trusts and the community
Typical environmental audit will cover the following areas:
compliance with current and proposed legislation and regulations transport:
o fuel efficiencyo precautions taken when transporting toxic substanceso vehicles emissions
energy use:o energy efficiencyo recycling waste energy
waste:o disposal methodso waste managemento waste minimizationo recyclingo emissionso procedures for dealing with accidental spillages
materials:o use of environmentally friendly materialso extent to which materials are renewableo substitution of toxic materials with non-toxic ones
impact on landscape and habitats:o damage to habitatso ways to reduce damage, preserve natural habitats and make sites attractive as
possible
2 variations on environmental audit:
Environmental review Environmental impact review
Arguments for CSR Arguments against CSR
Creation of a better social environment benefitsboth society and bss
The primary task of bss is to maximize its profits byconcentrating on commercial activities
Power should be used responsibly Social involvement results in higher prices tocustomers
Social involvement creates a favourable imagefor the company
Social involvement reduce economic efficiency Bss has the resource to help solve social
problems
Social activities reduce the internationalcompetitiveness of local businesses
Bss & society are interdependent Company director have a duty to shareholders Social involvement discourages additional gov.
intervention
Businesspeople lack the social skills to deal withproblems of society
Bss org(s) should adoptingsocially responsible policies
Firms should do things withintegrity, openness andhonest cooperation
Activities are to evaluated onsocial responsibility criteria
along with other criteria
Social or external costsare to be seen as part
of operating expenses
Firms need to beprepared to use its
resources for wider
social purposes
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1.4 STAKEHOLDERS
DEFINITION:
- A person or group that is involved in and can be affected by a particular organization, project system etc(Dave Hall)
- All people or groups that affect, and are affected by a business organization (Oxford Business Dictionary)-
People or groups who are affected by and/or able to influence the behavior of business organizations(Lecture notes)
EXTERNAL
INTERNAL
EXTERNAL
Types of Stakeholders
Government
Owners/
Shareholders Managers Employees
Suppliers Community
Customers
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(A) INTERNAL STAKEHOLDERS AND THEIR ROLES IN BUSINESS
1)
ENTREPRENEUR
Provides innovation- Has business idea Indulge in new business where businessnever existed
Provides organization- Land, labour, capital are hired and organized to produce goods and
services
- Makes decisions about Premises
Method of production
Product design
Wages
Risk taking
2)
SHAREHOLDERS
(OWNERS)
Become joint owners of business To receive dividends from after-tax profits To ensure the growth of business To ensure the stability/security of business To share in the success/profitability of business through an
appreciating share price
To ensure high share value (to maximize profit)
3)
DIRECTORS
Direct strategies and major decision making of business To retain control of business To increase market share and business growth To increase own power and status from business growth Ensure security of business Ensure profitability of business
4)
MANAGERS
Actively involved in running the business day to day Organizing and decision making (in their own hierarchies) Ensure security of business Accountability (to owners)
To ensure promotion prospects To ensure job satisfaction
5)
EMPLOYEES
To receive fair wage To ensure good working conditions To secure their jobs through survival and expansion of business To ensure job satisfaction
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(B) External Stakeholders
Definition: Stakeholders who are indirectly involved with the firm.
Below are their objectives and interest in a business/to a firm
Stakeholders tend to have conflicts with another class of stakeholders. Below are some causes or
situation reflecting the incident.
Customer
To obtain good value for money from the goods and services purchased.
To receive high level of customer services.
To receive after sales services and supply of spares from a bss which survivesinto the future.
Government
To receive tax revenue from profitable firms.
To direct operation of the bss for the benifit of community/nation.
To control bss operation and performance to ensure it is within the EU/National laws.
To assist bss in accordance with local/national policy.
To ensure bss provide employment
Controlling the impact of bss activity to environment.
Bank lenders
To be paid back in full when repayments are due.
To receive interest on the loan when due.
Community
To benifit from employment the bss creates.
To be free from environmental disadvantages.
Suppliers
To continue selling profitably to the bss.
To be paid promptly and fully for the goods supplied.
Competitors
To compete by all lawful means.
To differentiate products from those of other bss.
To compare and contrast performance with other bss.
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Employees
They seek for fair wages.Conflict raises when
managers pay them withunfair levels of wages.
Conflict occurs whenthere're rationalisationleading to redundancy.
They feel threathen of losingtheir jobs.
Working Conditions isuncomfortable for the them.
Their safety might be takenfor granted by the
managers.
Shareholders Conflict may arisewhen they seek forshort term profits.The bss however is
aiming for long termprofits.
Conflict with managers/directors. This is whenmanager might pursue their own interest, payingthemselves high salaries, organising time whichsuits their own needs. Only satisfactory levels of
profits generated. Shareholders however want highprofits.
Customer
Cnflct might occur whenthe products and servicesoffered is not satisfying.
Inefficient delivery serviceto them.
Unable to achive goodvalue for money.
Does not receive aftersales service.
Cnflct with bss/ownerswhen price is high. Owners
are maximizing theirprofits while consumer
want cheap product.
Suppliers
Conflct withmanagers when
they take too longto pay for products.This cause hardship
for smallersuppliers.
Cnflct with managers/shareholdersof a bss if they make late delivery.
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Government
cnflct when there's unethical bsswhich disobey rules and regulation setby the gov
Competitors
plagiarism of products lead to cnfltcwith the bss.
Comunity
cnflct happen when bss activitythreathen quality of life of the localresident.
Also when bss cannot offeremployment
Bank lenders
Managers could not pay back in fullwhen repayments are due.
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1.5 EXTERNAL ENVIRONMENT
PEST Analysis
Political/Legal Economy Social Technology
SWOT Analysis
Internal
Strength
Weakness
External
Opportunities
Threats
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POLITICAL/LEGAL
Political Environment
Concerns the activities of the governmentand political environment trends (general
stability of the country).
Roles of Government
Provider of goods and services Buyer of goods and services Regulation/Deregulation
Taxation
Direct & Indirect Effects of taxation on business:
o Reduces profits available for reinvestment and distribution to shareholders as a result ofcorporation tax (tax on company profit)
o Reduces willingness, as well as ability to expando Raises the price of goods and services, causes contraction in demand and reduces the volume of
goods and services sold as a result of expenditure tax/ value-added tax (VAT)
oReduces disposable incomes and therefore consumer spending as a result of income tax
o Alters income distribution the impact on business will vary, but producers of luxury goods willsuffer if income is redistributed to the less well off
Budget
Government provides certain welfarebenefits to various groups in the society
o This involves a transfer of incomefrom taxpayers to benefit receivers
o The purchases of those receivingbenefit are likely to be different
from the better off taxpayers
o Business that provide good andservices for the better off may
suffer a fall in the volume of trade,
whereas business providing goods
and services for the less well off
might benefit
Spending
Direct spending of the government ongoods, services and labour
Examples:o Infrastructure, school building and
health
There are many private sectors that relyheavily in government contracts
The business community benefits from theGovernment spending on infrastructure
which involves basic services that are
essential to industrial society
TaxationDisposable
incomesSpending
powerAggregatedemand
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Policies
Reasons of government policies:o Achieve a certain production
targets
o Achieve a particular structurewithin an industry
o Promote growth, investment andtechnical progress
Competition policy correct the abuse ofmonopoly power
Regional policy assist areas of highunemployment, declining industry
Assistance for small firmsMacro-Economic Policies
Fiscal Policy Concerns about the decisionsof the government on expenditure, tax
rates and government borrowing Monetary Policy Concerns the decisions
about the interest rate and the supply of
money in the economy
Recession
ExpansionaryFiscal Policy
Raise
governmentspending
Lower tax rates
Increaseaggregate
demand
Increase inoutput and
employment
Boom
ContractionaryFiscal Policy
Reducegovernmentspending
Raise tax rates
Reducesaggregatedemand
Reducesoutput,
employmentand inflation
Interest Rate Exchange RateAppreciation /
Depreciation of currency
Legal
The law andemployment practices
The law and consumerrights
The law and businesscompetition
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ECONO
MIC
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MICROECONOMICS
DEMAND AND SUPPLY
DEMAND
Demand is the amount of product that consumers are willing and able to purchase at any given price. Demand is
concerned with what the consumers are actually able to buy (what they can afford to and would buy), rather than
what they would like to buy. The change in price of a good and service will lead to a change in the quantity
demanded.
Price VS Quantity demanded for good/service
CHANGES IN DEMAND
Factors and effects:
INCOMEHigher incomes of consumers will be able to
buy. Demand of a product will only increase if the
incomes of those consumers buying the product
increase.
THE PRICE OF AND DEMAND FOR OTHER GOODS
The demands for one product often depend on theprice of and demand for another. A rise in the price in
one brand is likely to cause an increase in the
demand for others.
COMPLEMENTARYGoods are those which are used
together. Example, cars and petrol. An increase in
the price of one will affect the demand for another.
CHANGES IN TASTES AND FASHIONS Some products
are subject to changes in tastes and fashions. It is
more usual for a company to stop producing
products which have gone out of fashion altogether.
CHANGES IN POPULATIONChanges in population
levels, changes in the structure of population can
affect demand.
ADVERTISING Successful advertising and promotion
will shift the demand curve to the right.
LEGISLATIONGovernment policies can affect the
demand for a product. Example, a law requiring all
cyclists to wear helmets would lead to an increase in
the demand for cycling helmets at any given price.
0.00
0.50
1.00
1.50
2.00
2.50
3.00
20 40 60 80 100
Quantity demanded
demand
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SUPPLY
Supply is the amount of a product which suppliers will offer to the market at a given price. The higher the price of a
particular good or service, the more that will be offered to the market. A change in price will cause a movement
either up or down the supply curve. The curve will not change its position assuming that all other factors remain the
same.
Price VS Quantity supplied for good/service
CHANGES IN SUPPLY
Factors and effects:
COSTS OF PRODUCTIONA fall in costs of production
will mean more can be offered at the same price.
This will cause the supply curve to shift to the right.
CHANGES IN PRODUCTIONWhere it is possible to
shift production from one area to another, the price
of other products can influence the quantity
supplied. For example, a rise in the price of broccoli
might encourage farmers not only to produce more
broccolis but less of other crops.
LEGISLATIONA new anti-pollution law might
increase costs causing the supply curve to the left.
THE OBJECTIVES OF FIRMS Firms might seek toincrease their profit levels and their market share.
This might reduce the overall level of supply as other
firms are forced out of business.
EXPECTATIONS If businesses expect future prices to
rise they may restrict current supplies.
THE WEATHER The weather can influence the supply
of agricultural products.
0.00
0.50
1.00
1.50
2.00
2.50
3.00
20 40 60 80 100
Quantity supplied
supply
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PRICE
EQUILIBRIUM PRICE
The point at which the demand and supply curves
intersect is known as equilibrium price where PO=Q
O.
Section A shows an excess demand where demand
for a product is greater than supplied. This will lead
to shortage of products and many consumers being
left disappointed. Section B shows an excess supply
where supply for a product is greater than
demanded. This will lead to many products being left
over with no immediate buyers.
CHANGES IN DEMAND
Assume that there has been a rise in income which
resulted in an increase of demand. The demand
curve will shift to right. If demand increase from D1
to D2, the quantity demanded will also increase from
Q1 to Q2. Thus, the equilibrium price will rise from P1
to P2.
CHANGES IN SUPPLY
An increase in supply may have been as a result of
lower labour costs. This shifts supply curve from S1 to
S2 which leads to the equilibrium price falls from P1
to P2. Consumers are more willing and able to buy
goods at lower price and the quantity demanded
rises as well from Q1 to Q2.
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ECONOMIES OF SCALE
ECONOMIES OF SCALE
These are the reductions in a firms unit (average)
costs of production that result from an increase in
the scale of operations. The cost benefits can be
substantial in some industries that smaller firms will
be unlikely to survive due to lack of competitiveness.
They arise for five main reasons:
PURCHASING ECONOMIES- also bulk buyingeconomies. Suppliers will often offer
substantial discounts for large orders.
TECHNICAL ECONOMIES - 1.Large firms aremore likely to be able to justify the cost of
flow production lines. If these are worked at
high capacity level then they offer lower
unit cost than other production methods. 2.
The latest and most advance technical
equipment. Such expense can only be
justified when output is high so that fixed
costs can be spread thinly.
FINANCIAL ECONOMIES- 1. Banks and otherlending institutions often show preference
for lending to a big business with a proven
track record and diversified range of
products. 2. Raising finance by going publicfor existing Plc. Is very expensive.
Prospectus publishing costs and advertising
charges will not vary greatly whether it is a
large or small issue of shares. Therefore, the
average cost of raising the finance will be
lower for larger firms selling many millions
of dollars worth shares.
MARKETING ECONOMIES- Marketing costsobviously rise with the size of a business,
but not at the same rate. These costs can be
spread over a higher level of sales for a big
firm and this offers a substantial economy
of scale.
MANAGERIAL ECONOMIES- Small firmsoften employ general managers who have a
variety of management functions to
perform. As a firm expands, it should be
able to afford specialist functional
managers who should operate moreefficiently and the chance of them making
mistakes is lesser.
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DISECONOMIES OF SCALE
There are disadvantages to large-scale operations
too. Diseconomies of scale are those factors thatincrease unit costs as a firms scale of operation
increases beyond a certain size. These diseconomies
are all related to the management problems
associated with trying to control and direct an
organization with many thousands of workers, in
many separate divisions, often operating in several
different countries.
Causes of management problems:
Communication problems in largerorganizations
Alienation of workforce Coordinating the business Inflexibility
WAYS TO AVOID DISECONOMIES OF SCALE:
Management by objectives Decentralization Reduce diversification
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THEORY OF FIRM
Economists construct models of the market ranging, at one extreme from the ideal of perfect competition through
various forms of imperfection to pure monopoly at the other extreme.
MONOPOLY
It occurs when one business has total control over a
market and is the only seller of the product.
Monopolists are likely to erect barriers to prevent
others from entering their market. They will also
exert strong influence on the price which they charge
for their product. Because of the influence
monopolists have on their price, they are often called
PRICE MAKERS.
Monopolies tend to make abnormal profitscompared to competitive businesses. However, there
may be little or no incentive for a large business to
innovate if it faces a lack of competition. It may
therefore be less efficient and profitable than it is
capable of being, resulting in inefficient
management and a lower dividend for shareholders.
Effects of monopoly and perfect competition:
Prices It might be expected that prices forconsumers would be higher under
monopolies. However monopolies can
sometimes provide consumers with lower
prices than businesses operating under
competitive conditions. This is because large
size of monopoly businesses allows them to
gain economies of scale.
Choice It could be argued that a largenumber of businesses competing against
each other will lead to greater choice of
products for customers. But there are
conditions where competition does not lead
to wider choice for consumers because
competing businesses tend to replicate the
products of their competitors.
Innovation Businesses in competitivemarkets have the incentive to innovate as
they try to differentiate their products from
those of competitors. However, the
relatively large profits made by monopolies
allow them to invest heavily in R&D
OLIGOPOLY
When there are many firms but only a few dominate
the market, oligopoly is said to exist. Under
oligopoly, each firm will have a differentiated
product, often with a strong brand identity. Several
brands may be competing in the same market.
Businesses often follow the price of the market
leaders. This means they tend to be interdependent.
Barriers to entry exist:
Legal restriction, such as patents High start up costs, such as cost of
manufacturing
The promotion or advertising required Arrangements between businesses Collusion between businesses in cartels,
which act together to prevent new entrants
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MACROECONOMICS
GOVERNMENT ECONOMIC OBJECTIVES
ECONOMIC GROWTH
GDP
The total value of goods and services produced in a country one year is called the Gross Domestic Product. This is
measured in monetary terms, and inflation will raise the value of GDP. This increase is NOT ECONOMIC GROWTH.
Economic growth in the economy occurs when the real level of GDP rises as a result of increase in the physical
output of goods and services in an economy.
GNP
A measure of the amount of income generated as a result of a countrys economic activity
Why growth considered so desirable by governments?
Higher real GDP increases quantity of goodsand services-higher living standards
Higher output lead to increasedemployment-increase consumer incomes
Absolute poverty can be reduced if growthis substantial enough and the benefits are
sufficiently dispersed
Businesses should experience the risingdemand for their products
Higher GDP makes more resources availablefor government through greater income
from taxes and decreased burden of social
expenditure
THE BUSINESS CYCLE
BOOM (PEAK) In a BOOM consumer spending and
investmentwill be high. Many businesses will
experience high levels ofdemandfrom people with
increasing incomes. Profits should be high for most
firms and wages might be rising. Output will be high
and the economy will be growing steadily. Business
and consumer confidence is also likely to be high.
RECESSION A RECESSION is where incomes and
output start to fall. Business might experience a fall
in demand for their products and a decline in profit.
Some might start to lay off workers.
SLUMP (THROUGH) A SLUMP occurs at the bottom
of the cycle. Unemployment is likely to be high and
confidence, spending, investment and profits low.Many firms may be forced out of business.
RECOVERY A RECOVERY is where income starts to
rise again after a slump. Output will begin to
increase as spending and confidence increases.
Business will start to employ more workers as a
result.
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OPPORTUNITIES OR THREATS
When demand continues to rise at BOOM stage,
then serious problems for the economy can result in
government action to deflate or reduce demand.
(Inflation can result from demand-pull that will be
discussed later on) As growth continues towards
BOOM conditions and the economy approaches full
capacity, a number of other problems are likely to
arise:
Demand-pull inflation will accelerate,reducing industrial competitiveness and
leading to higher wage demands.
Labour shortages will become a problem,especially for skilled workers in highdemand. This will cause wages and business
costs to rise.
Unemployment will be low and incomes willbe rising and will encourage consumers to
borrow more to spend on durable goods.
Prices of these goods will rise and high price
of housing will be particular concern to
government.
As incomes continue to rise, demand forimports will rise. Home-based firms will find
easier to sell goods on domestic market
than overseas and may switch production
away from exports towards the home
market. The result of these two trends is for
a current-account deficitto become a
serious problem. The country will be
spending more foreign currency than it is
earning.
However not all RECESSION is bad. There will be
opportunities which well-managed firms may be
able to take advantage of:
Capital assets such as land and property,may be relatively cheap and firms could
investin expectation of an economicrecovery
Demand for inferior goods actuallyincrease
The risk of job losses may encourageimproved relations between employers and
employees-increase efficiency
Hard decisions may need to be takenregarding closures of factories and offices-
make business leaner and fitter and better
able to take advantage of economic growth
when this eventually starts again.
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LOW INFLATION
Inflation can be defined as an increase in the average price level of goods and services, whereas deflation is the fall
in average price level of goods and services. Governments set target rates of inflation. They aim for rates lower
than or same as those of their main international competitors.
Retail Price Index (RPI) is used to measure average price changes. Each month, government statisticians wouldrecord prices of items that commonly feature in an average households budgets. The changes are then
weighted to reflect the importance of each item in household budgets. All of the weighted price changes are then
averaged and given an index number. The base year is given a value of 100.
RPIX is another measure of inflation. It removes mortgage payments from the RPI figure. This is known as
underlying inflation.
Consumer Price Index (CPI) is similar to the RPI but is more sensitive to changes in household spending and allows
better comparison with inflation in other countries.
CAUSE OF INFLATION
COST-PUSH
In certain situations, businesses are faced with
higher costs of production. These could result from:
Rises in wages and salaries Tax increases Profits an increase in costs to raise profit
levels due to pressure from shareholders
can increase production costs
Imports-prices of imported goods may risedue to lower exchange rate
World demand for materials raises theirprices
When businesses face higher costs of production,
they will attempt to maintain profit margins, and
one way of doing this is to raise selling prices. This
becomes cost-push inflation.
DEMAND-PULL
When consumer demand in the economy is rising,
usually in BOOM stage, producers will realize that
existing stocks can be sold at higher prices. If they do
not raise prices, stocks could be sold out, leaving
unsatisfied demand. The increase in demand can be
due to:
Rise in consumer spending Firms investing in more machinery Government expenditure increasing More exports being bought abroad
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OPPORTUNITIES OR THREATS
If inflation rate is quite low, business can gain the
following benefits:
Cost increases can be passed on toconsumers more easily if there is a general
increase in prices.
The real value of debts owed by companieswill fall. Because the value of money is
falling, when a debt is repaid it is repaid
with money of less value than the original
loan.
Rising prices are also likely to affect assetsheld by firms, so the value of fixed assets
could rise. This will increase the value of a
business and when reflected on the balance
sheet, make the company more financial
secure.
However, higher rates of inflation, say above 10%
per year can have serious drawbacks for business:
Higher wage demands are likely and therecould be an increase in industrial disputes.
Consumers are becoming much more pricesensitive and look for bargains rather than
big brand names. Rapid inflation will often lead to higher
rates of interest. These higher rates make it
difficult for highly geared companies to find
the cash to make interest payments,
despite the fact that the real value of debts
is declining.
Cash-flow problem may occur for allbusinesses as they struggle to find more
money to pay the higher costs of materials
and other costs.
Inflation adds to uncertainty about thefuture. This will be the case in particular
with sales forecasts and with investment
appraisal, which requires estimates about
future cash flows.
Businesses that sell goods on credit will bereluctant to offer extended credit periods
Consumers may stockpile some items ortransfer their disposable income to
commodities that are more likely to hold or
increase their value.
Therefore, during periods of rapid inflation, business
may:
Cut back on investment spending Cut profit margins to limit their own price
rises
Reduce borrowing to levels at which theinterest payments are manageable
Reconsider their creditor policy Reduce labour costs
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LOW UNEMPLOYMENT
Unemployment is said to exist when members of the working population are willing and able to work, but are
unable to find employment.
CAUSES OF
UNEMPLOYMENT
EXPLANATION GOVERNMENT POLICY towards the
causes of unemployment
CYCLICAL
UNEMPLOYMENT
This occurs when an economy is in
recession. The recession stage of
business cycle results in a fall in the
demand for firms output. Business
therefore needs fewer workers.
Workers unemployed will spend less
and cause a deepening of the recession.
Government attempts tocontrol the economy as to
avoid substantial swings in the
business which lead eventually
to recessions.
Objective to keep inflation low.Anti-inflationary measures are
most likely to lead to cyclical
unemployment.
Aim to maintain a competitiverate of exchange so that
overseas demand for home-produced goods does not fall,
leading to cyclical
unemployment.
STRUCTURAL
UNEMPLOYMENT
This can exist even though the economy
is growing rapidly. This type of
unemployment results in certain types
of workers being unable to find work,
even though other labour markets are
short of labour. It results from structural
changes in the economy, which changes
the demand for labour.
It will provide education and training
programmes for workers who do not
have the required skills.
FRICTIONAL
UNEMPLOYMENT
Most workers who lose their jobs are
able to move quickly into new ones, but
others may take longer to find suitable
employment. If labour turnover rates
increase in the economy as a whole,
then the level of frictional
unemployment will increase.
The efficiency of the labour market can
be improved and frictional
unemployment reduced by provision of
information about job opportunities.
Real wage unemployment- It is argued that workers price themselves out of jobs. There are vacancies, but the
businesses will only be willing to pay wages which are lower than the workers are prepared to accept.
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OPPORTUNITIES OR THREATS
Demand The obvious effect of unemployment is that
people are not earning income and are likely to
spend less. Business will suffer a loss of demand for
their products.
Organization Unemployment can have a number of
effects on the internal organization of a business.
The firm can no longer afford to recruit new
members of staffs. This can lead to significant staff
rather than recruitment. Redundancies will add the
responsibilities and roles to those who remain in the
firm. This can lead to increasing demands on existing
employees. During periods of high unemployment,
some firms may reorganize their internal structure.
Payments Businesses may be faced with makingredundancy payments to workers. The cost of any
reorganization caused by redundancies will also have
to be borne by firms. Such costs may include lost
productivity after reorganization as employees
struggle to cope with new responsibilities.
Labour supply It may be easier for firms to recruit
new employees during a period of high
unemployment because people may be prepared to
work for less money. In this way firms can lower
their labour costs.
Output During periods of unemployment, many
firms reduce their output level to compensate for
falling demand. This can interrupt the flow of
production, causing production and stock control
problems.
Government spending High levels of unemployment
means that government spending on social security
will be high and will lose revenue from tax and
National Insurance contributions. To make up for
this the government may borrow, increase taxation
or reduce other items of spending.
Increased trade and reduced costs The services
offered by some firms depend upon other firms
going out of business. Firms specializing inreceiverships and pawnbrokers may see an increase
in the demand for their services.
Social issues Research into unemployment leads to
poverty and stress for those individuals, families, and
communities that have high levels of
unemployment. They can also include high levels of
vandalism and crime. This lead to higher insurance
premiums for businesses.
BALANCE OF PAYMENT
Balance of payment is a record of transactions between one country and the rest of the world.
The current account The difference between the
value of money entering a country (credits) and the
value of money leaving a country (debits) for: 1.
Trade in goods and services 2. Income to/from
abroad 3. Transfers are called the CURRENT
BALANCE.
Current balance = sales of exports and services,
income earned from abroad and transfers to a
country purchases of imports and services, income
going abroad and transfers from a country.
Capital account This involves the transfer of
ownership of assets, transfers of funds associated
with purchase and sale of assets and the cancellation
of liabilities.
The financial account This covers the flow of money
for transactions in financial assets and liabilities.
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OPPORTUNITIES OR THREATS
If a countrys economy has a large and persistent deficit on its balance of payments the serious economic problems
could result:
Depreciation in the value of its currencys exchange rate A decline in the countrys reserves of foreign currency An unwillingness of foreign investors to put money
EXCHANGE RATE
Exchange rate is a price of one currency in terms of another. Exchange rates are determined by the forces of
supply and demand. It is also affected by the base interest rates set by the Central Bank.
OPPORTUNITIES OR THREATS
APPRECIATIAN
When demand for a currency exceeds supply its value will rise.
The domestic firms that gainfrom an appreciation of the countrys currency are:
Importers of foreign raw materials and components, for whom the domestic currency cost of theseimports will be falling. This increases their competitiveness.
Importers of foreign manufactured goods, which are able to import the product more cheaply in terms ofdomestic currency.
In addition, lower import prices will help to reduce the rate of inflation for the whole economy and all firms are
likely to gain from this more stable position.
The domestic firms that lose from an appreciation of the currency:
Exporters of goods and services to foreign markets. Some business may decide to locate overseas to avoidthe high exchange rate.
Businesses that sell goods and services to the domestic market and have foreign competitors asappreciation makes imports cheaper.
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DEPRECIATION
The value of a currency is said to depreciate when one unit of it buys fewer units of other currencies.
The domestic businesses that gain from a depreciation of currency are:
Home-based exporters who can now reduce their prices in overseas markets. This should increase thevalue of their exports and lead to an expansion of the business.
Businesses that sell in domestic market will experience less price competition from importers.The home-based businesses that are likely to lose from depreciation are:
Manufacturers who depend heavily on imported supplies of material, components or energy sources. Retailers that purchase foreign supplies, especially if they are close domestic substitutes.
INTEREST RATE
It is the cost or price of borrowing. These are the different interest rates in the economy: overdraft, mortgage, and
credit cards. In any market, such as the market of mortgage, interest rates are determined by the demand for andsupply of money. If the borrowers demand more money for mortgages, the interest rate will rise.
INTEREST RATES AND CONSUMER SPENDING
Higher interest rates can:
Increase the cost of borrowing toconsumers. Consumers then tend to cut
back on taking out loans and using
overdrafts and credit cards. This will affect
business on selling goods on credits.
Lead to higher mortgage payments.Consumers with higher mortgage payments
will have less money to spend on other
goods. People are less willing to take out a
mortgage to buy property.
The overhead cost of the business willincrease.
Stop new investment. Encourages saving as savers gain more
money from the money saved.
Higher charges that result from interest rateincreases might persuade a business to use
retained profit to pay off outstanding loans.
This should reduce payments in future and
may lead to an increase in profit in the long
term.
Stocks are expensive to keep, so a rise ininterest rates might lead a business to cut
back on stocks, especially if it has borrowed
to buy them. It might also decide that
saving is a more profitable option.
If interest rates rises, saving and invest inUK becomes more attractive. Demanding
more pounds leads to a rise in the exchange
rate.
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SOCIAL
TECHNOLOGY
Demographical Factor
Age distribution - Birth rate, death rate, immigration/emigration
Fertility rate
Infant mortality rateNatural increase
Reproductive rate
Structure of population - affects patterns of employment, demands of consumers
Geographical
Age and location - Young people like to live in urban areas compared to older people
Urban and rural location - Encourage business and entertaintment outlet to in urban areas
Age and migration - Young people have higher mobility compared to old people
Social Cultural
Aspects of lifestyle and culture of the population
Determines what is acceptable and unacceptable in a productReference group - people who influences us
Concerns about food safety
Concerns about animals welfare
Concerns about the environment
Concerns about beuty and hygiene
Changing of roles in household buying
THE IMPACT OF TECHNOLOGY
Communication
Increase usage ofthe internet
Influence interfacewith supplies andcustomers
Product Technology
Impact on designand manufacture
Determines sppedof production,quality of products,roles of workers
Management /disposal of waste
Creates new
demand throughnew products
Costs of production
Increases fixedcosts and thusneeds large market
Encouragesmergers to createlarger firms in orderto spread costs
Larger firms usetechnology, requireless workers thusincreasing labourproductivity
Human Resourses
Affectsemployment
Affects the rolesand skills ofworkers
A flattening oforganisation charts
Market
Increases range ofproducts
Increasesmarket/distributionof products - eg.online market
Affects pricing ofproducts
Increases
competition in themarket
Changes thepattern of demand
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1.6 ORGANIZATIONAL PLANNING TOOLS
SWOT ANALYSIS
Examine the present situation of the business (its strength and weaknesses) and future possible changes
(opportunities and threats)
Important part of strategic planning: the firms assesses where it is now and what might happen in the future in
order to plan its strategy. The strategy may seek to build on its strength and/or protect against its weaknesses. The
firm will seek to exploit opportunities and deflect threats.
SIMPLE RULES FOR SUCCESFUL SWOT ANALYSIS
Distinguish where your organization is today and where it could be in the future Always be specific. Avoid grey areas Always apply SWOT in relation to your competition, better or worse Keep your SWOT short and simple. Avoid complexity and over analysis SWOT is subjective
STRENGTHS
Resources and capabilities that can be used asa basis for developing a competitiveadvantage.
Examples:
Marketing brand name, distributionchannels
Finance cash flow position, liquidity,profitability
People skills, motivation, ideas
Operations flexibility, volume, unit cost,quality
Exclusive access to certain resources
(5ps people, products, place,processes, procedures)
WEAKNESSES
The absense of certain strengths, the flip sideof strengths
Examples:
Marketing weak brand name, poorreputation
Finance poor budget control
People pack of trained/effective workforce,lack of direction
Operations poor productivity
OPPORTUNITIES
The change in external environement thatmay bring new opportunities for growth andprofits.
Examples:
Unfufilled customers needs (S)
Arrival of new technology (T)
Loosening of regulations (P)
Removal of international trade barriers (P&E)
THREATS
The change in the external environment thatpresent themselves as threats to the firms.
Examples:
Shifts in consumers taste away from the
firms products (S)
Emergence of substitute products (E&T)
New regulations (P)
Increased trade barriers (P&E)
SWOT
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DECISION MAKING
Reason in making a decision
To decide which course of action to take from the various possible alternatives To solve problems in a business
TYPES OF DECISION MAKING
DECISIONS MAKING PROCESS
Strategic decisions
More to general directionand overall policy ofbusiness
Long term decisions andable to influence theorganizations
Performance
Long term and high riskMade by the owner of thebusiness
In some public limitedcompanies, decisions aremade by the board ofdirectors
Others may requireshareholders consent
Tactical decisions
Medium term decisions
Can be calculated andmore predictable
Used to implementstrategic decisions
Made by the manager ofthe business
Required to implementstrategic decisions
Important tacticaldecisions made by thethose in the top of thebusiness hierarchy
Less important made byjunior managers
Operational / administrativedecisions
Lower level decisions
Short term and low risk
Require much less thought andevaluation
Made by (nearly) all employees
Sometimes required
guidance/approval from managersDelegating decisions to thosefurther down the hierarchy can bemotivated
Led to improvements in efficiencyand quality
Reducing the chain of command canimproved the decisions making
Identifying objectives
The business objectives may be differ atthe different stages of growth
Need to develop criteria to measurewhether it has achieved its objectives
Collecting information and ideas
The amount and nature of the informationneeded depend on the decisions
Ideas from working party to collect informationand ideas within the firm or from discussionsamong staff
Analyzing information and ideas
Analyze information to look foralternative course of action
Aim to identify which course of
action will best achieve the businessobjectives
Making decision
Commit oneself to one course of action
Some decisions can be reversed
Sometimes decisions cant be reached
collect more information and ideas
Communication
Personnel are informedand decisions is carried out
Outcome
Will take time beforethe results are known
Evaluate the results
Evaluate the results in aform of reports
Necessary to modify thecourse of action on thebasis of the report
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1.7 GROWTH AND EVOLUTION
INTERNAL GROWTH
Arises within the
company
The companies grow by using
its own resources
The expansion is based on reinvested
profit/debt financing.
EXTERNAL GROWTH
JOINT VENTURES
Definition
A joint venture is the long-term commitment of funds, facilities and services by two or more legally separate
interests, to a combined enterprise for their mutual benefits.A joint venture need not be a separate legal entity orcompany. Other forms of joint ventures include an agreement to work together formalised through a Heads of
Agreement or a Strategic Cooperation Agreement.
Occurs when a firm
invested its size by
taking over or merging
with other firm
(intergration)
Faster method
of increasing
eg: Franchises, MNC
Strategic Alliance &
Joint Venture
Mergers & Takeovers
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Reason for Joint Venture
Internal Reason
Build on company's
strengthsSpreading costs and risks
Improving access tofinancial resources
Economic of scale andadvantages of size
Access to new technologiesand customers
Access to innovativemanagerial practices
Number of sell people willincrease because we wonthave spend to time and
money hiring newemployees
Competitive Goal
Influencing structural
evolution of the industryDefensive response toblurring industryboundaries
Creation of strongercompetitive units
Speed to market
Improved agility
Strategic Goal
Synergies
Transfer oftechnology/skills
Diversification
Advantage
extend the marketing reach
access needed information andresources
build credibility with a particulartarget market
access new markets that wouldbe inaccessible
without the partner
Provide companies with theopportunity to obtain newcapacity and expertise.
Allow companies to enter intorelated business or newgeographic markets or obtain new
technological knowledge
Disadvantage
Risk giving control of itstechnology to its partner
Profitable returns may take sometime to achieve
high level of commitment of staff
and managementCultural differences andcommunications difficulties
Difficult to get out of quickly
Working in a different legal andcommercial system
Political risks in the country wherethe joint venture is based
Potential for conflict with your jointventure partner
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STRATEGIC ALLIANCES
Strategic Alliance
Relationship formed
between two or more
parties to pursue a set of
agreed upon goals or to
meet a critical business
need while remaining
independent
organizations
Why ?? How ??
Advanta es Disadvanta es
Marketing and advertisng
Gain customer trust
Gain more expertise
Expand business rapidly
Spend less time and money
Each partner must contribute
The alliance can be struck
One company will lead and the
Each partners retain bss independence
Strategic alliances can be combined with other agreements, such as licens
technology
Greater responsiveness
Opportunities for growth
Risk sharing
Increased leverage
Payment difficulties
Small company subsume by larger
Potential for conflict
Hi h commitment time, mone , eo le
Strategic priorities change over time
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MERGERS AND TAKEOVERS
Definition or main idea
The combination of two or more entities to achieve synergy
Merger
integration
combination of 2 or more co. forming a newcomany
involves mutual decision to combine
shares in th old co. exchanged fr equal num. ofshares in th merged entity.
Takeover
acquisition
th purchase of one co. by anthr with no new co.being formed.
doesnt need mutual decision to combine,even if thtarget co. doesnt wnt to be purchased.
acquiring firm usually offers cash price per share toth shareholders of th targer firm according to aspecified ratio.
Reason
Economies ofscale
Increase profit
Diversification
Cross selling
Synergy
Taxes
Resource/Techtransfer
Powersatisfactory
Monopoly
Empire buliding
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Types of mergers
Horizontal
Integration with firms in the same industry and at the same stage of production
Vertical(Forward)
Integration with a bss in th same industry bt a customer fr th exiting bss.
Vertical(Backward)
Integration with a bss in th same industry bt a supplier of th existing bss.
Merger
Horizontal
Vertical
Forward
Backward
BalancedConglomerate
Advantages
Reduce competitor
Possble econ. of .scales
Increased power oversupplier
Disavantages
Rationalization maybring bad publicity
May lead to mnopolyinvestigation ifexceeds certain limit.
Impact on stakeholders
Customers hv lesschoice
Employees may losejob due torationalization
Advantages
Abe to control thpromotion and pricing ofits product
Secures a secured outletfr th firm's product andmay excludecompetitor's product.
Disavantages
Consusmers maysuspect uncompetitiveactivity and reactnegatively
Lack of experience-goodmanufacturer doesntneccessarily make a
good retailer
Impact on stakeholders
Workers hv greater jobsecurity because th bsshas secured outlet
More various jobsopportunities fr thcommunity
Consumers may resent
lack of competition -withdrawal ofcompetitor's productfrom retail outlet.
Advantages
Control overquality,price,and delivery
time of suppliesEncouraged jointresearch to improvequality of supplies ofcomponents
Control supplies tocompetitors
Disavantages
Lack experience inmanaging supplying
company.Supplying bss becomecomplacent due tosecured customer.
Impact on stakeholders
Greater careeropportunities to th
workers and community.Consumers obtainimproved quality andinnovative prouct.
Control over supplies tocompetitors may limitcompetition
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Conglomerate merger
Intergration of co. that hv no common bs areas.
Takeovers
Pros and Cons of takeover
Advantages
Diversifies in firm'sindustry and market.
Spread risk
Take th bss into fastgrowing market
Disavantages
Lack of experience innew sector
Lack of clear focus anddirection
Impact on stakeholders
Greater careeropportunities fr
workers andcommunity
More job security tothe workforce becauseof risk is spread acrossmore industries.
Takeovers
Friendly Hostile Reverse
Friendly
usually th board of th targetcompany will be informedbefore a bidder makes anoffer
In private co.,th shareholdersand th board are likely thsame people or closelyconnected to each
other.Thus,private takeoversare likely to be friendly as thshareholders hv agreed tosell th co.
Hostile
Th bidder continues topursue even th board rejects.
Th bidder makes th offerwithout informing th boardbeforehand.
Not usually bad,as cn bebeneficial fr shareholders inorder to change fr more
effective management.
Reverse
Private co. acquires publicco.
Allow th private co. to floatitself while avoiding thexpenses and time involvedin a conventional initialpublic offering(IPO)
Pros
Increase sales/revenue
Venture into new bss and markets
Pofitability of target co.
Increase market shareDecrease competition
Reduction of overcapacity in th industry
Enlarge brand portfolio
Cons
Reduced competition and less choice frconsumers
Likelihood of price increases and job cuts
Cultural integration/conflict with newmanagement
Hidden liabilities of arget entity
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Problems associated with rapid growth
Diseconomies of scale
Factors that increase unit costs as a firms scales of operation increases beyond a certain size
Factors:
Communication problems Alienation of workforce-lack motivation Duplication of effort Office politics Poor and slow decision making Inertia-unwillingness to change Cannibalization- self competition Public and government opposition
Solutions:
Management by objectives Decentralization Reduce diversification-focus on core activities
Additionl capital in runing bigger firm,can lead to negative cashflow and increase inlong-term borrowing.
Financial
Problems in coping with larger bss operation.
Lack of coordination between divisions(Decentralization may solve this)
Managerial
Original marketing strategy may not be appropriate,as having wider range of products.
Marketing
True for target co. hat hv been acquired by larger co
Original owners might lose control when power conflict happens
Loss of control by original owners
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2. Assignedterritory.
3. Duration of thefranchise
agreement
4. Franchise feeand total
anticipatedinvestment
5. Trademark,patent, andsignage use.
6. Royalties andother fees you
are expected topay.
7. Advertising
8. Operatingprotocol.
9. Renewal rightsand franchisee
termination/cancellation policies
10. Resale rights.
1. Trainingand/or ongoing
support providedby the franchisor
Definition
FRANCHISE
A type of license that a party(franchisee) acquires
to allow them to have accessto a business' (the
franchisor) proprietaryknowledge, processes and
trademarks in order to allow
the party to sell a product orprovide a service under the
business name.
FRANCHISOR
A party ina franchising
enterprise thatultimately owns therights, trademarks
and proprietaryknowledge of thespecific business
entity.
FRANCHISEE
The party in afranchising agreementthat is purchasing the
right to use a business'strademarks, associated
brands and other
proprietary knowledgein order to open abranch
ROYALTY
A payment to anowner for the use ofproperty, especiallypatents, copyrightedworks, franchises or
natural resources
Content of
Franchise
Agreement
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Establishedbrand
Training
Volumepurchasing
power
advertisingProven
businessmodel
Accountingand budget
systems
Others helprunning your
business
To protect the copyright and privacy rights of bothparties.
Create a balance between individual privacy rightsand the needs of organizations to collect, use and
disclose personal information for reasonablecommercial purpose.
Protect its brand name. Avoid fraud
Importance of agreement.
FRANCHISOR
The businessesunder the
ultimate controlof the franchisor
can spreadrapidly
The franchisorhas a built-in andcaptive market
for all hisproducts withlittle financialcommitment
A significantincome can beearned without
the hard work of
meeting anddealing with
customers face-to-face.
ADVANTAGES of
Franchisee
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DISADVANTAGESof Franchisee
loss of control
The franchisormight go out of
business, orchange the waythey do things
Otherfranchisees
could give thebrand a badreputation
The franchisormay makemistakes in
their policies
You may find it
difficult to sellyour franchise -
you can onlysell it to
someoneapproved by
the franchisor
The franchiseewill have to paythe franchisor
for the servicesprovided and
for the use ofthe system
Franchisor
Problems oncontrolling the
franchiseeoperation in a
long run.
Failure by anindividual franchiseewill reflect badly onthe whole franchise
operation
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Definition ofmultinationalcorporation
A corporation orenterprise that
managesproduction
establishments ordelivers services inat least twocountries.
Not merelyimporters/expor
ters (producegoods and
services in morethan onecountry.
Some MNCshave annual
sales turnoversexceeding thesize of many
countries entire
economies.
They can have apowerful
influence ininternational
relations and localeconomies.
Corporation thathave their
headquarter in onecountry butoperating
branches, factories,and assembly
plants in others.
Advantages ofbeing
multinationalcorporation
To become nearer tomarkets throughout
the world
- Better marketinformation regarding
consumer tastes as aresult of closeness tothem
Growth motive
- A company mayhave reached aplateau satisfyingdomestic demand,which is not growing.Looking for newmarkets.
Market competition- The most certain
method of preventing
actual or potentialcompetition is toacquire foreign
businesses
Avoid ImportRestrictions
- When production isdone in host country,there is no need topay importduties/importrestriction
Government grantsand tax incentives .
- The favorable taxrates in an offshore
country are designedto promote a healthy
investmentenvironment thatattracts outside
wealth.
High TransportationCosts
- Transportation costsare like tariffs in that
they are barrierswhich raise consumer
price
Avoiding legislation inhome country
- Legislation or otherrestrictions can be
avoided by themultinational basing
some of its operationsin a different country
1.9 GLOBALIZATION
MULTINATIONAL COMPANIES
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Advantages of beingmultinationalcorporation
Spread risk
- In one area of thebusiness is doing
badly, moresuccessful ones will
help keep thebusiness intact
Diversification ofInvestment
- In some countries,regulations restrictthe international
investmentopportunities of
citizens. Offshoreaccounts are much
more flexible, givinginvestors unlimited
access tointernational
markets and to allmajor exchanges
Tax Reduction
- Many countries(known as tax
havens) offer taxincentives to foreign
investors.
Confidentiality
- Many offshorejurisdictions offerthe complimentarybenefit of secrecy
legislation
Lower costs ofproduction
- Lower labour ratesdue to much lowerdemand for local
labour compared todevelopedeconomies
Asset Protection
- Offshore centers
are popularlocations forrestructuring
ownership of assets.Through trusts,foundations or
through an existingcorpor