Behaviour of Organisations in Their Market Environment & the Significance of the Global Factors

that Shape National Business Activities(A Market Research Intended For Ollo)

Prepared By:Sheik Shami Ullah Chowdhury (ID-2012121015)

HND Business Intake 1, 2012

Prepared For:Mr. Khwaja Arafat Abdullah

Co-ordinator & FacultySchool of Business

BAC

Task 1 (Lo 1.3.1) How market structures determine the pricing and output decisions of Ollo:

Firms’ pricing and output decisions depend on barriers to entry and the behaviour of competitors. The actions of one’s competitors can easily influence the behaviour of a firm. This is proper for an oligopolistic industry whereby firms display mutual interdependence.

Ollo is an oligopolistic business with Banglalion & Qubee as their major competitors. If Ollo sets a price higher than that charged by others, the company can expect to lose a lot of sales.

Moreover, there are some barriers of entry Ollo must consider before expanding their business.

Barriers to entry are obstacles that deter new firms from entering a market to compete with the existing firms. They give firms a degree of market power such that decisions can be made by existing firms without risking their market share.

The most common types of barriers to entry are as follows:1. Availability of key resources.2. Government restrictions & legal barriers.3. Exclusive rights & patents.4. Initial capital cost.

We must keep in mind that, the degree of barriers of entry can determine firms’ pricing decisions.

The wireless industry requires a big sum of capital and it uses mobile data network as its main resource.Ollo had to put down a lot of money just to enter this market still they must consider the fact that their competitor Banglalion has already covered 30 major districts of the country with their service.Considering this fact Ollo now is preparing to build network coverage in any one division among Shyllet, Chittagong, Barisal and Rangpur.This will give them a competitive advantage over their other close competitor Qubee.More importantly, if Ollo decide to expand their service in Rangpur it will make them a monopolist in that locality because no other wireless company is operating there yet.

Lastly, when considering the marketing aspects of pricing we must consider the following:1. Brand loyalty.2. Customers’ perception of prices.3. Competitors’ price, and4. Maximising profit.

The assumption of profit maximisation provides a basis for beginning to look at the output of individual firms.The optimal level of output is where either profit is maximized or losses are minimized.

If a firm is trying to maximize its profits in the short-run, there are two equivalent ways in which the firm can achieve this objective:1. The firm can produce at the point where the difference between Total Revenue (TR) and Total Cost (TC) is at a maximum.2. The firm can produce at the point where the difference between Marginal Revenue (MR) and Marginal Cost (MC) is equal to zero.

Although as a new company Ollo cannot aim to maximise its profits yet. Thus, in order to gain strong brand loyalty Ollo is offering relatively low priced packages to exceed customers’ perception over their competitors.They are providing a volume of 3.5 GB at the price of 500 BDT1 while Banglalion provides only 2.5 GB volume at the price of 600 BDT2.Moreover, Ollo is providing prepaid modem at the price of 1499 BDT while Banglalion is charging 1999 BDT for their USB modem.

There is a chance of loss but the firm will continue to operate in the short-run as long as there is a positive contribution margin and the firm is recovering some of its fixed costs.

Task 2 (Lo 1.3.2) The way in which market forces shape Ollo’s responses:

Ollo’s response toward demand –Business cannot sell anything unless there is a demand for it. People must both want a product and have the money to buy it. How people will buy Ollo’s service depend on the following:

Price – For the individual consumers, a fall in the price of an item makes it cheaper compared to other goods. A fall in the relative price of an item increases demand for it. A fall in the item’s price also means that people with lower incomes will also be able to afford it. Thus the overall size of the market for the item increases.For these reasons, to penetrate and increase the market share Ollo has lowered their service price which has increased demand for their product.

Substitute – People may change from one product to another, as the relative prices changes. As a substitute product of Banglalion & Qubee, Ollo has decreased their price to attract customers to switch.

1 http://ollo.com.bd/get2 http://www.banglalionwimax.com/index.php/products-a-services/prepaid-plans

Complementary products – As the use of computers and laptops are increasing throughout the country, the demand and market for wireless service is rising as well. Feeling this Ollo has decided to expand their services to any one division among Shyllet, Chittagong, Barisal and Rangpur.

Ollo’s response toward supply – Supply depends largely on price. The higher the price that a product can be sold for, the more of it businesses will be willing to supply. The factors that affect Ollo’s decision about supply are as followed:

Change in technology –Technological developments which reduce costs of production will increase the quantity of a product supplied at a given price. In past wireless technology were very expensive, as it became cheaper and more available Ollo felt it’s feasible to enter the business.Although at the same time to avoid diseconomies of scales Ollo must not get beyond its ideal size because by employing too many people, with many levels in the hierarchy of management, there may be a number of undesirable effects.

Costs of making the product –To expand and run their business Ollo need to pay wages and build network towers to sustain their service. For this purpose Ollo has already covered most of Dhaka with their service and still working to expand their service outside of the capital.

Task 3 (Lo 1.3.3) How business and cultural environments shape the behaviour of Ollo:

The wider business environment may be analysed into six segments using the PESTEL framework.

- Political- Economic- Socio-cultural- Technological- Environmental protection- Legal

The political environment – Government is responsible for providing a stable framework for economic activity and, in particular, for maintain and improving the physical, social and market infrastructure.Currently only political risk Ollo might face toward development is the excessive corruption of government regulators in Bangladesh.

The economic environment – The economic activity affects firms at both national and international level, both in the general level of economic activity and in particular variables, such as exchange rates, interest rates and inflation.

Since there is a shortage of gross domestic product in Bangladesh the demand for goods and services are low here.Also, because of the critical inflation situation Ollo might face problems relating with price in neat future.

The socio-cultural environment – The social and cultural environment features long-term social trends and people’s beliefs.These can bring changes in Ollo’s patterns of demand, location of demand and recruitment policies.

The technological environment – The types of products or service that are made and sold, the way in which products are made, the way in which service are provided, the way in which markets are identified, the way in which the firms are managed, and the means and extent of communication with external clients all depends on the technological environment.Only reason service provider like Ollo exist is because of the technological development in wireless sector.

Environmental protection – The physical environment is important as a source of resources and because of increasing regulation.As a service provider Ollo does not enforce much environmental resources, still they do use resources like electricity and gas.

The legal environment – Laws come from common law, parliamentary legislation and government regulations derived from it. Especially the tax law and competition law effects companies like Ollo directly.

Task 4 (Lo 1.4.1) Significance of international trade to UK business organisations:

The buying and selling of goods and services across national borders is known as international trade. International trade is the backbone of our modern, commercial world, as producers in various nations try to profit from an expanded market, rather than be limited to selling within their own borders.

For an individual UK business organisation exporting to overseas markets can be attractive for a number of reasons. Some are as followed:

i. Overseas markets represent new market segments.ii. Saturation of its domestic market can force an organisation to seek overseas

markets.iii. The nature of a firm’s product may require an organisation to become active in

an overseas market.

iv. Commercial buyers of products operating in a number of overseas countries may require their suppliers to be able to cater for their needs across national boundaries.

v. Some goods and services are highly specialised and the domestic market is too small to allow economies of scale to be exploited.

Task 5 (Lo 1.4.2) The impact of global factors on UK business organisations:

Because of the international nature of service markets, the service industry is heavily influenced by global economic developments.

The barrier between the domestic and international environment is relatively permeable. In times of free trade, firms can expect incoming competition. That said the possibility of competing abroad is also available.

The environment of international trade can be analyzed using the PETEL approach.

Political factors (Government attitudes)The development of plans in global environment depends on the stability of the government, its role in the economy, international relations and informal relations between government officials and businesses.

There is a risk of business being expropriated by the local governments and there is also the risk of political unrest affecting the business.

To reduce these risk:i. Use local partners with good contacts.ii. Use leasing rather than outright purchase of facilities in overseas markets.iii. Take out insurance.

Economic factorsEconomic factor affect the demand for, and the ability to acquire, goods and services.

Here are some important economic factors that can affect a business:i. The overall level of economic activity.ii. The relative levels of inflation in the domestic and overseas market.iii. The exchange rate.iv. The relative prosperity of individual overseas markets.v. Economic growth in newly industrialised countries.

Social issuesChanges in social trends can impact on the demand for a firm's products and the availability and willingness of individuals to work.

In the UK, for example, the population has been ageing. This has increased the costs for firms who are committed to pension payments for their employees because their staffs are living longer. The ageing population also has impact on demand: for example, demand for sheltered accommodation and medicines have increased whereas demand for toys is falling.

Technological factorsA business is affected by following technological factors:

i. Access to domestic and overseas patents.ii. Intellectual property protection.iii. Technology transfer requirements.iv. Relative cost of technology compared to labour.

Although, new technologies create new products and new process it cannot on its own promote economic growth. Modern gadget and techniques have had very uneven success in modernising underdeveloped countries.

Environmental protectionThe environment and sustainability aspects of the home environment are equally applicable in the international trade environment. The legislative impact may differ, but the western media are likely to give enormous publicity to any perceived failings.

Legal factorsLegal factors are related to the legal environment in which firms operate. In recent years in the UK there have been many significant legal changes that have affected firms' behaviour. The introduction of age discrimination and disability discrimination legislation, an increase in the minimum wage and greater requirements for firms to recycle are examples of relatively recent laws that affect an organisation's actions. Legal changes can affect a firm's costs (e.g. if new systems and procedures have to be developed) and demand (e.g. if the law affects the likelihood of customers buying the good or using the service).

Task 6 (Lo 1.4.3) Impact of the policies of the European Union on UK business organisations:

The European Union comprises fifteen member states, with a further enlargement planned. It is a free trade area, and a customer’s union with a common external tariff.

There are two sources of EU law:

Primary sources Treaty Provisions [Treaty of Rome, TEU]

Secondary sources Legislation made by the EU institutions ECJ’s interpretations of primary and secondary sources of EU law

Article 249 of the Treaty provides that Secondary legislation constitutes the following:• Regulation• Directive • Decision• Recommendations and opinions

Regulations are the most direct form of EU law - as soon as they are passed, they have binding legal force throughout every Member State, on a par with national laws. National governments do not have to take action themselves to implement EU regulations.

EU directives lay down certain end results that must be achieved in every Member State. National authorities have to adapt their laws to meet these goals, but are free to decide how to do so. Directives may concern one or more Member States, or all of them.Each directive specifies the date by which the national laws must be adapted - giving national authorities the room for maneuver within the deadlines necessary to take account of differing national situations.

In order to join the Union, some economic and political conditions must be fulfilled; according to which a perspective member must:

i. Be a stable country, respecting human rights, the rule of law, and the protection of minorities.

ii. Have a functioning market economy.iii. Adopt the common rules, standards and policies that make up the body of EU

law.The EU assists these countries in taking on EU laws, provides a range of financial assistance to improve their infrastructure and economy.

The European Commission is the executive of the EU. The main tasks of the Commission are to:

i. Ensure that community rules and the principles of the ‘common market’ are observed.

ii. Make policy proposals to the council of ministers.iii. Enforce the implementation of legislation.iv. Administer community expenditure.

The European Economic Community has a number of features affecting UK business.

On goods:i. An end to customs documents.ii. No need for traders to submit tax declarations.

On internal market:i. Firms learn to compare more effectively.ii. Open trade policy makes EU firms match the world best.iii. Stable exchange rates cement the internal market.iv. Internal market rules embody a high level of environmental protection.

Elimination of trade restrictions covers the following areas:i. European regulations and standards means that products approved in any one

EU country can be freely marketed throughout the Union.ii. There is more competition and efficiency in Europe-wide services in

telecommunications and information technology by developing common standards for equipment.

iii. Shipping services between member countries are being provided on equal terms. Competition on air routes have increased, resulting in lower fares.

iv. Protections of ideas have become easier through harmonisation of national laws on patents, trademarks and copyrights.

BibliographyRiley, Pippa. Business Environment. New Delhi: Learning Media, 2011.

http://ollo.com.bd/get - Ollo.http://www.banglalionwimax.com/index.php/products-a-services/prepaid-plans - Banglalion.http://www.qubee.com.bd/prepay - Qubee.http://www.richardchangassociates.com/pdfs/CO1205_takingtheLead.pdf - Richard Y. Chang, Ph.D.http://www.bankofengland.co.uk/publications/Documents/speeches/2007/speech322.pdf - Speech by ANDREW SENTANCE