business notes(all) editted

8/2/2019 Business Notes(All) Editted

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1 BUSINESS NOTES (SEMESTER 1)


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Business Activity

INPUT - a.k.afactors ofprodution

1. Land - includes land andall natural

renewable/unrenewablesresources

2.Capital - anythingthat is owned by a

bss & used to makeprodution easier &

more efficient

3.Labour -workforce of a

business

4.Enterpreneur -willing to takerisks (loss and

profit)

3.Labour -management,

skilled workers,manual workers

4.Enterpreneur -someone who

organizes otherinputs to initiate theprocess of prodution

PROCESS - convertsresoures to goodsand services

1.Form - change

physical to usefulgoods

2.Place - send tothe right place

(transportation)

3.Time - sellduring high

demand

4.Possession -promotion &

advertisement (willlead to possession

by the consumes)

OUTPUT

1. Goods andservices -

physical andtangible goodsnon tangible

products sold topublic

2. Wastage

1.1 NATURE OF BUSINESS ACTIVITY

(A)BUSINESS ACTIVITY


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(B) BUSINESS FUNCTION

Production/operation makes the product/ deliver

the services

Marketing selling the business goods & services,

positioning them within the market

Finance financial reporting and control. Rising of the

capital necessary to run the business.

Human resources/personnel hiring, firing and

payroll.

(c)TYPES OF PRODUcTION

TYPES OFPRODUCTION

PRIMARY SECTOR -

including that extracts &uses the natural

resources of the Earth

eg:mining gold

SECONDARY SECTOR -including that manufactures

goods using the raw materialsprovided by the primary

sector

eg:rocket making, textile,biotech TERTIARY SECTOR -

provides services toconsumers & the other

sectors of industry

eg:insurance,transportation,entertainment


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1.2 TYPES OF ORGANIZATION

(A) PRIVATE SECTOR AND PUBLIC SECTOR

PRIVATE SECTOR PUBLIC SECTOR

FEATURES Organization owned by private individuals or

private of people

Have a clear aim of seeking profit for their owner

Organization owned by and

controlled by the government

Objective is to provide service

rather than profit for owners

Run essentially for the benefit

of community

DIVISION

Unincorperated bss

Bss-no legal differnece between the owners and the

bss

Tend to be small,owned either by one person or a

few partners

Incorperated bssSeparated legal identity from its owners

Bss can be sued,can be teken over and can be

liqiudity

Most are classed as the non-

market sector: goods and

services provided free to

consumers and are financed

out of taxation

Some (i.e.post office) are in

the market sector as

consumers are required to

pay for the services.

Some public sector bss havebeen transferred from the

public to the private sector

Pivate sectorbusiness

organisation

Unincorperatedbss

sole trader partnership

Incorperated bss

private limitedcompany

public limitedcompany


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Reasons forsetting up a

business

Independence

want to have afull control overthe business andprefer to maketheir owndecision.

To gain morereward.

by doing business,they will gainextra profitcompared to

profit gained bybeing employed.

Redundancy

employees whoare maderedundant bytheir employerdue to economicsituation andthese employeesbeingunemployed.

Extend hobbies

a passion of doingbusiness will leadto a businessactivity. eg :Mofaz

Cannot findemployment

an individual mightdidi not manage tofind any job,therefore theychoose to run abusiness.

Commitment to a

product

An individual mightbeing so comitted toa product until theywill feel like theywant to inovate theproduct as they wishit would be.

Satisfy creative needs.

an individual that are verycreative may channel theircreativity throughbusiness. ex. a person that

can create a beautifulsouveneir can sell it to thetourists.

eason for setting up ausiness.

it has been explained inthe previous page.

Business idea

it can come from manyplaces like the existingskills when doing another

job, adaptation of anexisting product, marketsearch, idea from collegue

etc.

Consider success of a business

The factors

the basic business idea.

finding out about the market.

marketing and promotion

people

finance

the product or service offered

Planning

a statement that outlines the waythat the business will achieve itsaims and objectives.

functions:

a clear idea of its direction andoperation.

to show the bank or otherinstitutions its likely position andability to pay back a loan.

identify the problems earlier

highlight its strenghths andweaknesses

Starting a business

influenced by:

Finance

sources of funds:

personal savings or past earnings

funds from partners or investors.

by paying the machinery that has been bought at a later date.bank or other financial institutions.

etc.

Getting advice.

in the form of:

a telephone number, email or internet site of a specialist.

a detailed discussion or interview

training videos or seminars

sources:

individuals

banks

enterprise agencies

others.

(B) STARTING A BUSINESS


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Possible problemsfaced by start-ups

Entrepeneur.

an individual might has lake ofskills, experience. vision, ambitionand motivation. Therefore amistake can be done when makingimportant decision.

Basic ideas.

the fresh product must beappealing enough to the marketin order to get profit ang beingrecognized.

The funding.

inadequate initialfunding can cause aproblem to the starts-up.

Promotion.

method of sales andpromotion is notappropiate. Plus, there

may be no unique sellingpoint.

High competition.

a new business may have to survivein a market that is full ofcompetition.

Planning

a new entrpeneur may have anon-proper business planningin terms of marketing,advertising, finance and others.


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(C) PROFIT-BASED ORGANIZATIONS

TYPES SOLE TRADER PARTNERSHIP

FEATURES

- Owned by just one person- The owner runs the business and mayemploy any number of people to help.- Retain full control of the business.- Owner enjoys all the profits.- He/she personally liable for all the debts

and all the decision made.

- Setting up is very straightforward. No legalformalities needed.

- Some types of business need to obtainspecial permission before landing

Once turnover reaches a certainlevel sole trader must register for

VAT

Must pay income tax andNational Insurance contributions. Some types of business need a

license such as alcohol, supplying

taxi service or public transport.

Must comply with legislationaimed at business practice. E.g

they must provide healthy and

safe working conditions for their

employees.

- A partnership has more than oneowner.

- It is usual for partner to specialize- There are no legal formalities to

complete when a partnership is

formed. However partners may draw

up a DEED OF PARTNERSHIP.

This is legal document which states

partner rights. It cover issues such as :

How much capital eachpartner will contributes.

How much profits and losseswill be shared

Procedure for endingpartnership

How much control eachpartner will have.

Rules for taking new partners

ADVANTAG

ES

- Freedom and flexibility ( can choose thehour he/she want to work or holiday.)

- Enjoyment of all the profits- Absence of legal formalities- The owner is in complete control and is

free to make decisions without

interference.

- No legal formalities when setting upbusiness

- Each partner can specialize- More finance can be raised due to

have more than one owner

- Can share the workload- Sharing of losses

DISADVANTAGES

- Sole trader have UNLIMITEDLIABILITY.

- Illness can stop the business activity.- The owner can be sued by the customers in

the event of dispute due to it isunincorporated business.

- If the person loses interest or die, then thebusiness will cease.

- Limited scope for economic of scales.

- Profits need to be shared amongstmore owners.

- Partners may disagree when making adecision

- The partnership can be end when oneof the partner die

- Any decision made by one partner onbehalf of the company is legally

binding on all other partner.

- Can be sued by customers


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FEATURES of companies :

Limited companied have separate legal identity from their own owner. They can own assets, form contracts, employ people, sue and be sued in their own right. The owners have LIMITED LIABILITY. The capital of limited company id divided into shares. Limited company runs by a director appointed by the shareholders. The board of Director is accountable to shareholders and should run the company as the shareholders wish. If they do not perform well, they can be voted out at an Annual General Meeting (AGM) Companies pay corporation tax. A limited company must have minimum of 2 members up to no upper limit

FORMING A LIMITED COMPANY :

2 DOCUMENTSMemorandum of Association & Articles of Association The memorandum gives detail about the company. The Articles of Association deal with the internal running of the company. The two documents will be sent to the Registrar of Companies with the names of director If they are acceptable, The Certificate of Incorporation will be awarded to allow them to trade. They also must submit a copy of its annual accounts to the Registrar each year.

TYPES PRIVATE LIMITED PUBLIC LIMITED

FEATURES- The business must ends in Limited or

Ltd.

- Shares must only be transferredprivately and all the shareholders must

agree with the transfer.

- Shares are not advertised for generalsale.

- Often as family business owned bymembers of family or closed friends.

- Ends with Plc.- The shares of the company can be bought and

sold by the public on the stock exchange

ADVANTAGES- Shareholders have limited liability.- More capital can be raised as there are

no limit on the number of the

shareholders.

- Control of the company cannot be lost tothe outsiders.

- Business will be continued even if oneof the owner dies

- Shareholders have limited liability- More power can be enjoyed due to their large

size

- Huge amount of money can be raised from thsale of shares to the public

- Production costs may be lower as firm maygain economies of scale

- Easier to raised finance since financialinstitution are more willing to lend to plc.

DISADVANTAGES- -Profits have to be shared amongst large

number of shareholders.

- There are legal procedures to form up abusiness

- Firm does not allow to sell shares topublic, This will restricts the amount of

capital can be raised

- - Financial information filed with theRegistrar can be inspected by public.

Competitor could use this advantage.

- The setting up cost can be very expensive- It is possible for an outside to take control of

the company since everyone can buy their

shares.- All of the companys account can be inspecte

by members of the public.

- Because of their size, they are not able to deawith the customers in personal.


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NON PROFIT ORGANIZATIONS

An organization that supports an issue or matter of private interest or public concern for non-commercial

purposes, without concern for monetary profit.

Characteristics

- Do not operate to generate profit.- May accept, hold or disburse money and other things of value.- May legally and ethically trade at profit.- Typically funded by donations- Have tax exempt status- Operated by volunteers or paid positions.- Can have members but many do not.

Issues faced by NPOs

- Unreliable funding.- Long hours + Low pay = Employee burnout.

- Founders syndrome dynamic founders try to retain control of the project.PRESSURE GROUPS

A group doing advocacy: to encourage or prevent changes in public policy without trying to be elected.

Characteristics

- Sometimes referred to groups within a society that has similar opinion on issues.- The effectiveness of a pressure group depends on: number of members, public support, resources and influence

on media and politicians.

- Activities of pressure group includes: boycotting products, media campaign, lobbying the government,demonstrations and petitions.

NON GOVERNMENTAL ORGANIZATIONS

A private institution that is independent of the government.

Characteristics

- Usually use public relations to meet their goals.- People working for NGOs are volunteers and paid staff. Paid staffs typically receive lower pay than in other

sectors.

- Volunteers are not purely altruistic. They may have their individual interests such as skills, experience andcontacts.

- Sources of funds include membership fees, sale of goods and services, private donations and grants frominternational institutions or government.

- NGOs are not legal entities under international law (except the Red Cross).


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IMPORTANCEof

ORGANIZATIONALOBJECTIVES

Determine therole of theemployees

Determine thestrategy to be

done.

Provide shareholderswith a clear idea of

the business in whichthey have invested.

Provide asense of

direction forthe business.

Provide abasis fordecision-making.

Measurementof

Achievement.

CHARITIES

A trust, company or incorporated association establishes for charitable purposes only.

Characteristics- Usually non-profit organizations.- Sometimes referred to as foundations.- Normally subjected to some form of supervision by the government to prevent charity fraud and to allow the

government to influence the scope and agenda of charities.

- Generally enjoy tax exemptions for their income and donors generally enjoy tax relief for gifts for charities.

1.3 ORGANIZATIONAL OBJECTIVES

(A)THE IMPORTANCE OF OBJECTIVES


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SSpecific MMeasurable AAgreed R TRealistic Time-specific

Content & Natureof Objectives

Used to asessthe business'performance.

SMARTStates thegoal of thebusiness

What should amission statement

has?

Boundaries forthe organization

A vision of whatthe organization

wants to be

A statement of thefundamental purposeof he organization so

as to inspire thosewho work for it.

Guidance fordecision-making

A statement ofvalues to guide

individualbehaviour.

A statement of thecharacter of the

organization and thecustomers it seeks to

serve.

(B) STATEMENTS


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Characteristicsof a well-producedmission-

statement.

Provide informationand inspiration totheir employees

Outlines clearly theway ahead for the

organization.

Provides adefinition ofsuccess.

Provides a livingstatement that can be

translated into goalsand objectives at eachlevel of organization.

Provides informationand inspiration to their

employees

IMPORTANT TERMS TO BE REMEMBERED

TERM(S) MEANING(S)

Mission Statement

A statement of the business core aims, phrased in a way to motivate

employees and to stimulate interest by outside groups.

Vision/AimA statement of the purpose of the business, usually not specific and

mainly to attract stakeholders

Objective A goal that an organization or individual wants to achieve.

Strategic objectives

What the organization wants to achieve to remain competitive & ensure

its long-term sustainability

Example: To enlarge market share

Tactical objectivesMore to short-term departmental performance to obtain strategic

objectives.

Operational Objectives Low-level objectives which are addresed to individuals or small groups.


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AIM

CORPORATEOBJECTIVES

DIVISIONALOBJECTIVES

DEPARTMENTALOBJECTIVES

INDIVIDUAL OBJECTIVES

AIM To maximise shareholders value

CORPORATE

OBJECTIVES

To gain profit of all divisions by 10% ayear

DIVISIONAL

OBJECTIV

ES

To increase market share by 10%

DEPARTMENT

OBJECTIVES

MARKETING: To increase salesrevenue by 10%

INDIVIDUALOBJECTIVES

Introduce 5 more clients about the businesseach year.

BusinessEthics

Ethics:

A set of values &beliefs whichinfluences how

individuals, groups &society behave

Business Ethics:

Concern with howsuch values & beliefs

operate in a bss.

Help firms to decide whataction are right or wrongin certain circumstances

(C) AIMS AND OBJECTIVES

(D) ETHICAL OBJECTIVES

HIERARCHY OF OBJECTIVES EXAMPLES


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Forced to turn down cheaper suppliers who test onanimals

Increasing cost

Forced to turn down profitable business

Loss of Profits

Alter the way it approaches business matters.

Business Practice

Shareholders may object if by being ethical, theirinvestments is harmed.

Profit vs Ethics

Some suppliers only supply products of business thatis ethical.

Relation with Suppliers

Increasing no. of customersare taking into account afirm's behaviour whenbuying their products

Increase in sale

Consumer'sViews

Improvements in the

recruitment and retentionstaffs.

More able to recruit wellqualified & motivated staff.

Employees

Employees with highmotivation due to the goodname of the firm.

Employee'sMotivation

BENEFITS OF ETHICAL BEHAVIOUR EFFECTS OF ETHICAL BEHAVIOUR


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aligning a company's activities with the social, economic and environmental of its stakeholders.

organizations consider the interests of society by taking responsibility for the impact of their activities on customers,employees, shareholders, communities and the environmentin all aspects of their operations.

CORPORATE SOCIAL RESPONSIBILITY (CSR)

BARRIERS TOCORPORATE

RESPONSIBILITY

Cost and profit> may raise the cost

> profit will decrease

Informationavailable toconsumers,

governments andpressure groups

> without it, it isdifficult to monitorthe bss activities.

Value and beliefs

> value and beliefs ofmanagers and

employees of a bss maynot correspond withwhat the majority ofothers in a society

regard as responsible.

SOCIAL AUDITING- Defined as: A check to make sure the financial performance of

bss is accurately shown in its accounts.

- Process by which a bss org attempts to assess the impact ofentire range of its activities on stakeholders.

- To evaluate its performance against a set of non-financialcriteria (its effect on environment, its attempts to meet social

obligation to employees.

- May involve:oIndentifying the social obj and ethical values of the org.oDefining the stakeholders of bss.oEstablishing social performance indicators.oMeasuring performance, keeping records & preparing social

accounts.

oSubmitting the accounts to an independent audit andpublishing results.

- May include:oThe salary difference between the highest and lowest paid

employee.

oHealth and safety information.oThe extent to which employees feel valued.oThe view of consumers about whether the bss is living up to its

Benefits of social auditing:

Provide valuable information to pressure groups & consumersabout corp responsibility of a bss.

Allow the managers of a bss to gain a complete picture of theimpact of the bsss activities.

Preventing future criticism of its activities. Able to identify the extent to which it is meeting some of its non-

financial activities.

Shareholders can use it to raise questions about bsss activities atannual shareholder meetings.

Gov can use social audit of a range of bss in particular industry toassess the need of legislation or regulation of bss in the industry.

Bss might have to change:

The aims and objectives of bss Operating methods, this might lead to

increasing costs.

The relationship with employees whichinvolve changing work practices.

The relationship with otherstakeholders, including suppliers and

people in the local community.

Changing the organization of bss. Taking into account the needs of

consumers when making marketing

decisions.

Providing help to bodies andorganization outside of bss.

intervene directly so that

consequences for it behaviours.

gov create legislation which bss must

adhere to.

some prob may occur:

o bss can obey the 'letter of the law'rather than the 'spirit of the law'.

o legislation which only applieswithin national boundaries may

not effect bss in other countries.

Gov work with particularindustries & bss sectors to

encourage the creation of

regulatory bodies which help to

control the activity of bss.

Voluntary org tend to monitor thebehavior of relevant firms.

Gov by threatening legislation ifthe self-regulatory bodies are not

seen to be working

Free market will act effectively to

police less responsible bss.

Consumer behaviour will force

irresponsible bss to act with greater

accountability.

This is likely to happen when the

consumers have sufficient

Campaign from some of pressuregroups (animal welfare, etc) may

affect the bss.

If they fail, they called for greaterdemocracy in corporate

behaviour which involved the

stakeholders of the company.


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Areas ofcorporate social

objectives:

Theenvironment

Energy

Fair businesspractice

Humanresource

Communityinvolvement

Products

ENVIRONMENTAL AUDIT

A systematic review of the interactionbetween an organization and the physicalenvironment.

Looks at the orgs compliance withenvironmental regulations and its

environmental policy, the environmental

risks to which it is exposed, waste

management and recycling.

Aims of environmental audit:

- Verify compliance with environmental, health andsafety legislation.

- Verify compliance with the orgs own policy.- Minimize human exposure to risk and ensure that

health and safety provisions are adequate.

- Identify corporate risk from potential environmentalfailure.

- Increase the workforces awareness of companysenvironmental policy.

- Identify ways to further reduce waste and energyusage.

- Satisfy external pressure from customers, insures,ethical investment trusts and the community

Typical environmental audit will cover the following areas:

compliance with current and proposed legislation and regulations transport:

o fuel efficiencyo precautions taken when transporting toxic substanceso vehicles emissions

energy use:o energy efficiencyo recycling waste energy

waste:o disposal methodso waste managemento waste minimizationo recyclingo emissionso procedures for dealing with accidental spillages

materials:o use of environmentally friendly materialso extent to which materials are renewableo substitution of toxic materials with non-toxic ones

impact on landscape and habitats:o damage to habitatso ways to reduce damage, preserve natural habitats and make sites attractive as

possible

2 variations on environmental audit:

Environmental review Environmental impact review

Arguments for CSR Arguments against CSR

Creation of a better social environment benefitsboth society and bss

The primary task of bss is to maximize its profits byconcentrating on commercial activities

Power should be used responsibly Social involvement results in higher prices tocustomers

Social involvement creates a favourable imagefor the company

Social involvement reduce economic efficiency Bss has the resource to help solve social

problems

Social activities reduce the internationalcompetitiveness of local businesses

Bss & society are interdependent Company director have a duty to shareholders Social involvement discourages additional gov.

intervention

Businesspeople lack the social skills to deal withproblems of society

Bss org(s) should adoptingsocially responsible policies

Firms should do things withintegrity, openness andhonest cooperation

Activities are to evaluated onsocial responsibility criteria

along with other criteria

Social or external costsare to be seen as part

of operating expenses

Firms need to beprepared to use its

resources for wider

social purposes


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1.4 STAKEHOLDERS

DEFINITION:

- A person or group that is involved in and can be affected by a particular organization, project system etc(Dave Hall)

- All people or groups that affect, and are affected by a business organization (Oxford Business Dictionary)-

People or groups who are affected by and/or able to influence the behavior of business organizations(Lecture notes)

EXTERNAL

INTERNAL

EXTERNAL

Types of Stakeholders

Government

Owners/

Shareholders Managers Employees

Suppliers Community

Customers


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(A) INTERNAL STAKEHOLDERS AND THEIR ROLES IN BUSINESS

1)

ENTREPRENEUR

Provides innovation- Has business idea Indulge in new business where businessnever existed

Provides organization- Land, labour, capital are hired and organized to produce goods and

services

- Makes decisions about Premises

Method of production

Product design

Wages

Risk taking

2)

SHAREHOLDERS

(OWNERS)

Become joint owners of business To receive dividends from after-tax profits To ensure the growth of business To ensure the stability/security of business To share in the success/profitability of business through an

appreciating share price

To ensure high share value (to maximize profit)

3)

DIRECTORS

Direct strategies and major decision making of business To retain control of business To increase market share and business growth To increase own power and status from business growth Ensure security of business Ensure profitability of business

4)

MANAGERS

Actively involved in running the business day to day Organizing and decision making (in their own hierarchies) Ensure security of business Accountability (to owners)

To ensure promotion prospects To ensure job satisfaction

5)

EMPLOYEES

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


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(B) External Stakeholders

Definition: Stakeholders who are indirectly involved with the firm.

Below are their objectives and interest in a business/to a firm

Stakeholders tend to have conflicts with another class of stakeholders. Below are some causes or

situation reflecting the incident.

Customer

To obtain good value for money from the goods and services purchased.

To receive high level of customer services.

To receive after sales services and supply of spares from a bss which survivesinto the future.

Government

To receive tax revenue from profitable firms.

To direct operation of the bss for the benifit of community/nation.

To control bss operation and performance to ensure it is within the EU/National laws.

To assist bss in accordance with local/national policy.

To ensure bss provide employment

Controlling the impact of bss activity to environment.

Bank lenders

To be paid back in full when repayments are due.

To receive interest on the loan when due.

Community

To benifit from employment the bss creates.

To be free from environmental disadvantages.

Suppliers

To continue selling profitably to the bss.

To be paid promptly and fully for the goods supplied.

Competitors

To compete by all lawful means.

To differentiate products from those of other bss.

To compare and contrast performance with other bss.


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Employees

They seek for fair wages.Conflict raises when

managers pay them withunfair levels of wages.

Conflict occurs whenthere're rationalisationleading to redundancy.

They feel threathen of losingtheir jobs.

Working Conditions isuncomfortable for the them.

Their safety might be takenfor granted by the

managers.

Shareholders Conflict may arisewhen they seek forshort term profits.The bss however is

aiming for long termprofits.

Conflict with managers/directors. This is whenmanager might pursue their own interest, payingthemselves high salaries, organising time whichsuits their own needs. Only satisfactory levels of

profits generated. Shareholders however want highprofits.

Customer

Cnflct might occur whenthe products and servicesoffered is not satisfying.

Inefficient delivery serviceto them.

Unable to achive goodvalue for money.

Does not receive aftersales service.

Cnflct with bss/ownerswhen price is high. Owners

are maximizing theirprofits while consumer

want cheap product.

Suppliers

Conflct withmanagers when

they take too longto pay for products.This cause hardship

for smallersuppliers.

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


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Government

cnflct when there's unethical bsswhich disobey rules and regulation setby the gov

Competitors

plagiarism of products lead to cnfltcwith the bss.

Comunity

cnflct happen when bss activitythreathen quality of life of the localresident.

Also when bss cannot offeremployment

Bank lenders

Managers could not pay back in fullwhen repayments are due.


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1.5 EXTERNAL ENVIRONMENT

PEST Analysis

Political/Legal Economy Social Technology

SWOT Analysis

Internal

Strength

Weakness

External

Opportunities

Threats


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POLITICAL/LEGAL

Political Environment

Concerns the activities of the governmentand political environment trends (general

stability of the country).

Roles of Government

Provider of goods and services Buyer of goods and services Regulation/Deregulation

Taxation

Direct & Indirect Effects of taxation on business:

o Reduces profits available for reinvestment and distribution to shareholders as a result ofcorporation tax (tax on company profit)

o Reduces willingness, as well as ability to expando Raises the price of goods and services, causes contraction in demand and reduces the volume of

goods and services sold as a result of expenditure tax/ value-added tax (VAT)

oReduces disposable incomes and therefore consumer spending as a result of income tax

o Alters income distribution the impact on business will vary, but producers of luxury goods willsuffer if income is redistributed to the less well off

Budget

Government provides certain welfarebenefits to various groups in the society

o This involves a transfer of incomefrom taxpayers to benefit receivers

o The purchases of those receivingbenefit are likely to be different

from the better off taxpayers

o Business that provide good andservices for the better off may

suffer a fall in the volume of trade,

whereas business providing goods

and services for the less well off

might benefit

Spending

Direct spending of the government ongoods, services and labour

Examples:o Infrastructure, school building and

health

There are many private sectors that relyheavily in government contracts

The business community benefits from theGovernment spending on infrastructure

which involves basic services that are

essential to industrial society

TaxationDisposable

incomesSpending

powerAggregatedemand


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Policies

Reasons of government policies:o Achieve a certain production

targets

o Achieve a particular structurewithin an industry

o Promote growth, investment andtechnical progress

Competition policy correct the abuse ofmonopoly power

Regional policy assist areas of highunemployment, declining industry

Assistance for small firmsMacro-Economic Policies

Fiscal Policy Concerns about the decisionsof the government on expenditure, tax

rates and government borrowing Monetary Policy Concerns the decisions

about the interest rate and the supply of

money in the economy

Recession

ExpansionaryFiscal Policy

Raise

governmentspending

Lower tax rates

Increaseaggregate

demand

Increase inoutput and

employment

Boom

ContractionaryFiscal Policy

Reducegovernmentspending

Raise tax rates

Reducesaggregatedemand

Reducesoutput,

employmentand inflation

Interest Rate Exchange RateAppreciation /

Depreciation of currency

Legal

The law andemployment practices

The law and consumerrights

The law and businesscompetition


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ECONO

MIC


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MICROECONOMICS

DEMAND AND SUPPLY

DEMAND

Demand is the amount of product that consumers are willing and able to purchase at any given price. Demand is

concerned with what the consumers are actually able to buy (what they can afford to and would buy), rather than

what they would like to buy. The change in price of a good and service will lead to a change in the quantity

demanded.

Price VS Quantity demanded for good/service

CHANGES IN DEMAND

Factors and effects:

INCOMEHigher incomes of consumers will be able to

buy. Demand of a product will only increase if the

incomes of those consumers buying the product

increase.

THE PRICE OF AND DEMAND FOR OTHER GOODS

The demands for one product often depend on theprice of and demand for another. A rise in the price in

one brand is likely to cause an increase in the

demand for others.

COMPLEMENTARYGoods are those which are used

together. Example, cars and petrol. An increase in

the price of one will affect the demand for another.

CHANGES IN TASTES AND FASHIONS Some products

are subject to changes in tastes and fashions. It is

more usual for a company to stop producing

products which have gone out of fashion altogether.

CHANGES IN POPULATIONChanges in population

levels, changes in the structure of population can

affect demand.

ADVERTISING Successful advertising and promotion

will shift the demand curve to the right.

LEGISLATIONGovernment policies can affect the

demand for a product. Example, a law requiring all

cyclists to wear helmets would lead to an increase in

the demand for cycling helmets at any given price.

0.00

0.50

1.00

1.50

2.00

2.50

3.00

20 40 60 80 100

Quantity demanded

demand


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SUPPLY

Supply is the amount of a product which suppliers will offer to the market at a given price. The higher the price of a

particular good or service, the more that will be offered to the market. A change in price will cause a movement

either up or down the supply curve. The curve will not change its position assuming that all other factors remain the

same.

Price VS Quantity supplied for good/service

CHANGES IN SUPPLY

Factors and effects:

COSTS OF PRODUCTIONA fall in costs of production

will mean more can be offered at the same price.

This will cause the supply curve to shift to the right.

CHANGES IN PRODUCTIONWhere it is possible to

shift production from one area to another, the price

of other products can influence the quantity

supplied. For example, a rise in the price of broccoli

might encourage farmers not only to produce more

broccolis but less of other crops.

LEGISLATIONA new anti-pollution law might

increase costs causing the supply curve to the left.

THE OBJECTIVES OF FIRMS Firms might seek toincrease their profit levels and their market share.

This might reduce the overall level of supply as other

firms are forced out of business.

EXPECTATIONS If businesses expect future prices to

rise they may restrict current supplies.

THE WEATHER The weather can influence the supply

of agricultural products.

0.00

0.50

1.00

1.50

2.00

2.50

3.00

20 40 60 80 100

Quantity supplied

supply


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PRICE

EQUILIBRIUM PRICE

The point at which the demand and supply curves

intersect is known as equilibrium price where PO=Q

O.

Section A shows an excess demand where demand

for a product is greater than supplied. This will lead

to shortage of products and many consumers being

left disappointed. Section B shows an excess supply

where supply for a product is greater than

demanded. This will lead to many products being left

over with no immediate buyers.

CHANGES IN DEMAND

Assume that there has been a rise in income which

resulted in an increase of demand. The demand

curve will shift to right. If demand increase from D1

to D2, the quantity demanded will also increase from

Q1 to Q2. Thus, the equilibrium price will rise from P1

to P2.

CHANGES IN SUPPLY

An increase in supply may have been as a result of

lower labour costs. This shifts supply curve from S1 to

S2 which leads to the equilibrium price falls from P1

to P2. Consumers are more willing and able to buy

goods at lower price and the quantity demanded

rises as well from Q1 to Q2.


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ECONOMIES OF SCALE

ECONOMIES OF SCALE

These are the reductions in a firms unit (average)

costs of production that result from an increase in

the scale of operations. The cost benefits can be

substantial in some industries that smaller firms will

be unlikely to survive due to lack of competitiveness.

They arise for five main reasons:

PURCHASING ECONOMIES- also bulk buyingeconomies. Suppliers will often offer

substantial discounts for large orders.

TECHNICAL ECONOMIES - 1.Large firms aremore likely to be able to justify the cost of

flow production lines. If these are worked at

high capacity level then they offer lower

unit cost than other production methods. 2.

The latest and most advance technical

equipment. Such expense can only be

justified when output is high so that fixed

costs can be spread thinly.

FINANCIAL ECONOMIES- 1. Banks and otherlending institutions often show preference

for lending to a big business with a proven

track record and diversified range of

products. 2. Raising finance by going publicfor existing Plc. Is very expensive.

Prospectus publishing costs and advertising

charges will not vary greatly whether it is a

large or small issue of shares. Therefore, the

average cost of raising the finance will be

lower for larger firms selling many millions

of dollars worth shares.

MARKETING ECONOMIES- Marketing costsobviously rise with the size of a business,

but not at the same rate. These costs can be

spread over a higher level of sales for a big

firm and this offers a substantial economy

of scale.

MANAGERIAL ECONOMIES- Small firmsoften employ general managers who have a

variety of management functions to

perform. As a firm expands, it should be

able to afford specialist functional

managers who should operate moreefficiently and the chance of them making

mistakes is lesser.


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DISECONOMIES OF SCALE

There are disadvantages to large-scale operations

too. Diseconomies of scale are those factors thatincrease unit costs as a firms scale of operation

increases beyond a certain size. These diseconomies

are all related to the management problems

associated with trying to control and direct an

organization with many thousands of workers, in

many separate divisions, often operating in several

different countries.

Causes of management problems:

Communication problems in largerorganizations

Alienation of workforce Coordinating the business Inflexibility

WAYS TO AVOID DISECONOMIES OF SCALE:

Management by objectives Decentralization Reduce diversification


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THEORY OF FIRM

Economists construct models of the market ranging, at one extreme from the ideal of perfect competition through

various forms of imperfection to pure monopoly at the other extreme.

MONOPOLY

It occurs when one business has total control over a

market and is the only seller of the product.

Monopolists are likely to erect barriers to prevent

others from entering their market. They will also

exert strong influence on the price which they charge

for their product. Because of the influence

monopolists have on their price, they are often called

PRICE MAKERS.

Monopolies tend to make abnormal profitscompared to competitive businesses. However, there

may be little or no incentive for a large business to

innovate if it faces a lack of competition. It may

therefore be less efficient and profitable than it is

capable of being, resulting in inefficient

management and a lower dividend for shareholders.

Effects of monopoly and perfect competition:

Prices It might be expected that prices forconsumers would be higher under

monopolies. However monopolies can

sometimes provide consumers with lower

prices than businesses operating under

competitive conditions. This is because large

size of monopoly businesses allows them to

gain economies of scale.

Choice It could be argued that a largenumber of businesses competing against

each other will lead to greater choice of

products for customers. But there are

conditions where competition does not lead

to wider choice for consumers because

competing businesses tend to replicate the

products of their competitors.

Innovation Businesses in competitivemarkets have the incentive to innovate as

they try to differentiate their products from

those of competitors. However, the

relatively large profits made by monopolies

allow them to invest heavily in R&D

OLIGOPOLY

When there are many firms but only a few dominate

the market, oligopoly is said to exist. Under

oligopoly, each firm will have a differentiated

product, often with a strong brand identity. Several

brands may be competing in the same market.

Businesses often follow the price of the market

leaders. This means they tend to be interdependent.

Barriers to entry exist:

Legal restriction, such as patents High start up costs, such as cost of

manufacturing

The promotion or advertising required Arrangements between businesses Collusion between businesses in cartels,

which act together to prevent new entrants


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MACROECONOMICS

GOVERNMENT ECONOMIC OBJECTIVES

ECONOMIC GROWTH

GDP

The total value of goods and services produced in a country one year is called the Gross Domestic Product. This is

measured in monetary terms, and inflation will raise the value of GDP. This increase is NOT ECONOMIC GROWTH.

Economic growth in the economy occurs when the real level of GDP rises as a result of increase in the physical

output of goods and services in an economy.

GNP

A measure of the amount of income generated as a result of a countrys economic activity

Why growth considered so desirable by governments?

Higher real GDP increases quantity of goodsand services-higher living standards

Higher output lead to increasedemployment-increase consumer incomes

Absolute poverty can be reduced if growthis substantial enough and the benefits are

sufficiently dispersed

Businesses should experience the risingdemand for their products

Higher GDP makes more resources availablefor government through greater income

from taxes and decreased burden of social

expenditure

THE BUSINESS CYCLE

BOOM (PEAK) In a BOOM consumer spending and

investmentwill be high. Many businesses will

experience high levels ofdemandfrom people with

increasing incomes. Profits should be high for most

firms and wages might be rising. Output will be high

and the economy will be growing steadily. Business

and consumer confidence is also likely to be high.

RECESSION A RECESSION is where incomes and

output start to fall. Business might experience a fall

in demand for their products and a decline in profit.

Some might start to lay off workers.

SLUMP (THROUGH) A SLUMP occurs at the bottom

of the cycle. Unemployment is likely to be high and

confidence, spending, investment and profits low.Many firms may be forced out of business.

RECOVERY A RECOVERY is where income starts to

rise again after a slump. Output will begin to

increase as spending and confidence increases.

Business will start to employ more workers as a

result.


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OPPORTUNITIES OR THREATS

When demand continues to rise at BOOM stage,

then serious problems for the economy can result in

government action to deflate or reduce demand.

(Inflation can result from demand-pull that will be

discussed later on) As growth continues towards

BOOM conditions and the economy approaches full

capacity, a number of other problems are likely to

arise:

Demand-pull inflation will accelerate,reducing industrial competitiveness and

leading to higher wage demands.

Labour shortages will become a problem,especially for skilled workers in highdemand. This will cause wages and business

costs to rise.

Unemployment will be low and incomes willbe rising and will encourage consumers to

borrow more to spend on durable goods.

Prices of these goods will rise and high price

of housing will be particular concern to

government.

As incomes continue to rise, demand forimports will rise. Home-based firms will find

easier to sell goods on domestic market

than overseas and may switch production

away from exports towards the home

market. The result of these two trends is for

a current-account deficitto become a

serious problem. The country will be

spending more foreign currency than it is

earning.

However not all RECESSION is bad. There will be

opportunities which well-managed firms may be

able to take advantage of:

Capital assets such as land and property,may be relatively cheap and firms could

investin expectation of an economicrecovery

Demand for inferior goods actuallyincrease

The risk of job losses may encourageimproved relations between employers and

employees-increase efficiency

Hard decisions may need to be takenregarding closures of factories and offices-

make business leaner and fitter and better

able to take advantage of economic growth

when this eventually starts again.


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LOW INFLATION

Inflation can be defined as an increase in the average price level of goods and services, whereas deflation is the fall

in average price level of goods and services. Governments set target rates of inflation. They aim for rates lower

than or same as those of their main international competitors.

Retail Price Index (RPI) is used to measure average price changes. Each month, government statisticians wouldrecord prices of items that commonly feature in an average households budgets. The changes are then

weighted to reflect the importance of each item in household budgets. All of the weighted price changes are then

averaged and given an index number. The base year is given a value of 100.

RPIX is another measure of inflation. It removes mortgage payments from the RPI figure. This is known as

underlying inflation.

Consumer Price Index (CPI) is similar to the RPI but is more sensitive to changes in household spending and allows

better comparison with inflation in other countries.

CAUSE OF INFLATION

COST-PUSH

In certain situations, businesses are faced with

higher costs of production. These could result from:

Rises in wages and salaries Tax increases Profits an increase in costs to raise profit

levels due to pressure from shareholders

can increase production costs

Imports-prices of imported goods may risedue to lower exchange rate

World demand for materials raises theirprices

When businesses face higher costs of production,

they will attempt to maintain profit margins, and

one way of doing this is to raise selling prices. This

becomes cost-push inflation.

DEMAND-PULL

When consumer demand in the economy is rising,

usually in BOOM stage, producers will realize that

existing stocks can be sold at higher prices. If they do

not raise prices, stocks could be sold out, leaving

unsatisfied demand. The increase in demand can be

due to:

Rise in consumer spending Firms investing in more machinery Government expenditure increasing More exports being bought abroad


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If inflation rate is quite low, business can gain the

following benefits:

Cost increases can be passed on toconsumers more easily if there is a general

increase in prices.

The real value of debts owed by companieswill fall. Because the value of money is

falling, when a debt is repaid it is repaid

with money of less value than the original

loan.

Rising prices are also likely to affect assetsheld by firms, so the value of fixed assets

could rise. This will increase the value of a

business and when reflected on the balance

sheet, make the company more financial

secure.

However, higher rates of inflation, say above 10%

per year can have serious drawbacks for business:

Higher wage demands are likely and therecould be an increase in industrial disputes.

Consumers are becoming much more pricesensitive and look for bargains rather than

big brand names. Rapid inflation will often lead to higher

rates of interest. These higher rates make it

difficult for highly geared companies to find

the cash to make interest payments,

despite the fact that the real value of debts

is declining.

Cash-flow problem may occur for allbusinesses as they struggle to find more

money to pay the higher costs of materials

and other costs.

Inflation adds to uncertainty about thefuture. This will be the case in particular

with sales forecasts and with investment

appraisal, which requires estimates about

future cash flows.

Businesses that sell goods on credit will bereluctant to offer extended credit periods

Consumers may stockpile some items ortransfer their disposable income to

commodities that are more likely to hold or

increase their value.

Therefore, during periods of rapid inflation, business

may:

Cut back on investment spending Cut profit margins to limit their own price

rises

Reduce borrowing to levels at which theinterest payments are manageable

Reconsider their creditor policy Reduce labour costs


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LOW UNEMPLOYMENT

Unemployment is said to exist when members of the working population are willing and able to work, but are

unable to find employment.

CAUSES OF

UNEMPLOYMENT

EXPLANATION GOVERNMENT POLICY towards the

causes of unemployment

CYCLICAL

UNEMPLOYMENT

This occurs when an economy is in

recession. The recession stage of

business cycle results in a fall in the

demand for firms output. Business

therefore needs fewer workers.

Workers unemployed will spend less

and cause a deepening of the recession.

Government attempts tocontrol the economy as to

avoid substantial swings in the

business which lead eventually

to recessions.

Objective to keep inflation low.Anti-inflationary measures are

most likely to lead to cyclical

unemployment.

Aim to maintain a competitiverate of exchange so that

overseas demand for home-produced goods does not fall,

leading to cyclical

unemployment.

STRUCTURAL

UNEMPLOYMENT

This can exist even though the economy

is growing rapidly. This type of

unemployment results in certain types

of workers being unable to find work,

even though other labour markets are

short of labour. It results from structural

changes in the economy, which changes

the demand for labour.

It will provide education and training

programmes for workers who do not

have the required skills.

FRICTIONAL

UNEMPLOYMENT

Most workers who lose their jobs are

able to move quickly into new ones, but

others may take longer to find suitable

employment. If labour turnover rates

increase in the economy as a whole,

then the level of frictional

unemployment will increase.

The efficiency of the labour market can

be improved and frictional

unemployment reduced by provision of

information about job opportunities.

Real wage unemployment- It is argued that workers price themselves out of jobs. There are vacancies, but the

businesses will only be willing to pay wages which are lower than the workers are prepared to accept.


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Demand The obvious effect of unemployment is that

people are not earning income and are likely to

spend less. Business will suffer a loss of demand for

their products.

Organization Unemployment can have a number of

effects on the internal organization of a business.

The firm can no longer afford to recruit new

members of staffs. This can lead to significant staff

rather than recruitment. Redundancies will add the

responsibilities and roles to those who remain in the

firm. This can lead to increasing demands on existing

employees. During periods of high unemployment,

some firms may reorganize their internal structure.

Payments Businesses may be faced with makingredundancy payments to workers. The cost of any

reorganization caused by redundancies will also have

to be borne by firms. Such costs may include lost

productivity after reorganization as employees

struggle to cope with new responsibilities.

Labour supply It may be easier for firms to recruit

new employees during a period of high

unemployment because people may be prepared to

work for less money. In this way firms can lower

their labour costs.

Output During periods of unemployment, many

firms reduce their output level to compensate for

falling demand. This can interrupt the flow of

production, causing production and stock control

problems.

Government spending High levels of unemployment

means that government spending on social security

will be high and will lose revenue from tax and

National Insurance contributions. To make up for

this the government may borrow, increase taxation

or reduce other items of spending.

Increased trade and reduced costs The services

offered by some firms depend upon other firms

going out of business. Firms specializing inreceiverships and pawnbrokers may see an increase

in the demand for their services.

Social issues Research into unemployment leads to

poverty and stress for those individuals, families, and

communities that have high levels of

unemployment. They can also include high levels of

vandalism and crime. This lead to higher insurance

premiums for businesses.

BALANCE OF PAYMENT

Balance of payment is a record of transactions between one country and the rest of the world.

The current account The difference between the

value of money entering a country (credits) and the

value of money leaving a country (debits) for: 1.

Trade in goods and services 2. Income to/from

abroad 3. Transfers are called the CURRENT

BALANCE.

Current balance = sales of exports and services,

income earned from abroad and transfers to a

country purchases of imports and services, income

going abroad and transfers from a country.

Capital account This involves the transfer of

ownership of assets, transfers of funds associated

with purchase and sale of assets and the cancellation

of liabilities.

The financial account This covers the flow of money

for transactions in financial assets and liabilities.


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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.


APPRECIATIAN

When demand for a currency exceeds supply its value will rise.

The domestic firms that gainfrom an appreciation of the countrys currency are:

Importers of foreign raw materials and components, for whom the domestic currency cost of theseimports will be falling. This increases their competitiveness.

Importers of foreign manufactured goods, which are able to import the product more cheaply in terms ofdomestic currency.

In addition, lower import prices will help to reduce the rate of inflation for the whole economy and all firms are

likely to gain from this more stable position.

The domestic firms that lose from an appreciation of the currency:

Exporters of goods and services to foreign markets. Some business may decide to locate overseas to avoidthe high exchange rate.

Businesses that sell goods and services to the domestic market and have foreign competitors asappreciation makes imports cheaper.


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DEPRECIATION

The value of a currency is said to depreciate when one unit of it buys fewer units of other currencies.

The domestic businesses that gain from a depreciation of currency are:

Home-based exporters who can now reduce their prices in overseas markets. This should increase thevalue of their exports and lead to an expansion of the business.

Businesses that sell in domestic market will experience less price competition from importers.The home-based businesses that are likely to lose from depreciation are:

Manufacturers who depend heavily on imported supplies of material, components or energy sources. Retailers that purchase foreign supplies, especially if they are close domestic substitutes.

INTEREST RATE

It is the cost or price of borrowing. These are the different interest rates in the economy: overdraft, mortgage, and

credit cards. In any market, such as the market of mortgage, interest rates are determined by the demand for andsupply of money. If the borrowers demand more money for mortgages, the interest rate will rise.

INTEREST RATES AND CONSUMER SPENDING

Higher interest rates can:

Increase the cost of borrowing toconsumers. Consumers then tend to cut

back on taking out loans and using

overdrafts and credit cards. This will affect

business on selling goods on credits.

Lead to higher mortgage payments.Consumers with higher mortgage payments

will have less money to spend on other

goods. People are less willing to take out a

mortgage to buy property.

The overhead cost of the business willincrease.

Stop new investment. Encourages saving as savers gain more

money from the money saved.

Higher charges that result from interest rateincreases might persuade a business to use

retained profit to pay off outstanding loans.

This should reduce payments in future and

may lead to an increase in profit in the long

term.

Stocks are expensive to keep, so a rise ininterest rates might lead a business to cut

back on stocks, especially if it has borrowed

to buy them. It might also decide that

saving is a more profitable option.

If interest rates rises, saving and invest inUK becomes more attractive. Demanding

more pounds leads to a rise in the exchange

rate.


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SOCIAL

TECHNOLOGY

Demographical Factor

Age distribution - Birth rate, death rate, immigration/emigration

Fertility rate

Infant mortality rateNatural increase

Reproductive rate

Structure of population - affects patterns of employment, demands of consumers

Geographical

Age and location - Young people like to live in urban areas compared to older people

Urban and rural location - Encourage business and entertaintment outlet to in urban areas

Age and migration - Young people have higher mobility compared to old people

Social Cultural

Aspects of lifestyle and culture of the population

Determines what is acceptable and unacceptable in a productReference group - people who influences us

Concerns about food safety

Concerns about animals welfare

Concerns about the environment

Concerns about beuty and hygiene

Changing of roles in household buying

THE IMPACT OF TECHNOLOGY

Communication

Increase usage ofthe internet

Influence interfacewith supplies andcustomers

Product Technology

Impact on designand manufacture

Determines sppedof production,quality of products,roles of workers

Management /disposal of waste

Creates new

demand throughnew products

Costs of production

Increases fixedcosts and thusneeds large market

Encouragesmergers to createlarger firms in orderto spread costs

Larger firms usetechnology, requireless workers thusincreasing labourproductivity

Human Resourses

Affectsemployment

Affects the rolesand skills ofworkers

A flattening oforganisation charts

Market

Increases range ofproducts

Increasesmarket/distributionof products - eg.online market

Affects pricing ofproducts

Increases

competition in themarket

Changes thepattern of demand


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1.6 ORGANIZATIONAL PLANNING TOOLS

SWOT ANALYSIS

Examine the present situation of the business (its strength and weaknesses) and future possible changes

(opportunities and threats)

Important part of strategic planning: the firms assesses where it is now and what might happen in the future in

order to plan its strategy. The strategy may seek to build on its strength and/or protect against its weaknesses. The

firm will seek to exploit opportunities and deflect threats.

SIMPLE RULES FOR SUCCESFUL SWOT ANALYSIS

Distinguish where your organization is today and where it could be in the future Always be specific. Avoid grey areas Always apply SWOT in relation to your competition, better or worse Keep your SWOT short and simple. Avoid complexity and over analysis SWOT is subjective

STRENGTHS

Resources and capabilities that can be used asa basis for developing a competitiveadvantage.

Examples:

Marketing brand name, distributionchannels

Finance cash flow position, liquidity,profitability

People skills, motivation, ideas

Operations flexibility, volume, unit cost,quality

Exclusive access to certain resources

(5ps people, products, place,processes, procedures)

WEAKNESSES

The absense of certain strengths, the flip sideof strengths

Examples:

Marketing weak brand name, poorreputation

Finance poor budget control

People pack of trained/effective workforce,lack of direction

Operations poor productivity

OPPORTUNITIES

The change in external environement thatmay bring new opportunities for growth andprofits.

Examples:

Unfufilled customers needs (S)

Arrival of new technology (T)

Loosening of regulations (P)

Removal of international trade barriers (P&E)

THREATS

The change in the external environment thatpresent themselves as threats to the firms.

Examples:

Shifts in consumers taste away from the

firms products (S)

Emergence of substitute products (E&T)

New regulations (P)

Increased trade barriers (P&E)

SWOT


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DECISION MAKING

Reason in making a decision

To decide which course of action to take from the various possible alternatives To solve problems in a business

TYPES OF DECISION MAKING

DECISIONS MAKING PROCESS

Strategic decisions

More to general directionand overall policy ofbusiness

Long term decisions andable to influence theorganizations

Performance

Long term and high riskMade by the owner of thebusiness

In some public limitedcompanies, decisions aremade by the board ofdirectors

Others may requireshareholders consent

Tactical decisions

Medium term decisions

Can be calculated andmore predictable

Used to implementstrategic decisions

Made by the manager ofthe business

Required to implementstrategic decisions

Important tacticaldecisions made by thethose in the top of thebusiness hierarchy

Less important made byjunior managers

Operational / administrativedecisions

Lower level decisions

Short term and low risk

Require much less thought andevaluation

Made by (nearly) all employees

Sometimes required

guidance/approval from managersDelegating decisions to thosefurther down the hierarchy can bemotivated

Led to improvements in efficiencyand quality

Reducing the chain of command canimproved the decisions making

Identifying objectives

The business objectives may be differ atthe different stages of growth

Need to develop criteria to measurewhether it has achieved its objectives

Collecting information and ideas

The amount and nature of the informationneeded depend on the decisions

Ideas from working party to collect informationand ideas within the firm or from discussionsamong staff

Analyzing information and ideas

Analyze information to look foralternative course of action

Aim to identify which course of

action will best achieve the businessobjectives

Making decision

Commit oneself to one course of action

Some decisions can be reversed

Sometimes decisions cant be reached

collect more information and ideas

Communication

Personnel are informedand decisions is carried out

Outcome

Will take time beforethe results are known

Evaluate the results

Evaluate the results in aform of reports

Necessary to modify thecourse of action on thebasis of the report


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1.7 GROWTH AND EVOLUTION

INTERNAL GROWTH

Arises within the

company

The companies grow by using

its own resources

The expansion is based on reinvested

profit/debt financing.

EXTERNAL GROWTH

JOINT VENTURES

Definition

A joint venture is the long-term commitment of funds, facilities and services by two or more legally separate

interests, to a combined enterprise for their mutual benefits.A joint venture need not be a separate legal entity orcompany. Other forms of joint ventures include an agreement to work together formalised through a Heads of

Agreement or a Strategic Cooperation Agreement.

Occurs when a firm

invested its size by

taking over or merging

with other firm

(intergration)

Faster method

of increasing

eg: Franchises, MNC

Strategic Alliance &

Joint Venture

Mergers & Takeovers


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Reason for Joint Venture

Internal Reason

Build on company's

strengthsSpreading costs and risks

Improving access tofinancial resources

Economic of scale andadvantages of size

Access to new technologiesand customers

Access to innovativemanagerial practices

Number of sell people willincrease because we wonthave spend to time and

money hiring newemployees

Competitive Goal

Influencing structural

evolution of the industryDefensive response toblurring industryboundaries

Creation of strongercompetitive units

Speed to market

Improved agility

Strategic Goal

Synergies

Transfer oftechnology/skills

Diversification

Advantage

extend the marketing reach

access needed information andresources

build credibility with a particulartarget market

access new markets that wouldbe inaccessible

without the partner

Provide companies with theopportunity to obtain newcapacity and expertise.

Allow companies to enter intorelated business or newgeographic markets or obtain new

technological knowledge

Disadvantage

Risk giving control of itstechnology to its partner

Profitable returns may take sometime to achieve

high level of commitment of staff

and managementCultural differences andcommunications difficulties

Difficult to get out of quickly

Working in a different legal andcommercial system

Political risks in the country wherethe joint venture is based

Potential for conflict with your jointventure partner


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STRATEGIC ALLIANCES

Strategic Alliance

Relationship formed

between two or more

parties to pursue a set of

agreed upon goals or to

meet a critical business

need while remaining

independent

organizations

Why ?? How ??

Advanta es Disadvanta es

Marketing and advertisng

Gain customer trust

Gain more expertise

Expand business rapidly

Spend less time and money

Each partner must contribute

The alliance can be struck

One company will lead and the

Each partners retain bss independence

Strategic alliances can be combined with other agreements, such as licens

technology

Greater responsiveness

Opportunities for growth

Risk sharing

Increased leverage

Payment difficulties

Small company subsume by larger

Potential for conflict

Hi h commitment time, mone , eo le

Strategic priorities change over time


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MERGERS AND TAKEOVERS

Definition or main idea

The combination of two or more entities to achieve synergy

Merger

integration

combination of 2 or more co. forming a newcomany

involves mutual decision to combine

shares in th old co. exchanged fr equal num. ofshares in th merged entity.

Takeover

acquisition

th purchase of one co. by anthr with no new co.being formed.

doesnt need mutual decision to combine,even if thtarget co. doesnt wnt to be purchased.

acquiring firm usually offers cash price per share toth shareholders of th targer firm according to aspecified ratio.

Reason

Economies ofscale

Increase profit

Diversification

Cross selling

Synergy

Taxes

Resource/Techtransfer

Powersatisfactory

Monopoly

Empire buliding


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Types of mergers

Horizontal

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

Vertical(Forward)

Integration with a bss in th same industry bt a customer fr th exiting bss.

Vertical(Backward)

Integration with a bss in th same industry bt a supplier of th existing bss.

Merger

Horizontal

Vertical

Forward

Backward

BalancedConglomerate

Advantages

Reduce competitor

Possble econ. of .scales

Increased power oversupplier

Disavantages

Rationalization maybring bad publicity

May lead to mnopolyinvestigation ifexceeds certain limit.

Impact on stakeholders

Customers hv lesschoice

Employees may losejob due torationalization

Advantages

Abe to control thpromotion and pricing ofits product

Secures a secured outletfr th firm's product andmay excludecompetitor's product.

Disavantages

Consusmers maysuspect uncompetitiveactivity and reactnegatively

Lack of experience-goodmanufacturer doesntneccessarily make a

good retailer


Workers hv greater jobsecurity because th bsshas secured outlet

More various jobsopportunities fr thcommunity

Consumers may resent

lack of competition -withdrawal ofcompetitor's productfrom retail outlet.

Advantages

Control overquality,price,and delivery

time of suppliesEncouraged jointresearch to improvequality of supplies ofcomponents

Control supplies tocompetitors

Disavantages

Lack experience inmanaging supplying

company.Supplying bss becomecomplacent due tosecured customer.


Greater careeropportunities to th

workers and community.Consumers obtainimproved quality andinnovative prouct.

Control over supplies tocompetitors may limitcompetition


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Conglomerate merger

Intergration of co. that hv no common bs areas.

Takeovers

Pros and Cons of takeover

Advantages

Diversifies in firm'sindustry and market.

Spread risk

Take th bss into fastgrowing market

Disavantages

Lack of experience innew sector

Lack of clear focus anddirection


Greater careeropportunities fr

workers andcommunity

More job security tothe workforce becauseof risk is spread acrossmore industries.

Takeovers

Friendly Hostile Reverse

Friendly

usually th board of th targetcompany will be informedbefore a bidder makes anoffer

In private co.,th shareholdersand th board are likely thsame people or closelyconnected to each

other.Thus,private takeoversare likely to be friendly as thshareholders hv agreed tosell th co.

Hostile

Th bidder continues topursue even th board rejects.

Th bidder makes th offerwithout informing th boardbeforehand.

Not usually bad,as cn bebeneficial fr shareholders inorder to change fr more

effective management.

Reverse

Private co. acquires publicco.

Allow th private co. to floatitself while avoiding thexpenses and time involvedin a conventional initialpublic offering(IPO)

Pros

Increase sales/revenue

Venture into new bss and markets

Pofitability of target co.

Increase market shareDecrease competition

Reduction of overcapacity in th industry

Enlarge brand portfolio

Cons

Reduced competition and less choice frconsumers

Likelihood of price increases and job cuts

Cultural integration/conflict with newmanagement

Hidden liabilities of arget entity


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Problems associated with rapid growth

Diseconomies of scale

Factors that increase unit costs as a firms scales of operation increases beyond a certain size

Factors:

Communication problems Alienation of workforce-lack motivation Duplication of effort Office politics Poor and slow decision making Inertia-unwillingness to change Cannibalization- self competition Public and government opposition

Solutions:

Management by objectives Decentralization Reduce diversification-focus on core activities

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

Financial

Problems in coping with larger bss operation.

Lack of coordination between divisions(Decentralization may solve this)

Managerial

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

Marketing

True for target co. hat hv been acquired by larger co

Original owners might lose control when power conflict happens

Loss of control by original owners


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2. Assignedterritory.

3. Duration of thefranchise

agreement

4. Franchise feeand total

anticipatedinvestment

5. Trademark,patent, andsignage use.

6. Royalties andother fees you

are expected topay.

7. Advertising

8. Operatingprotocol.

9. Renewal rightsand franchisee

termination/cancellation policies

10. Resale rights.

1. Trainingand/or ongoing

support providedby the franchisor

Definition

FRANCHISE

A type of license that a party(franchisee) acquires

to allow them to have accessto a business' (the

franchisor) proprietaryknowledge, processes and

trademarks in order to allow

the party to sell a product orprovide a service under the

business name.

FRANCHISOR

A party ina franchising

enterprise thatultimately owns therights, trademarks

and proprietaryknowledge of thespecific business

entity.

FRANCHISEE

The party in afranchising agreementthat is purchasing the

right to use a business'strademarks, associated

brands and other

proprietary knowledgein order to open abranch

ROYALTY

A payment to anowner for the use ofproperty, especiallypatents, copyrightedworks, franchises or

natural resources

Content of

Franchise

Agreement


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Establishedbrand

Training

Volumepurchasing

power

advertisingProven

businessmodel

Accountingand budget

systems

Others helprunning your

business

To protect the copyright and privacy rights of bothparties.

Create a balance between individual privacy rightsand the needs of organizations to collect, use and

disclose personal information for reasonablecommercial purpose.

Protect its brand name. Avoid fraud

Importance of agreement.

FRANCHISOR

The businessesunder the

ultimate controlof the franchisor

can spreadrapidly

The franchisorhas a built-in andcaptive market

for all hisproducts withlittle financialcommitment

A significantincome can beearned without

the hard work of

meeting anddealing with

customers face-to-face.

ADVANTAGES of

Franchisee


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DISADVANTAGESof Franchisee

loss of control

The franchisormight go out of

business, orchange the waythey do things

Otherfranchisees

could give thebrand a badreputation

The franchisormay makemistakes in

their policies

You may find it

difficult to sellyour franchise -

you can onlysell it to

someoneapproved by

the franchisor

The franchiseewill have to paythe franchisor

for the servicesprovided and

for the use ofthe system

Franchisor

Problems oncontrolling the

franchiseeoperation in a

long run.

Failure by anindividual franchiseewill reflect badly onthe whole franchise

operation


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Definition ofmultinationalcorporation

A corporation orenterprise that

managesproduction

establishments ordelivers services inat least twocountries.

Not merelyimporters/expor

ters (producegoods and

services in morethan onecountry.

Some MNCshave annual

sales turnoversexceeding thesize of many

countries entire

economies.

They can have apowerful

influence ininternational

relations and localeconomies.

Corporation thathave their

headquarter in onecountry butoperating

branches, factories,and assembly

plants in others.

Advantages ofbeing

multinationalcorporation

To become nearer tomarkets throughout

the world

- Better marketinformation regarding

consumer tastes as aresult of closeness tothem

Growth motive

- A company mayhave reached aplateau satisfyingdomestic demand,which is not growing.Looking for newmarkets.

Market competition- The most certain

method of preventing

actual or potentialcompetition is toacquire foreign

businesses

Avoid ImportRestrictions

- When production isdone in host country,there is no need topay importduties/importrestriction

Government grantsand tax incentives .

- The favorable taxrates in an offshore

country are designedto promote a healthy

investmentenvironment thatattracts outside

wealth.

High TransportationCosts

- Transportation costsare like tariffs in that

they are barrierswhich raise consumer

price

Avoiding legislation inhome country

- Legislation or otherrestrictions can be

avoided by themultinational basing

some of its operationsin a different country

1.9 GLOBALIZATION

MULTINATIONAL COMPANIES


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Advantages of beingmultinationalcorporation

Spread risk

- In one area of thebusiness is doing

badly, moresuccessful ones will

help keep thebusiness intact

Diversification ofInvestment

- In some countries,regulations restrictthe international

investmentopportunities of

citizens. Offshoreaccounts are much

more flexible, givinginvestors unlimited

access tointernational

markets and to allmajor exchanges

Tax Reduction

- Many countries(known as tax

havens) offer taxincentives to foreign

investors.

Confidentiality

- Many offshorejurisdictions offerthe complimentarybenefit of secrecy

legislation

Lower costs ofproduction

- Lower labour ratesdue to much lowerdemand for local

labour compared todevelopedeconomies

Asset Protection

- Offshore centers

are popularlocations forrestructuring

ownership of assets.Through trusts,foundations or

through an existingcorpor

business notes(all) editted

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