BUSINESS AND BUSINESS AND MANAGEMENTMANAGEMENT

MODULE 1MODULE 1

BUSINESS ORGANIZATIONS BUSINESS ORGANIZATIONS & ENVIRONMENT& ENVIRONMENT

Economic Opportunities & ThreatsEconomic Opportunities & Threats

Refers to large scale economic Refers to large scale economic factors affecting the economy as a factors affecting the economy as a wholewhole– Government policiesGovernment policies– Attitudes and actions in foreign Attitudes and actions in foreign

countriescountries– Business and consumer confidenceBusiness and consumer confidence

Macroeconomic ObjectivesMacroeconomic Objectives

Governments tend to have four Governments tend to have four objectives:objectives:– Control inflationControl inflation– Economic growthEconomic growth– Reduce unemploymentReduce unemployment– Acceptable international trade balanceAcceptable international trade balance

Controlled Rate of InflationControlled Rate of Inflation

A continual rise in the general prices A continual rise in the general prices of the economyof the economy

Most countries regard a low or Most countries regard a low or sustainable inflation rate as a sustainable inflation rate as a necessity for achieving the other necessity for achieving the other economic objectiveseconomic objectives

There are two main causes of There are two main causes of inflationinflation

Demand Pull InflationDemand Pull Inflation

Caused by excessive aggregate Caused by excessive aggregate demand in the economydemand in the economy– Any factor that causes a rise in Any factor that causes a rise in

consumption, investment, government consumption, investment, government spending or trade will lead to an spending or trade will lead to an increase in aggregate demandincrease in aggregate demand

If consumer confidence is high, this If consumer confidence is high, this encourages people to spend money, encourages people to spend money, and firms to spend money on and firms to spend money on productionproduction

Cost Push InflationCost Push Inflation

Caused by higher production costs Caused by higher production costs leading to a rise in prices (assuming leading to a rise in prices (assuming firms want to maintain their profit firms want to maintain their profit margins)margins)– Union wage increasesUnion wage increases– Material costsMaterial costs– Affects of climate on cropsAffects of climate on crops

Controlling InflationControlling Inflation

By limiting demand-pull and cost-push By limiting demand-pull and cost-push factorsfactors– Domestic government might raise taxes to Domestic government might raise taxes to

control the amount of consumption in the control the amount of consumption in the economyeconomy

– It could subsidize local businesses to reduce It could subsidize local businesses to reduce costs of productioncosts of production

– Could pursue “supply-side policies” that Could pursue “supply-side policies” that improve the productive capacity of the improve the productive capacity of the economy (investment in health care/education economy (investment in health care/education etc)etc)

– Exercise 10 – Zimbabwe’s Inflation ProblemsExercise 10 – Zimbabwe’s Inflation Problems

UnemploymentUnemployment

Measures the proportion of a Measures the proportion of a country’s workforce not in country’s workforce not in employmentemployment

Influenced by aggregate demand – Influenced by aggregate demand – as production is high, unemployment as production is high, unemployment will be lowwill be low

Economic costs of unemployment Economic costs of unemployment affect both the government and affect both the government and societysociety

Unemployment SolutionsUnemployment Solutions

Demand-side policiesDemand-side policies– Directly target increasing the level of Directly target increasing the level of

aggregate demandaggregate demandReducing taxes or increasing government Reducing taxes or increasing government

spendingspendingReducing interest ratesReducing interest rates

Supply-side policiesSupply-side policies– Increase the level of aggregate supplyIncrease the level of aggregate supply– Tend to be more permanent policiesTend to be more permanent policies

Types of UnemploymentTypes of Unemployment

Frictional – time lapse between leaving Frictional – time lapse between leaving one and finding anotherone and finding another

Seasonal – caused by seasonal changeSeasonal – caused by seasonal change Technological – losing a job to automationTechnological – losing a job to automation Regional – analysis of different areas Regional – analysis of different areas

(urban vs rural)(urban vs rural) Structural – a particular industry suffersStructural – a particular industry suffers Cyclical – recessionary unemployment; Cyclical – recessionary unemployment;

affecting everyoneaffecting everyone

Economic GrowthEconomic Growth

Refers to an increase in a country’s Refers to an increase in a country’s economic activity over timeeconomic activity over time

Measured by the change in total Measured by the change in total output known as the GDPoutput known as the GDP

Changes in the economic pattern are Changes in the economic pattern are typically known as typically known as cyclescycles

There are several key phasesThere are several key phases

The Business CycleThe Business Cycle

Peak

Slump

Trend line

Recession

RecoveryEconomic Activity

Time

GDP ($)

Trading CycleTrading Cycle Peak – economic activity is at its highest levelPeak – economic activity is at its highest level

– Consumer spending and investment is high; low Consumer spending and investment is high; low unemployment; good cash flowunemployment; good cash flow

Recession – dip in level of economic activity for Recession – dip in level of economic activity for two successive quarterstwo successive quarters– Declining aggregate demand; falling exports and lower Declining aggregate demand; falling exports and lower

investmentinvestment Slump – bottom of a recession (last decline stage)Slump – bottom of a recession (last decline stage)

– High unemployment and low levels of consumer High unemployment and low levels of consumer spending; poor cash flow and high bankruptcy ratesspending; poor cash flow and high bankruptcy rates

Recovery – level of GDP starts to rise againRecovery – level of GDP starts to rise again– Consumption, spending and investment begin to riseConsumption, spending and investment begin to rise

Mini Case StudyMini Case Study

Case StudyCase Study – ASOS

Source:Source: Jones, Hall, Raffo, Business Jones, Hall, Raffo, Business Studies 3Studies 3rdrd Edition, Unit 3, page 37 Edition, Unit 3, page 37

Coping with a RecessionCoping with a Recession Cost reductionCost reduction

– Efforts to cut utility bills; cheaper warehousing; Efforts to cut utility bills; cheaper warehousing; staff reductionsstaff reductions

Price reductionPrice reduction– Influence consumer spendingInfluence consumer spending

Non-pricing strategiesNon-pricing strategies– Repackaging, special offers, after-sales careRepackaging, special offers, after-sales care

BrandingBranding– Consumers maintain loyalty to a brand even Consumers maintain loyalty to a brand even

during recessionary times; price elasticityduring recessionary times; price elasticity OutsourcingOutsourcing

– Lower production costs overseas can help Lower production costs overseas can help maintain a businesses profit levelmaintain a businesses profit level

Barriers to Economic GrowthBarriers to Economic Growth

Lack of infrastructureLack of infrastructure– Basic electricity, roads, hospitals etcBasic electricity, roads, hospitals etc

Lack of technical knowledgeLack of technical knowledge Rapid population growthRapid population growth

– High net birth results in too many mouths to High net birth results in too many mouths to feed, which may hinder economic developmentfeed, which may hinder economic development

High foreign debt repaymentsHigh foreign debt repayments– Countries are obliged to meet interest and Countries are obliged to meet interest and

debt repayments first leaving little for debt repayments first leaving little for domestic growthdomestic growth

Balance of PaymentsBalance of Payments

A record of a country’s money A record of a country’s money inflows and outflows (over a specific inflows and outflows (over a specific time)time)

Made up of a capital account and Made up of a capital account and current accountcurrent account– CurrentCurrent

Export and import earnings and Export and import earnings and expendituresexpenditures

– CapitalCapitalGovernment services, foreign currency etcGovernment services, foreign currency etc

Current AccountCurrent Account

Visible trade balanceVisible trade balance– International trade in tangible goods (oil, International trade in tangible goods (oil,

steel cars etc)steel cars etc) Invisible trade balanceInvisible trade balance

– Intangible goods such as banking, Intangible goods such as banking, distribution and insurancedistribution and insurance

Exchange RatesExchange Rates Measures the value of one currency in Measures the value of one currency in

terms of another foreign currencyterms of another foreign currency A higher rate (appreciation of currency) A higher rate (appreciation of currency)

means that export prices will be relatively means that export prices will be relatively higher, thereby reducing competitivenesshigher, thereby reducing competitiveness

A lower rate (depreciation of currency) A lower rate (depreciation of currency) means that domestic firms that import raw means that domestic firms that import raw materials will suffer from having to pay materials will suffer from having to pay higher priceshigher prices

Governments try to protect the balance of Governments try to protect the balance of payments by adjusting exchange rates payments by adjusting exchange rates (through interest rate changes)(through interest rate changes)– Exercise – Exchange ratesExercise – Exchange rates

Protecting Against Currency Protecting Against Currency FluctuationsFluctuations

Large fluctuations in exchange rates can Large fluctuations in exchange rates can create difficulties for businessescreate difficulties for businesses

Cannot accurately forecast import Cannot accurately forecast import requirements (costs)requirements (costs)

International deals may be postponed until International deals may be postponed until currency fluctuations are minimizedcurrency fluctuations are minimized

ProtectionismProtectionism– Government policy used to safeguard domestic Government policy used to safeguard domestic

businessbusiness– Involves tariffs or quotas for exampleInvolves tariffs or quotas for example

Examples of ProtectionismExamples of Protectionism TariffsTariffs

– Form of tax placed on imported products; gives Form of tax placed on imported products; gives domestic goods a slight advantagedomestic goods a slight advantage

QuotasQuotas– Quantitative limits that prevent too many foreign Quantitative limits that prevent too many foreign

products entering a countryproducts entering a country SubsidiesSubsidies

– Payments made by government to a domestic business Payments made by government to a domestic business as a form of aidas a form of aid

EmbargosEmbargos– Physical bans on international trade with certain Physical bans on international trade with certain

countriescountries StandardsStandards

– Imposition on strict standards (health and safety) on Imposition on strict standards (health and safety) on certain imported productscertain imported products