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BUSINESS NOTES (SEMESTER 1)

BUSINESS NOTES (SEMESTER 1)

1.1 NATURE OF BUSINESS ACTIVITY


(A)BUSINESS ACTIVITY

Business Activity

INPUT - a.k.a factors of prodution

PROCESS - converts resoures to goods and services

OUTPUT

1. Land

- includes land and all natural renewable/unrenewables resources

1.Form - change physical to useful goods

2.Capital - anything that is owned by a bss & used to make prodution easier & more efficient

2.Place - send to the right place (transportation)

1. Goods and services physical and tangible goods non tangible products sold to public

2. Wastage 3.Time - sell during high demand

3.Labour workforce of a business

3.Labour management, skilled workers, manual workers

4.Enterpreneur willing to take risks (loss and profit)

4.Enterpreneur someone who organizes other inputs to initiate the process of prodution

4.Possession promotion & advertisement (will lead to possession by the consumes)

BUSINESS NOTES (SEMESTER 1)

(B) BUSINESS FUNCTION

Production/operation makes the product/ deliver the services Finance financial reporting and control. Rising of the capital necessary to run the business.

Marketing selling the business goods & services, positioning them within the market Human resources/personnel hiring, firing and payroll.

(c)TYPES OF PRODUcTION

SECONDARY SECTOR including that manufactures goods using the raw materials provided by the primary sector eg:rocket making, textile, biotech TERTIARY SECTOR provides services to consumers & the other sectors of industry eg:insurance, transportation, entertainment

PRIMARY SECTOR including that extracts & uses the natural resources of the Earth eg:mining gold

TYPES OF PRODUCTION

BUSINESS NOTES (SEMESTER 1)

1.2 TYPES OF ORGANIZATION


(A) PRIVATE SECTOR AND PUBLIC SECTOR PRIVATE SECTOR FEATURES Organization owned by private individuals or private of people Have a clear aim of seeking profit for their owner PUBLIC SECTOR 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
Pivate sector business organisation

Unincorperated bss

Incorperated bss

sole trader

partnership

private limited company

public limited company

Most are classed as the nonmarket 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 have been transferred from the public to the private sector

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 bss Separated legal identity from its owners Bss can be sued,can be teken over and can be liqiudity

BUSINESS NOTES (SEMESTER 1)


Independence want to have a full control over the business and prefer to make their own decision. To gain more reward. by doing business, they will gain extra profit compared to profit gained by being employed.

(B) STARTING A BUSINESS


Satisfy creative needs. an individual that are very creative may channel their creativity through business. ex. a person that can create a beautiful souveneir can sell it to the tourists.

Commitment to a product An individual might being so comitted to a product until they will feel like they want to inovate the product as they wish it would be.

Reasons for setting up a business

Redundancy employees who are made redundant by their employer due to economic situation and these employees being unemployed.

Cannot find employment an individual might didi not manage to find any job, therefore they choose to run a business.

Extend hobbies a passion of doing business will lead to a business activity. eg : Mofaz

Business idea Reason for setting up a business. it has been explained in the previous page. it can come from many places like the existing skills when doing another job, adaptation of an existing product, market search, 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

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.

Planning a statement that outlines the way that the business will achieve its aims and objectives. functions: a clear idea of its direction and operation. to show the bank or other institutions its likely position and ability to pay back a loan. identify the problems earlier highlight its strenghths and weaknesses

BUSINESS NOTES (SEMESTER 1)

Entrepeneur. an individual might has lake of skills, experience. vision, ambition and motivation. Therefore a mistake can be done when making important decision.

Planning a new entrpeneur may have a non-proper business planning in terms of marketing, advertising, finance and others.

Basic ideas. the fresh product must be appealing enough to the market in order to get profit ang being recognized.

Possible problems faced by start-ups

High competition. a new business may have to survive in a market that is full of competition. Promotion. method of sales and promotion is not appropiate. Plus, there may be no unique selling point.

The funding. inadequate initial funding can cause a problem to the startsup.

BUSINESS NOTES (SEMESTER 1)

(C) PROFIT-BASED ORGANIZATIONS

TYPES FEATURES

SOLE TRADER
Owned by just one person The owner runs the business and may employ 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 legal formalities needed. Some types of business need to obtain special permission before landing Once turnover reaches a certain level sole trader must register for VAT Must pay income tax and National Insurance contributions. Some types of business need a license such as alcohol, supplying taxi service or public transport. Must comply with legislation aimed at business practice. E.g they must provide healthy and safe working conditions for their employees.

PARTNERSHIP
A partnership has more than one owner. 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 each partner will contributes. How much profits and losses will be shared Procedure for ending partnership How much control each partner will have. Rules for taking new partners

ADVANTAG ES

Freedom and flexibility ( can choose the hour 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 up business Each partner can specialize More finance can be raised due to have more than one owner Can share the workload Sharing of losses

DISADVANT AGES

Sole trader have UNLIMITED LIABILITY. Illness can stop the business activity. The owner can be sued by the customers in the event of dispute due to it is unincorporated business. If the person loses interest or die, then the business will cease. Limited scope for economic of scales.

Profits need to be shared amongst more owners. Partners may disagree when making a decision The partnership can be end when one of the partner die Any decision made by one partner on behalf of the company is legally binding on all other partner. Can be sued by customers

BUSINESS NOTES (SEMESTER 1)

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 DOCUMENTS Memorandum 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 FEATURES ADVANTAGES -

PRIVATE LIMITED The business must ends in Limited or Ltd. Shares must only be transferred privately and all the shareholders must agree with the transfer. Shares are not advertised for general sale. Often as family business owned by members of family or closed friends. 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 to the outsiders. Business will be continued even if one of the owner dies -

PUBLIC LIMITED Ends with Plc. The shares of the company can be bought and sold by the public on the stock exchange

Shareholders have limited liability More power can be enjoyed due to their larger size Huge amount of money can be raised from the sale of shares to the public Production costs may be lower as firm may gain economies of scale Easier to raised finance since financial institution are more willing to lend to plc. 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 inspected by members of the public. Because of their size, they are not able to deal with the customers in personal.

DISADVANTAGES -

-Profits have to be shared amongst large number of shareholders. There are legal procedures to form up a business Firm does not allow to sell shares to public, This will restricts the amount of capital can be raised - Financial information filed with the Registrar can be inspected by public. Competitor could use this advantage.

BUSINESS NOTES (SEMESTER 1)

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 and contacts. - Sources of funds include membership fees, sale of goods and services, private donations and grants from international institutions or government. - NGOs are not legal entities under international law (except the Red Cross).

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BUSINESS NOTES (SEMESTER 1)

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

Measurement of Achievement. Provide a basis for decisionmaking. Determine the role of the employees

IMPORTANCE of
Provide a sense of direction for the business.

ORGANIZATIONAL OBJECTIVES

Determine the strategy to be done.

Provide shareholders with a clear idea of the business in which they have invested.

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BUSINESS NOTES (SEMESTER 1)

Content & Nature of Objectives

Used to asess the business' performance.

SMART

States the goal of the business

Specific

Measurable

Agreed

Realistic

Time-specific

(B) STATEMENTS

A statement of the fundamental purpose of he organization so as to inspire those who work for it. A vision of what the organization wants to be

Guidance for decision-making

A statement of values to guide individual behaviour.

Boundaries for the organization

What should a mission statement has?

A statement of the character of the organization and the customers it seeks to serve.

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BUSINESS NOTES (SEMESTER 1)

Provide information and inspiration to their employees

Provides information and inspiration to their employees

Characteristics of a wellproduced missionstatement.

Outlines clearly the way ahead for the organization.

Provides a living statement that can be translated into goals and objectives at each level of organization.

Provides a definition of success.

IMPORTANT TERMS TO BE REMEMBERED

TERM(S)

MEANING(S) A statement of the business core aims, phrased in a way to motivate employees and to stimulate interest by outside groups. A statement of the purpose of the business, usually not specific and mainly to attract stakeholders A goal that an organization or individual wants to achieve. What the organization wants to achieve to remain competitive & ensure its long-term sustainability Example: To enlarge market share More to short-term departmental performance to obtain strategic objectives. Low-level objectives which are addresed to individuals or small groups.

Mission Statement

Vision/Aim

Objective

Strategic objectives

Tactical objectives

Operational Objectives

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BUSINESS NOTES (SEMESTER 1)

(C) AIMS AND OBJECTIVES

HIERARCHY OF OBJECTIVES

EXAMPLES

AIM CORPORATE OBJECTIVES DIVISIONAL OBJECTIVES DEPARTMENTAL OBJECTIVES INDIVIDUAL OBJECTIVES

AIM
CORPOR ATE OBJECTIV ES
DIVISION AL OBJECTIV ES
DEPARTME NT OBJECTIVE S

To maximise shareholders value To gain profit of all divisions by 10% a year To increase market share by 10% MARKETING: To increase sales revenue by 10% Introduce 5 more clients about the business each year.

INDIVIDUAL OBJECTIVES

(D) ETHICAL OBJECTIVES

Ethics: A set of values & beliefs which influences how individuals, groups & society behave

Business Ethics
Help firms to decide what action are right or wrong in certain circumstances Business Ethics: Concern with how such values & beliefs operate in a bss.

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BUSINESS NOTES (SEMESTER 1)

BENEFITS OF ETHICAL BEHAVIOUR EFFECTS OF ETHICAL BEHAVIOUR

Consumer's Views

Increasing no. of customers are taking into account a firm's behaviour when buying their products Increase in sale

Increasing cost Forced to turn down cheaper suppliers who test on animals Loss of Profits Forced to turn down profitable business

Employees

Improvements in the recruitment and retention staffs. More able to recruit well qualified & motivated staff.

Business Practice
Alter the way it approaches business matters. Profit vs Ethics Shareholders may object if by being ethical, their investments is harmed.

Employee's Motivation

Employees with high motivation due to the good name of the firm.

Relation with Suppliers Some suppliers only supply products of business that is ethical.

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BUSINESS NOTES (SEMESTER 1)

CORPORATE SOCIAL RESPONSIBILITY (CSR) 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 environment in all aspects of their operations.

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 applies within national boundaries may not effect bss in other countries.

Government intervention

Gov work with particular industries & bss sectors to encourage the creation of regulatory bodies which help to control the activity of bss. Voluntary org tend to monitor the behavior of relevant firms. Gov by threatening legislation if the self-regulatory bodies are not seen to be working

Self Regulation

Bss might have to change: The aims and objectives of bss Operating methods, this might lead to increasing costs. The relationship with employees which involve changing work practices. The relationship with other stakeholders, 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 and organization outside of bss.

Free market will act effectively to police less responsible bss. arket Pressures Consumer behaviour will force irresponsible bss to act with greater accountability. This is likely to happen when the consumers have sufficient information.

M Market Pressures

Campaign from some of pressure groups (animal welfare, etc) may affect the bss. If they fail, they called for greater democracy in corporate behaviour which involved the stakeholders of the company.

Pressure Groups

Benefits of social auditing: Provide valuable information to pressure groups & consumers about corp responsibility of a bss. Allow the managers of a bss to gain a complete picture of the impact of the bsss activities. Preventing future criticism of its activities. Able to identify the extent to which it is meeting some of its nonfinancial activities. Shareholders can use it to raise questions about bsss activities at annual shareholder meetings. Gov can use social audit of a range of bss in particular industry to assess the need of legislation or regulation of bss in the industry.

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 of entire range of its activities on stakeholders. - To evaluate its performance against a set of non-financial criteria (its effect on environment, its attempts to meet social obligation to employees. - May involve: o Indentifying the social obj and ethical values of the org. o Defining the stakeholders of bss. o Establishing social performance indicators. o Measuring performance, keeping records & preparing social accounts. o Submitting the accounts to an independent audit and publishing results. - May include: o The salary difference between the highest and lowest paid employee. o Health and safety information. o The extent to which employees feel valued. o The view of consumers about whether the bss is living up to its ideals.

Cost and profit > may raise the cost > profit will decrease

Value and beliefs > value and beliefs of managers and employees of a bss may not correspond with what the majority of others in a society regard as responsible. BARRIERS TO CORPORATE RESPONSIBILITY

Information available to consumers, governments and pressure groups > without it, it is difficult to monitor the bss activities.

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BUSINESS NOTES (SEMESTER 1)

Areas of corporate social objectives:


The environment

Arguments for CSR Creation of a better social environment benefits both society and bss Power should be used responsibly Social involvement creates a favourable image for the company Bss has the resource to help solve social problems Bss & society are interdependent Social involvement discourages additional gov. intervention ENVIRONMENTAL AUDIT A systematic review of the interaction between an organization and the physical environment. Looks at the orgs compliance with environmental regulations and its environmental policy, the environmental risks to which it is exposed, waste management and recycling.

Arguments against CSR The primary task of bss is to maximize its profits by concentrating on commercial activities Social involvement results in higher prices to customers Social involvement reduce economic efficiency Social activities reduce the international competitiveness of local businesses Company director have a duty to shareholders Businesspeople lack the social skills to deal with problems of society Aims of environmental audit:

Energy

Fair business practice

Human resource

Community involvement

Products

2 variations on environmental audit:


Environmental review Environmental impact review

- Verify compliance with environmental, health and safety 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 environmental failure. - Increase the workforces awareness of companys environmental policy. - Identify ways to further reduce waste and energy usage. - 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 efficiency o precautions taken when transporting toxic substances o vehicles emissions energy use: Bss org(s) should adopting o energy efficiency socially responsible policies o recycling waste energy waste: Firms should do things with o disposal methods integrity, openness and o waste management honest cooperation o waste minimization o recycling Activities are to evaluated on o emissions social responsibility criteria o procedures for dealing with accidental spillages along with other criteria materials: o use of environmentally friendly materials o extent to which materials are renewable o substitution of toxic materials with non-toxic ones impact on landscape and habitats: o damage to habitats o ways to reduce damage, preserve natural habitats and make sites attractive as possible

Social or external costs are to be seen as part of operating expenses Firms need to be prepared to use its resources for wider social purposes

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BUSINESS NOTES (SEMESTER 1)

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)

Customers

Government

EXTERNAL

Owners/ Shareholders

Managers

Employees

INTERNAL

Suppliers

Community EXTERNAL

Types of Stakeholders

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BUSINESS NOTES (SEMESTER 1)

(A) INTERNAL STAKEHOLDERS AND THEIR ROLES IN BUSINESS

Provides innovation - Has business idea

Indulge in new business where business never existed

1) ENTREPRENEUR

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 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) 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 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 To receive fair wage To ensure good working conditions To secure their jobs through survival and expansion of business To ensure job satisfaction

2) SHAREHOLDERS (OWNERS)

3) DIRECTORS

4) MANAGERS

5) EMPLOYEES

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BUSINESS NOTES (SEMESTER 1)

(B) External Stakeholders Definition: Stakeholders who are indirectly involved with the firm. Below are their objectives and interest in a business/to a firm

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 survives into 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.
Stakeholders tend to have conflicts with another class of stakeholders. Below are some causes or situation reflecting the incident.

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BUSINESS NOTES (SEMESTER 1)

Shareholders

Conflict may arise when they seek for short term profits. The bss however is aiming for long term profits.

Conflict with managers/directors. This is when manager might pursue their own interest, paying themselves high salaries, organising time which suits their own needs. Only satisfactory levels of profits generated. Shareholders however want high profits.

They seek for fair wages. Conflict raises when managers pay them with unfair levels of wages. Conflict occurs when there're rationalisation leading to redundancy. They feel threathen of losing their jobs.

Customer
Cnflct might occur when the products and services offered is not satisfying.

Employees Working Conditions is uncomfortable for the them.

Inefficient delivery service to them.

Their safety might be taken for granted by the managers.


Does not receive after sales service.

Unable to achive good value for money. Cnflct with bss/owners when price is high. Owners are maximizing their profits while consumer want cheap product. Conflct with managers when they take too long to pay for products. This cause hardship for smaller suppliers.

Suppliers

Cnflct with managers/shareholders of a bss if they make late delivery.

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BUSINESS NOTES (SEMESTER 1)

Comunity cnflct happen when bss activity threathen quality of life of the local resident. Also when bss cannot offer employment

Bank lenders Managers could not pay back in full when repayments are due.

Government cnflct when there's unethical bss which disobey rules and regulation set by the gov

Competitors plagiarism of products lead to cnfltc with the bss.

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BUSINESS NOTES (SEMESTER 1)

1.5 EXTERNAL ENVIRONMENT

PEST Analysis

Political/Legal

Economy

Social

Technology

SWOT Analysis

Internal

External

Strength

Opportunities

Weakness

Threats

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BUSINESS NOTES (SEMESTER 1)

POLITICAL/LEGAL Political Environment Concerns the activities of the government and 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 of corporation tax (tax on company profit) o Reduces willingness, as well as ability to expand o 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) o Reduces 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 will suffer if income is redistributed to the less well off

Taxation

Disposable incomes

Spending power

Aggregate demand

Budget Government provides certain welfare benefits to various groups in the society o This involves a transfer of income from taxpayers to benefit receivers o The purchases of those receiving benefit are likely to be different from the better off taxpayers o Business that provide good and services 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 on goods, services and labour Examples: o Infrastructure, school building and health There are many private sectors that rely heavily in government contracts The business community benefits from the Government spending on infrastructure which involves basic services that are essential to industrial society

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BUSINESS NOTES (SEMESTER 1)

Policies Reasons of government policies: o Achieve a certain production targets o Achieve a particular structure within an industry o Promote growth, investment and technical progress Competition policy correct the abuse of monopoly power Regional policy assist areas of high unemployment, declining industry

Assistance for small firms Macro-Economic Policies

Fiscal Policy Concerns about the decisions of 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

Expansionary Fiscal Policy Recession


Raise government spending Lower tax rates

Increase aggregate demand

Increase in output and employment

Contractionary Fiscal Policy Boom


Reduce government spending Raise tax rates

Reduces aggregate demand

Reduces output, employment and inflation

Interest Rate

Exchange Rate

Appreciation /

Depreciation of currency

Legal

The law and employment practices

The law and consumer rights

The law and business competition

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BUSINESS NOTES (SEMESTER 1)

ECONOMIC ENVIRONMENT

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BUSINESS NOTES (SEMESTER 1)

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 3.00 2.50 2.00 1.50 1.00 0.50 0.00 20 40 60 Quantity demanded 80 100 demand

CHANGES IN DEMAND Factors and effects: INCOME Higher 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 the price of and demand for another. A rise in the price in one brand is likely to cause an increase in the demand for others. COMPLEMENTARY Goods 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 POPULATION Changes 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. LEGISLATION Government 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.

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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 3.00 2.50 2.00 1.50 1.00 0.50 0.00 20 40 60 Quantity supplied 80 100 supply

CHANGES IN SUPPLY Factors and effects: COSTS OF PRODUCTION A 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 PRODUCTION Where 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.

LEGISLATION A new anti-pollution law might increase costs causing the supply curve to the left. THE OBJECTIVES OF FIRMS Firms might seek to increase 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.

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BUSINESS NOTES (SEMESTER 1)

PRICE
EQUILIBRIUM PRICE The point at which the demand and supply curves intersect is known as equilibrium price where PO=QO. 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 buying economies. Suppliers will often offer substantial discounts for large orders. TECHNICAL ECONOMIES - 1.Large firms are more 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 other lending 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 public for 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 costs obviously 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 firms often 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 more efficiently 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 that increase 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 larger organizations 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 profits compared 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 for consumers 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 large number 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 competitive markets 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 goods and services-higher living standards Higher output lead to increased employment-increase consumer incomes Absolute poverty can be reduced if growth is substantial enough and the benefits are sufficiently dispersed Businesses should experience the rising demand for their products Higher GDP makes more resources available for government through greater income from taxes and decreased burden of social expenditure

THE BUSINESS CYCLE 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.

BOOM (PEAK) In a BOOM consumer spending and investment will be high. Many businesses will experience high levels of demand from people with increasing incomes. Profits should be high for most

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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 high demand. This will cause wages and business costs to rise. Unemployment will be low and incomes will be 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 for imports 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 deficit to 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 invest in expectation of an economic recovery Demand for inferior goods actually increase The risk of job losses may encourage improved relations between employers and employees-increase efficiency Hard decisions may need to be taken regarding closures of factories and officesmake 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 would record 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 rise due to lower exchange rate World demand for materials raises their prices

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 to consumers more easily if there is a general increase in prices. The real value of debts owed by companies will 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 assets held 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. the cash to make interest payments, despite the fact that the real value of debts is declining. Cash-flow problem may occur for all businesses as they struggle to find more money to pay the higher costs of materials and other costs. Inflation adds to uncertainty about the future. 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 be reluctant to offer extended credit periods Consumers may stockpile some items or transfer their disposable income to commodities that are more likely to hold or increase their value.

However, higher rates of inflation, say above 10% per year can have serious drawbacks for business: Higher wage demands are likely and there could be an increase in industrial disputes. Consumers are becoming much more price sensitive 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

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 the interest 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 CYCLICAL UNEMPLOYMENT EXPLANATION 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 POLICY towards the causes of unemployment Government attempts to control 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 competitive rate of exchange so that overseas demand for homeproduced goods does not fall, leading to cyclical unemployment. It will provide education and training programmes for workers who do not have the required skills.

STRUCTURAL UNEMPLOYMENT

FRICTIONAL 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. 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 making redundancy 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 in receiverships 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 gain from an appreciation of the countrys currency are: Importers of foreign raw materials and components, for whom the domestic currency cost of these imports will be falling. This increases their competitiveness. Importers of foreign manufactured goods, which are able to import the product more cheaply in terms of domestic 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 avoid the high exchange rate. Businesses that sell goods and services to the domestic market and have foreign competitors as appreciation makes imports cheaper.

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BUSINESS NOTES (SEMESTER 1)

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 the value 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 and supply 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 to consumers. 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 will increase. Stop new investment. Encourages saving as savers gain more money from the money saved. Higher charges that result from interest rate increases 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 in interest 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 in UK becomes more attractive. Demanding more pounds leads to a rise in the exchange rate.

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SOCIAL

Demographical Factor Age distribution - Birth rate, death rate, immigration/emigration Fertility rate Infant mortality rate Natural 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 product Reference 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

TECHNOLOGY

THE IMPACT OF TECHNOLOGY


Communication Increase usage of the internet Influence interface with supplies and customers Product Technology Costs of production Human Resourses Market Increases range of products Increases market/distribution of products - eg. online market Affects pricing of products Increases competition in the market Changes the pattern of demand Impact on design Increases fixed Affects and manufacture costs and thus employment needs large market Affects the roles Determines spped of production, Encourages and skills of quality of products, mergers to create workers roles of workers larger firms in order A flattening of to spread costs Management / organisation charts disposal of waste Larger firms use technology, require Creates new less workers thus demand through increasing labour new products productivity

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BUSINESS NOTES (SEMESTER 1)

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.

STRENGTHS Resources and capabilities that can be used as a basis for developing a competitive advantage. Examples: Marketing brand name, distribution channels 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 side of strengths Examples: Marketing weak brand name, poor reputation Finance poor budget control People pack of trained/effective workforce, lack of direction Operations poor productivity

SWOT

OPPORTUNITIES The change in external environement that may bring new opportunities for growth and profits. 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 that present 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)

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

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BUSINESS NOTES (SEMESTER 1)

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 Strategic decisions More to general direction and overall policy of business Long term decisions and able to influence the organizations Performance Long term and high risk Made by the owner of the business In some public limited companies, decisions are made by the board of directors Others may require shareholders consent Tactical decisions Medium term decisions Can be calculated and more predictable Used to implement strategic decisions Made by the manager of the business Required to implement strategic decisions Important tactical decisions made by the those in the top of the business hierarchy Less important made by junior managers Operational / administrative decisions Lower level decisions Short term and low risk Require much less thought and evaluation Made by (nearly) all employees Sometimes required guidance/approval from managers Delegating decisions to those further down the hierarchy can be motivated Led to improvements in efficiency and quality Reducing the chain of command can improved the decisions making

DECISIONS MAKING PROCESS Identifying objectives The business objectives may be differ at the different stages of growth Need to develop criteria to measure whether it has achieved its objectives Collecting information and ideas The amount and nature of the information needed depend on the decisions Ideas from working party to collect information and ideas within the firm or from discussions among staff

Analyzing information and ideas Analyze information to look for alternative course of action Aim to identify which course of action will best achieve the business objectives

Making decision Commit oneself to one course of action Some decisions can be reversed Sometimes decisions cant be reached collect more information and ideas

Evaluate the results Communication Personnel are informed and decisions is carried out Outcome Will take time before the results are known Evaluate the results in a form of reports Necessary to modify the course of action on the basis of the report

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BUSINESS NOTES (SEMESTER 1)

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

eg: Franchises, MNC Occurs when a firm invested its size by taking over or merging with other firm (intergration) Faster method of increasing size Strategic Alliance & Joint Venture Mergers & Takeovers

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 or company. Other forms of joint ventures include an agreement to work together formalised through a Heads of Agreement or a Strategic Cooperation Agreement.

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Reason for Joint Venture

Internal Reason
Build on company's strengths Spreading costs and risks Improving access to financial resources Economic of scale and advantages of size Access to new technologies and customers Access to innovative managerial practices Number of sell people will increase because we wont have spend to time and money hiring new employees

Competitive Goal
Influencing structural evolution of the industry Defensive response to blurring industry boundaries Creation of stronger competitive units Speed to market Improved agility

Strategic Goal
Synergies Transfer of technology/skills Diversification

Advantage
extend the marketing reach access needed information and resources build credibility with a particular target market access new markets that would be inaccessible without the partner Provide companies with the opportunity to obtain new capacity and expertise. Allow companies to enter into related business or new geographic markets or obtain new technological knowledge

Disadvantage
Risk giving control of its technology to its partner Profitable returns may take some time to achieve high level of commitment of staff and management Cultural differences and communications difficulties Difficult to get out of quickly Working in a different legal and commercial system Political risks in the country where the joint venture is based Potential for conflict with your joint venture partner

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STRATEGIC ALLIANCES

Spend less time and money Expand business rapidly Gain more expertise Gain customer trust Marketing and advertisng budget decrease

Strategic alliances can be combined with other agreements, such as licensing of technology Each partners retain bss independence

Why ??

How ??

One company will lead and the other become partners. The alliance can be struck between rival companies. Each partner must contribute distinctive "core strengths"

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

Potential for conflict

Advantages
Increased leverage Greater responsiveness Risk sharing Opportunities for growth

Disadvantages

Payment difficulties

High commitment time, money, people Small company subsume by larger company 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 new comany involves mutual decision to combine shares in th old co. exchanged fr equal num. of shares 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 th target co. doesnt wnt to be purchased. acquiring firm usually offers cash price per share to th shareholders of th targer firm according to a specified ratio.

Economies of scale Empire buliding Increase profit

Monopoly

Diversification

Reason
Power satisfactory Cross selling

Resource/Tech transfer Taxes

Synergy

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BUSINESS NOTES (SEMESTER 1)

Types of mergers
Horizontal Forward

Merger

Vertical

Backward

Conglomerate

Balanced

Horizontal Integration with firms in the same industry and at the same stage of production

Advantages

Disavantages

Impact on stakeholders

Reduce competitor Possble econ. of . scales Increased power over supplier

Rationalization may bring bad publicity May lead to mnopoly investigation if exceeds certain limit.

Customers hv less choice Employees may lose job due to rationalization

Vertical(Forward) Integration with a bss in th same industry bt a customer fr th exiting bss.

Advantages Abe to control th promotion and pricing of its product Secures a secured outlet fr th firm's product and may exclude competitor's product.

Disavantages Consusmers may suspect uncompetitive activity and react negatively Lack of experience-good manufacturer doesnt neccessarily make a good retailer

Impact on stakeholders Workers hv greater job security because th bss has secured outlet More various jobs opportunities fr th community Consumers may resent lack of competition withdrawal of competitor's product from retail outlet.

Vertical(Backward) Integration with a bss in th same industry bt a supplier of th existing bss.

Advantages Control over quality,price,and delivery time of supplies Encouraged joint research to improve quality of supplies of components Control supplies to competitors

Disavantages Lack experience in managing supplying company. Supplying bss become complacent due to secured customer.

Impact on stakeholders Greater career opportunities to th workers and community. Consumers obtain improved quality and innovative prouct. Control over supplies to competitors may limit competition

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BUSINESS NOTES (SEMESTER 1)

Conglomerate merger Intergration of co. that hv no common bs areas. Advantages Diversifies in firm's industry and market. Spread risk Take th bss into fast growing market Disavantages Lack of experience in new sector Lack of clear focus and direction Impact on stakeholders Greater career opportunities fr workers and community More job security to the workforce because of risk is spread across more industries.

Takeovers
Takeovers

Friendly

Hostile

Reverse

Friendly
usually th board of th target company will be informed before a bidder makes an offer In private co.,th shareholders and th board are likely th same people or closely connected to each other.Thus,private takeovers are likely to be friendly as th shareholders hv agreed to sell th co.

Hostile
Th bidder continues to pursue even th board rejects. Th bidder makes th offer without informing th board beforehand. Not usually bad,as cn be beneficial fr shareholders in order to change fr more effective management.

Reverse
Private co. acquires public co. Allow th private co. to float itself while avoiding th expenses and time involved in a conventional initial public offering(IPO)

Pros and Cons of takeover

Pros
Increase sales/revenue Venture into new bss and markets Pofitability of target co. Increase market share Decrease competition Reduction of overcapacity in th industry Enlarge brand portfolio

Cons
Reduced competition and less choice fr consumers Likelihood of price increases and job cuts Cultural integration/conflict with new management Hidden liabilities of arget entity

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BUSINESS NOTES (SEMESTER 1)

Problems associated with rapid growth

Financial
Additionl capital in runing bigger firm,can lead to negative cashflow and increase in long-term borrowing.

Managerial
Problems in coping with larger bss operation. Lack of coordination between divisions(Decentralization may solve this)

Marketing
Original marketing strategy may not be appropriate,as having wider range of products.

Loss of control by original owners


True for target co. hat hv been acquired by larger co Original owners might lose control when power conflict happens 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

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BUSINESS NOTES (SEMESTER 1)


FRANCHISOR A party in a franchising enterprise that ultimately owns the rights, trademarks and proprietary knowledge of the specific business entity.

FRANCHISE A type of license that a party (franchisee) acquires to allow them to have access to a business' (the franchisor) proprietary knowledge, processes and trademarks in order to allow the party to sell a product or provide a service under the business name.

ROYALTY A payment to an owner for the use of property, especially patents, copyrighted works, franchises or natural resources

FRANCHISEE The party in a franchising agreement that is purchasing the right to use a business's trademarks, associated brands and other proprietary knowledge in order to open a branch

Definition

1. Training and/or ongoing support provided by the franchisor

2. Assigned territory. 3. Duration of the franchise agreement

10. Resale rights.

4. Franchise fee and total anticipated investment

9. Renewal rights and franchisee termination/canc ellation policies

Content of Franchise Agreement


5. Trademark, patent, and signage use.

8. Operating protocol. 7. Advertising

6. Royalties and other fees you are expected to pay.

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BUSINESS NOTES (SEMESTER 1)

To protect the copyright and privacy rights of both parties.

Create a balance between individual privacy rights and the needs of organizations to collect, use and disclose personal information for reasonable commercial purpose.

Importance of agreement.

Protect its brand name.

Avoid fraud

The businesses under the ultimate control of the franchisor can spread rapidly

FRANCHISOR A significant income can be earned without the hard work of meeting and dealing with customers faceto-face. Established brand Others help running your business The franchisor has a built-in and captive market for all his products with little financial commitment

Training

Accounting and budget systems

ADVANTAGES of Franchisee

Volume purchasing power

Proven business model

advertising

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BUSINESS NOTES (SEMESTER 1)

loss of control The franchisee will have to pay the franchisor for the services provided and for the use of the system
DISADVANTAGES of Franchisee

The franchisor might go out of business, or change the way they do things

You may find it difficult to sell your franchise you can only sell it to someone approved by the franchisor The franchisor may make mistakes in their policies

Other franchisees could give the brand a bad reputation

Problems on controlling the franchisee operation in a long run.

Franchisor

Failure by an individual franchisee will reflect badly on the whole franchise operation

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BUSINESS NOTES (SEMESTER 1)

1.9 GLOBALIZATION
MULTINATIONAL COMPANIES
A corporation or enterprise that manages production establishments or delivers services in at least two countries.

Corporation that have their headquarter in one country but operating branches, factories, and assembly plants in others.

Not merely importers/expor ters (produce goods and services in more than one country.

Definition of multinational corporation

They can have a powerful influence in international relations and local economies.

Some MNCs have annual sales turnovers exceeding the size of many countries entire economies.
To become nearer to markets throughout the world - Better market information regarding consumer tastes as a result of closeness to them

Avoiding legislation in home country - Legislation or other restrictions can be avoided by the multinational basing some of its operations in a different country

Growth motive - A company may have reached a plateau satisfying domestic demand, which is not growing. Looking for new markets.

High Transportation Costs - Transportation costs are like tariffs in that they are barriers which raise consumer price

Advantages of being multinational corporation

Market competition - The most certain method of preventing actual or potential competition is to acquire foreign businesses

Government grants and tax incentives . - The favorable tax rates in an offshore country are designed to promote a healthy investment environment that attracts outside wealth.

Avoid Import Restrictions - When production is done in host country, there is no need to pay import duties/import restriction

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Spread risk - In one area of the business is doing badly, more successful ones will help keep the business intact

Asset Protection - Offshore centers are popular locations for restructuring ownership of assets. Through trusts, foundations or through an existing corporation individual wealth ownership can be transferred from people to other legal entities

Diversification of Investment - In some countries, regulations restrict the international investment opportunities of citizens. Offshore accounts are much more flexible, giving investors unlimited access to international markets and to all major exchanges

Advantages of being multinational corporation

Lower costs of production - Lower labour rates due to much lower demand for local labour compared to developed economies

Tax Reduction - Many countries (known as tax havens) offer tax incentives to foreign investors. Confidentiality - Many offshore jurisdictions offer the complimentary benefit of secrecy legislation

Cheaper rent and site costs - Resulting from lower demand for commercial property

Low material costs on various parts of the world - Different countries have different low material costs for different materials

Advantages of being multinational corporation

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The threat of nationalization forcing a company to sell its local assets to the government or to other local nationals

Cultural heterogeneity MNCs' work force is bound to lead to different perceptions of existing policies and patterns of organizational behavior and incongruent perceptions of the desired ones.

Disadvantages of being multinational corporation Cost Must Abide the law in host country. This might increase the administrative load and can mean staff are treated differently according to where the work. - Offshore Accounts are not cheap to set up. Setting up an offshore corporation may mean steep legal fees, corporate or account registration fees and in some cases investors are even required to own property (a residence) in the country in which they have an offshore account or operate a holding company. Furthermore many offshore accounts require minimum investments of between $100,000 and $1 million.

Unemployment is reduced Playing the role of government Many governments, especially in the poor world, fail to meet expectations. As a result of this governance failure, MNCs would benefits them on certain roles. MNC will become major employers of labour. This will help alleviate unemployment black spots.

Increase in revenue MNC will contribute tax revenue to the government and other revenues. Tax revenue will increase as the profits of the company increase. MNC will contribute other revenue when they purchase existing national assets.

Increase sale for local firms Local firms benefits from supplying services and components to the new factory.

Benefits on host country(impact)

Advanced technology is introduced MNCs will transfer its technology as well as expertise and ideas into its host country.

Boost in investment Streghtening the domestic competition Existence of MNCs in host country will make the local firms be more competitive The investment in the country would increase. This would bring foreign currency and if output from the plant is exported then further foreign exchange can be earn.

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Exploitation of local workforce. Some countries may have not implement strict labour and health and safety rules

MNCs engage in transfer pricing where they shift production between countries so as to benefit from lower tax arrangements in certain countries Local computing firms may be squeezed out of business

Drawbacks to the host country


Exploitation of natural resources

Pollutions from plant might be at higher levels than allowed in the base country.

Might affect the host country with their own culture

Profits may be sent back to their own country rather than using for reinvestment in the host countires.

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2.2 ORGANIZATIONAL STRUCTURE

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