Business and Environmen t

Saadat Ali Mughal

9/18/2011

Business and environment

1AS. 1 Enterprise
The nature of business activity People go to work because; they need the income to buy goods and services of all kinds. Some goods are essential and for some others they feel that they should or would like to have- and this is their real reason for working. The combine efforts of these millions of workers convert raw material into forms that are useful and valuable to the whole population. In this way they are helping to produce the goods and services, which ensure a high standard of living for the community in general.

ADDING VALUE
What do we mean by value? Things can have value in the financial sense and in the sense that they are good or worthwhile. Things are good or worthwhile not simply because they are appreciated by particular individuals and add to their enjoyment but rather because they improve welfare or quality of life and or / the social and cultural environment. Added value or value added It is the difference between the cost of bought in components and the price charged for the finished product. Value added is not the same as profit. To calculate profit, we need to subtract wages (labour costs) financial costs and overheads. Value added can be calculated by the following formula: Added Value = Sales revenue External expenditures External expenditure does not include the cost of land, labour and capital of the organization. Adding value is important for the business because this creates brand loyalty amongst customers due to which a business is able to maintain long-term sales. Also continuously adding value increases customers attracted to innovations. Then adding value creates a high quality image of a product which allows businesses to charge a high price. This may result in higher profits for a business as long as it is able to charge a price higher than the expenses it incurs.

Some basic definitions

1. BUSINESS ACTIVITY It is the transformation of resources (raw material and human resource) into products 2

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(goods & services) to satisfy the needs and wants of customers. The main aim for any business is profit making. 2. OPPROTUNITY COST This is the next best choice given up in favour of the alternative chosen from two choices. E.g. If a business has a choice of purchasing new premises or new machinery and it also has the ability to buy these but chosen new machinery because of its greater utility, then the premises is the cost opportunity. 3. FACTORS OF PRODCUTION They are the resources necessary for the production of goods and services. There are four factors of production as follows: a. Land: These include all renewable and non-renewable resources (raw material) including water (fish), forests, coal, oil and minerals. b. Labour: The human resource required in the development of products e.g. for running machinery i.e. the employees of the business. c. Capital: The finance (money) invested by the owner to start a business e.g. machinery & rent. d. Enterprise / Entrepreneur: An organization or individual that takes risk to start a business by initial investment. 4 CONSUMER GOODS These are the tangible goods (that can be felt) which are sold to the general public. This includes durable and non-durable goods. Durable goods such as machinery, garments and mobiles can last for a long time while non-durable goods such as edible things soon become damaged. 5. CAPITAL GOODS They are physical products, manufactured specifically to be sold to other industries for the production of other goods and services like commercial vehicles. 6. SERVICES They are non-tangible products for the public to satisfy their wants. They could be commercial or personal. Commercial services include banking, insurance, transportation which are done on a large scale. Personal services are one-to-one services such as hairdressing, teacher and lawyer. 7. PRIAMRY SECTOR Also called extraction industry. These include firms involved in activities to extract the natural resources of the earth e.g. mining, fishing and agriculture. These will give with the resources (raw materials) for production of goods and services. 8. SECONDARY SECTOR Also termed as Manufacturing industry. These deals or includes firms and industries that process the raw materials extracted by the primary sector into finished goods to satisfy the needs and wants of customers e.g. Steel Industry, Textile Industry & Food Industry. 9. TERTIARY SECTOR

Business and environment Another name is the service sector. They include firms and industries that provide services to other firms or customers belonging to the general public e.g. retailing, banking, teaching, consultants. 10. PUBLIC SECTOR The firms in this business are owned, controlled and run purely by the government. They are usually financed by the taxes. e.g. Pakistan State Oil. Usually these firms might be too important or strategic to left to the private owners. e.g. certain health and education institution services may have to be given for free to the poor sector of population that private sector wont usually provides. 11. PRIVATE SECTOR The firms are owned, controlled and run by private individuals who have profit as the main objective. Most business fall in this category. The sizes of businesses vary sole traders, partnerships, limited companies are all included in this sector. 12. INDUSTRIALISATION The increase in the importance of the secondary sector against the primary sector usually in developing countries is industrialization. This means an overall increase in the level of and value of output as well as ratio of working force in the manufacturing industry. This results in increased GDP and higher living standards. 13. DE-INDUSTRALISATION It is the rise in the importance of tertiary sector and decrease in the importance of secondary or manufacturing sector. It occurs mostly in developed countries. This means that the value of service sector increases. De-industrilisation reduces competition with developing countries and has more specialized jobs for educated people that are more interesting. 14. BUSINESS FUNCTIONS They are the activities that occur in a business and are controlled and directed by the business management. They are necessary for the efficient running of the business as well as production. The different functions are: a. PRODUCTION: This deals with the actual manufacture of goods / products demanded by the customers. It requires co-ordination of all resources to produce the best product at lowest cost. b. RESEARCH & DEVELOPMENT: It is to find out the exact requirements of customers as to the product and its price through market research. It also includes finding the right market segment to be aimed. c. FINANCES: The finance and accounting function is the allotment of relevant funds for each and every function as well as to keep record of all incomes and expenses and the profits or losses. d. MARKETING: This function involves the 4 Ps. Product & Packaging which is the development of the actual product as demanded by the customers and within an attractive packaging suitable for the segment aimed as well as keeping the product safe. Promotion of the product through advertising so the information of a product

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reaches the target audience. Charging the correct price is also necessary so that customers buy and profits are also made. And selling at the correct place is necessary too. e. ADMINISTRATION: It is the physical office environment that ensures efficient working of different functions in co-ordination as well as good communication. f. HUMAN RESOURCE: It deals with the recruitment and appraisal of employees to maintain correct standards of working in the company. Its function is identification of vacancy, finding a suitable employee and conducting training workshops. ECONOMY An economy is an area in which people make or produce goods and services. This area can be of any size, with any number of people involved. For example a local economy could be a village, town or city. A national economy is a country like U.K. and international economy is this globe. Indeed, every country in the world is considered as an economy as long as it is involved in the production of goods and services and all countries together makeup the world economy. ECONOMICS It is a study of the ways in which human kind provides for its material wellbeing. Economists are concern with the study of human behavior as a relationship between ends and scare means which have alternative uses. Economics can be divided in to two types: Microeconomics- it is a study of individual markets. For example, market for computers, CD players or household items. Macroeconomics- it is the study of the whole economy. It includes looking at unemployment, international trade and government policies. NEEDS These are essential for life and can not be postponed. All people, whether rich or poor, have same basic needs i.e. food, clothing and shelter. WANTS Wants are without limit and can be postponed. People usually want mire than they need. For example, car, house, television, sound system etc. SCARE RESOURCES These resources are limited in their supply. There are only a limited number of resources such as workers, machines, factories, raw materials etc. Yet there are a number of different ways in which they could be used. Similarly people only have a limited amount of money and have lots of needs and wants to satisfy. Also the Governments have limited amount of money and they are unable to satisfy all their wants. UNLIITED OR FREE RESOURCES

Business and environment These resources are unlimited in their supply and are not paid for. These include sunlight, seawater, air etc. Economists are not concerned with free resources. OPPORTUNITY COST The real cost of choosing one thing and not another is known as opportunity cost. 0r Opportunity cost is the cost in terms of the best alternative forgone. It makes clear the true resource cost of any economic decision. For instance, if one buys a watch it may cost 50 but what is more significant is what has to be given up to make the purchase. This may be the opportunity to purchase a pair of shoes or the opportunity to have extra leisure instead of working to earn the 50. THE BASIC ECONOMIC PROBLEMS The problem arises because resources are scarce, but human wants are unlimited. RESOURCES: THE FACTORS OF PRODUCTION The scare resources available for use in the production of goods and services to satisfy wants are called factors of production. These work as inputs into a production process from which an output of goods and services emerges.

TYPES OF ECONOMIC SYSTEM

Free market economy A free market economy is one in which all economy resources, and business sectors are owned, controlled and run by private individuals or companies. There is no government control or extremely limited control in this economy. However, no such economy exists in any country though USA is closest to it. In this type of economy, the resources are allocated to different products according to the demand of the consumers. Also the main objective of business in free market economy is profit as high profits as are efficiently possible. Advantages Since such an economy is driven by a profit motive so businesses are motivated to work harder. Therefore they are more efficient as they want as high productivity as possible because this would lower costs and so increase profits. The labour is also more efficient as training is provided periodically to improve the skills of workers to increase productivity. Also the labour is highly motivated as it may receive bonuses and extra wages for hard work. Then there is a lot of competition in free economy as anyone could start up a business in any sector they want so this means that prices remain low as each business owners try to beat the other in sales. Since prices are low, inflation will also be low. Also a major advantage is consumer sovereignty. This means that more of those goods are produced which are required and demanded by the consumers. This leads to efficient allocation of resources as the best possible use of the land, labour, and capital is made to get the maximum output required to satisfy the wants and needs of customers. Continuous technological advancement takes place as business try to find few techniques and logics to improve the efficiency of workers as well as make better utilization of the scarce resources of production. This would lead to increased GDP that leads to economic growth.

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Also a very wide variety of products are available for the consumers to choose from which are of the best quality possible at the lowest prices possible. This leads to rise in living standards of the population. Disadvantages The major disadvantage is the large gap that exists between the rich and poor sectors of society. The businesses in free market economy concentrate on those with higher incomes as profit is the main motive. So the rich become richer while the poor becomes poorer which could lead to an average fall off in the living standards. In the free economy, more luxury goods are produced as they give higher profits while necessities are less. This means that the poorer people may not get services and goods which form the basic needs of survival like food, water, shelter, health services and education. Another big disadvantage is the formation of monopolies is possible as mergers and take-over occur uncontrolled. The monopolies could then charge higher prices exploiting their position as the sole dealer in a certain market. This could lead to rise in inflation and so a fall in living standards that could lead the economy into recession. Also the resources are exploited in the free economy as duplication of products occurs so in the end wastage of resources and quick exhaustion of scarce resources could occur. Planned market economy This is the type of economy in which all resources are owned, controlled and run by the state or government. It is also known as the command economy. There is virtually no private sector activity in this type and the main objective of the government is the welfare of society. However, none of such economies really exists and the closest examples are that of North Korea and Cuba and even in these there is a lot of private activity. Advantages There is very less wastage of resources since the government produces only as much as needed by the people. So no duplication of products occurs and so no wasteful competition takes place. Another major advantage is that thered be high employment as the government seeks to provide as many jobs as possible because this would keep the community happy and the government intact. Then in a planned economy, there is equal distribution of goods and services for all socio-economic levels of society to fulfill the basic needs of everyone. This reduces the gap between the rich and poor sectors of economy. It may be that certain goods are provided for free to the very poor members. Since the government controls prices, this means that thered be no high prices and so inflation will be low. This would lead to economic growth which is a major objective of the government. Then since private activity is nearly non-existent, it means that that thered be no private monopolies that could exploit the consumers.

Business and environment Also private businesses have short-term aims, while the government can do long-term planning and work for the benefit of the country in the long-run. Disadvantages Since government doesnt run the economy for profit, there is nearly no motivation to work hard in employees and the businesses tend to be very inefficient so there is very low productivity. Also the labour is very inefficient as it knows that whether or not it works, wages would be given to them. The labour cant trained and if dismissed from the job, it has no where to go. Also, there is no competition in a government economy. So there is no incentive for technological advancement. This means that costs of production might be high that could lead to higher prices and so losses for government controlled economy. It could also in the long-run lead to inflation. Even though it is said that resources last longer in a planned economy, yet their utilization is not efficient as there is no motive to work properly. The labour knows that whether they come late or early, do their jobs or not, they would get their salaries. Also frustration is felt in those employees who are by nature hard workers as they get no extra returns in any form i.e.: monetary or non-monetary. There since the government decides what to produce and in what quantity, this means that the demand of consumer is not taken into account. It also means that people of all levels get the same goods so the quality and packaging of goods quality of services would be very low. It also means that the consumers are left with no choice and have no variety as over the entire country the same things are produced. The decisions taken are very slow and bureaucratic. This is because the approval of all levels of government from the bottom to up must be taken for which a lot of time is needed. Then the implementation of the decision is also very slow and so the changes take a long time to be visible. Therefore economic growth is very slow. Mixed economy It is clear from the brief analysis of market and command economies that, in the pure sense, these type of economic systems occur in theory and not in reality. In contrast, the mixed economy is undoubtedly the best form of economic activity within the global economy. As its name indicates, it involves both private and public sector in the process of resource allocation. Consequently, decisions on most important economic issues involve some form of planning and interaction between government, businesses and labour through the market mechanism. Private ownership of productive resources operates alongside public ownership in many mixed economies. At this time the government is responsible for: Substantial areas of public expenditure such as health, social service, education and defence. The direct operation of nationalized industries such as coal, iron and steel, railway, water, gas, telephone and electricity. Providing support for large areas of manufacturing, such as vehicle production, aerospace and electronics, in partnership with the private sector. It combines most of the advantages of market and command economic system and most of their problems are solved in mixed economic system. The major problem is the conflict of interest between government and private sector.

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BUSINESS ENVIRONMENT IS DYNAMIC The business environment consists of the surrounding factors that either help or hinder the development of businesses. Following six elements may make business environment dynamic: The legal and regulatory environment- People are willing to start new businesses if they believe that the risk of losing their money isnt too great. Part of that decision is affected by how governments work with businesses. Governments can do a lot to lessen the risk of starting and running a business through the laws (also known as acts) that are passed by its elected officials. The Constitution defines the powers that can be exercised by the different levels of government (i.e., federal, provincial, and municipal). The economic environment- The economic environment impacts businesses as well as consumers. The economic environment looks at income, expenditures, and resources that affect the cost of running a business. Businesses review the results of major economic indicators such as consumer spending, employment levels, and productivity. This analysis will give them a sense of what is happening in the marketplace and what actions they may need to take. The technological environment- Various tools and machines developed throughout history has changed the business environment tremendously. Few technological changes have had a more comprehensive and lasting impact on businesses than the emergence of information technology (IT): computers, modems, cellular phones, and so on. Chief among these developments is the Internet. The competitive environment- Competition among businesses has never been greater than it is today. Some companies have found a competitive edge by focusing on quality. The goal for many companies is zero defectsno mistakes in making the product. Some companies, such as Toyota in Japan, have come close to meeting that standard. However, simply making a high-quality product isnt enough to allow a company to stay competitive in world markets. Companies now have to offer both high-quality products and outstanding service at competitive prices (value). That is why General Motors (GM) is building automobile plants in Argentina, Poland, China, and Thailand. The strategies of combining excellence with low-cost labour and minimizing distribution costs have resulted in larger markets and potential long-term growth for GM. The social environment- Demography is the statistical study of the human population with regard to its size, density, and other characteristics such as age, race, gender, and income. Demographic trends mostly affect businesses and career choices. The Canadian population is going through major changes that are dramatically affecting how people live, where they live, what they buy, and how they spend their time. Furthermore, tremendous population shifts are leading to new opportunities for some firms and to declining opportunities for others. The global environment- The global environment of business is so important that we show it as surrounding all other environmental influences. Two important environmental changes in recent years have been the growth of international competition and the increase of free trade among nations. Japanese manufacturers like

Business and environment Honda, Mitsubishi, and Sony won much of the market for automobiles, videocassette recorders, digital video disk players, television sets, and other products by offering global consumers products of higher quality than those made by domestic manufacturers. This competition hurt many industries, and many jobs were lost. As a result, more businesses have become more competitive. Today, manufacturers in countries such as China, India, South Korea, and Mexico can produce high-quality goods at low prices because their workers are paid less money than Canadian workers and because theyve learned quality concepts from Japanese, German, and U.S. producers. Late in the 1990s, however, Thailand, Malaysia, Hong Kong, Japan, South Korea, and other Asian countries had banking problems that caused a major upheaval in global markets. These problems affected all nations, showing the interdependence of countries around the world today. Businesses grow and prosper in a healthy environment. The results are job growth and the wealth that makes it possible to have a high quality of life. Companies should be aware of these elements and make it a practice to continuously assess the business environment for changes in trends. These trends could impact the organizations ability to achieve its objectives, steer clear of threats, or take advantage of new opportunities.

Todays Dynamic business environment

WHAT A BUSINESS NEED TO SUCCEED The greatest people in business have certain attributes in common. Several personal qualities are important, like a thirst for continuous education, personal drive and motivation, strong goals and ambition, clear vision, and always a great deal of passion.

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Beyond those personal qualities though, what makes a successful business person stand out from the crowd? Here are business skills you need if you want to get ahead: Internal Factors Communication Planning Financial strength Risk Logistics Productivity Management Leadership Personal Productivity Creativity Inventiveness Problem Solving Brainstorming Making connections External Factors Favourable Govt. policies Infrastructure Cheep labour Less competitive environment Availability of cheep raw material Financial and technical help Growing market and Economic conditions

WHY MANY BISINESSES FAIL EARLY A significant proportion of new businesses will fail within the first 24 months of operation. There are a number of underlying factors that contribute to this statistic. Many individuals are unprepared when starting a business. Preparation is not as simple as coming up with an idea but rather involves a wide range of activities. Individuals tend to focus too much on their core idea, and neglect the basics. Many businesses do not consider simple questions such as where their customers are going to come from, how they are going to maintain a steady cash flow, or what possible oncosts might exist. Many new businesses are run by individuals without expertise or experience in running a business and subsequently fail to address the attention to detail required. In short, the two major reasons for small business failure are a lack of appropriate business planning and poor cash flow management which contributes to a lack of working capital. Difficult to sustain their competitive advantage Technological change might affect businesses Over-extended in finances Decline of same kind of business Unfavourable Government policies Bad Economic conditions Traditional goods Social and cultural changes

QUALITIES AN ENTREPRENURE IS LIKELY NEED FOR SUCCESS Becoming an entrepreneur is not only about starting a business or even several businesses; it is about having the drive and attitude to become successful in business. Successful entrepreneurs share similar thinking processes and have several very important personal qualities which allow them to become so success in their ventures. For example, look at Richard Branson; he has a true inner drive to succeed and grow

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Business and environment this businesses rather than focusing on earning lots of college degrees or even technical knowledge in any special field. Here are some qualities all successful entrepreneurs share: Inner Drive for Succeed- Every successful entrepreneur has a deep drive to succeed and grow this business ventures. They look at the big picture and show real ambition in their efforts. These people set high goals to achieve and remain very committed to reaching those goals no matter what gets in the way of their achieving them. They keep striving toward the mark they have determined and lead others to excel as well. Strong Belief in Their Abilities- Another trait that successful entrepreneurs share is a healthy measure of self-esteem and frequently they exhibit assertive personalities. They tend to be strong-willed people. They remain focused on their goals and are very determined that they can and will achieve them. They fully believe in their ability to succeed and never doubt that ability. They are optimistic and many others may think of them as a bit flamboyant or even arrogant; actually, they are only highly focused and avoid spending very much time thinking about criticism they consider unconstructive. Continual Search for New Ideas and Innovation- Successful entrepreneurs are passionate about ways to accomplish tasks better and always seek ways to improve their services or products. The continually seek to improve processes and work smarter. They are quite creative and resourceful and accept and implement new innovations quickly. Open Minded about Change- When the successful entrepreneur finds something does work well for them or their business, they change it. These entrepreneurs know how important it is to remain on top of their field and realize that in order to be Number One, they must allow their business to evolve. They change as times change. The latest technology, techniques, and methods of doing business are something they take time to keep up to date on and if they see ways in which new technology or business methods can benefit their venture, they grab the opportunity to implement the change. They love to take on new opportunities. Naturally Competitive- Those entrepreneurs who succeed are competitors; they do not shy away from competition. They realize the way to achieve their goals and high standards is to remain competitive with competing businesses that are successful. Highly Motivation and Energy- Successful entrepreneurs are so full of energy and motivation, always moving, that others may view them as "hyper". They drive toward success through their overflowing self motivation. They know that in order to achieve high standards and goals, being motivated and ambitious are crucial. Ability to Accept Constructive Criticism and Even Rejection- In order to remain on the forefront of their field, entrepreneurs who are truly innovative are frequently told that something they wish to accomplish can't be done. They simply adjust their path when they encounter truly constructive and helpful input to their overall plans; when the comments are pessimistic or not useful, they simply disregard the input. They

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realize that they will surely encounter rejection and their path will contain obstacles but accept that as part of being a leader in business. They meet each obstacle and find ways to leap over it; they deal with rejection appropriately. Truly successful entrepreneurs exhibit passion, drive, and resourcefulness. They strive to success and continually improve. They are true pioneers and don't mind fighting on the front lines. The great entrepreneurs don't mind when others laugh or criticize them in the beginning because they recognize their pathway and are simply too busy working to achieve their dreams. ROLE OF BUSINESS ENTREPRISE IN THE DEVELOPMENT OF A BUSINESS AND COUNTRY Investment Self employment Job opportunities GDP, GNP, NI Tax revenue Ancillary services Impact on imports, exports and budget deficit

THE RANGE AND AIMS OF SOCIAL ENTREPRISE

Social enterprises are businesses that trade in the market with a social purpose. Social Enterprises are found in most economic sectors and are distinguished by the way they do business: They are commercial enterprises that trade in the market place in order to achieve explicit social aims and financial self-sufficiency. They are part of a stakeholder economy and are structured and governed by and for stakeholder groups or by trustees Their surpluses are principally reinvested to achieve their social/community aims.

Whereas in the traditional private business model any commitment to the community is demonstrated after economic profit is earned, the social enterprise model is an integrated approach where the social aim is incorporated as part of the production process for goods and services. (Social Enterprise London) There are many different types of social enterprises covering a range of forms and functions. These include: Local community businesses: have a strong geographical definition and focus on local services and markets Social firms: provide employment and training to disadvantaged groups Intermediate labour market companies: provide training for the long-term unemployed Credit unions and community banks : provide access to finance for members Co-operatives : jointly owned enterprises in which associations of people unite to meet common economic and social needs 13

Business and environment Employee-owned businesses: create and save jobs as part of economic development strategies Charities trading arms: enable charities to meet objectives in innovative ways e.g. fair trading companies Development Trusts: regenerate communities by investing in local community owned or small businesses through finance, business training and support

TRIPPLE BOTTOM LINE

In practical terms, triple bottom line accounting means expanding the traditional reporting framework to take into account ecological and social performance in addition to financial performance. The concept of TBL demands that a company's responsibility be to stakeholders rather than shareholders. In this case, "stakeholders" refers to anyone who is influenced, either directly or indirectly, by the actions of the firm. According to the stakeholder theory, the business entity should be used as a vehicle for coordinating stakeholder interests, instead of maximizing shareholder (owner) profit. The triple bottom line is made up of "social, economic and environmental" the "people, planet, profit" phrase was coined for Shell by Sustainability, influenced by 20th century urbanist Patrick Geddes's notion of 'folk, work and place'. "People" (human capital) pertains to fair and beneficial business practices toward labour and the community and region in which a corporation conducts its business. A TBL company conceives a reciprocal social structure in which the well-being of corporate, labour and other stakeholder interests are interdependent. "Planet" (natural capital) refers to sustainable environmental practices. A TBL company endeavors to benefit the natural order as much as possible or at the least do no harm and curtail environmental impact. A TBL endeavor reduces its ecological footprint by, among other things, carefully managing its consumption of energy and non-renewable and reducing manufacturing waste as well as rendering waste less toxic before disposing of it in a safe and legal manner. "Profit" is the economic value created by the organisation after deducting the cost of all inputs, including the cost of the capital tied up. It therefore differs from traditional accounting definitions of profit. In the original concept, within a sustainability framework, the "profit" aspect needs to be seen as the real economic benefit enjoyed by the host society. It is the real economic impact the organization has on its economic environment. This is often confused to be limited to the internal profit made by a company or organization (which nevertheless remains an essential starting point for the computation). Therefore, an original TBL approach cannot be interpreted as simply traditional corporate accounting profit plus social and environmental impacts unless the "profits" of other entities are included as a social benefits.

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Saadat Ali Mughal 1AS2 Business Structure

TYPES OF PRODUCTION The production is divided into three stages. 1 Primary production This is the first stage of production and includes workers employed in mining, fishing, forestry and farming. Most of output in primary production is in a raw or unusable state. 2 Secondary production In this secondary production, people working in all kinds of manufacturing processes transform raw materials into the goods and products that we need. It is much more probable that the raw materials are turned into Semi manufactured goods in one factory and then sent to another to be finished off or incorporate into a larger or more complex product. While this is happening the value of the materials is increasing as they are being. Building and construction industry is also included into secondary sector. 3 Tertiary Production. The activities of tertiary sector are the transform of goods from factory to the consumer. In tertiary sector there are two broad groups & workers, those providing commercial services (communications, finance, insurance, wholesaling and retailing etc.) and those offering direct services (teachers, doctors, nurses etc.)

BUSINESS SECTOR
The productions and distribution of goods are in the hands of very large number of business enterprises, which vary immensely in their scale and organization. The reason for this variety of business organization is that some activities can only be carried out by large firms, while others are best conducted by small ones. There are five forms of enterprise to be identified in the private sector.

Unincorporated companies
These companied have two distinct features: The unincorporated business does not have a separate legal identity. The owner and the business are one and the same in the eye of the law. Consequently, if there are problems with the business, it is the owner who is sued or fined for any wrong doing. If the unincorporated business is sued or goes into liquidation (when it is unable to meet all its debts), the assets of the owner e.g. his/her house can be sold off to meet the debts of the business. This is called unlimited liability. The two types of businesses that are unincorporated are: Sole traders Partnerships

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Business and environment 1 The sole Trader It is a simplest and most common form of business organization. Sole trader start business with heir own capital and labour and takes the profits as their rewards. Plumber, builders, retailers, wholesalers, hairdressers, painters are some of the examples of sole traders. They need not to follow legal restrictions and can take independent decisions; they enjoy all profit and have personal contacts with employees and customers. On the others hand sole traders have to face many difficulties like they have unlimited liabilities, difficult to raise capital, lack of control and technological progress. 2 Partnership Some time, businesses benefit life as a partnership, when more than two people join hand with each other and establish a business. The main features of partnership are as fallows. There may be between two to twenty partners. Profit and losses are shred between the partners. It is best to have a written partnership agreement stating. How much capital each partner will contribute. How profit (or loss) will be sheared among the partners The procedure for ending the partnership How much control each partner has. Rules for taking a new partner. All partners are entitled to be involved in the management & business. An agreement made by one partner on behalf of the partnership is binding and has to be accepted by all the partners. The partners have unlimited liability. Advantages of partnership Partners can share the workload. Since there is more than one owner, more finance, contacts, ideas can be raised. Each partner can specialize and can handle different departments. There are no legal formalities to complete with when setting up a business. Its annual accounts do not have to be submitted to any one. Disadvantages of partnership The individual partners have unlimited liability Profit has to be shared amongst more owners. Partners may disagree or conflicts may rise The size of a partnership is limited to a maximum of 20 partners. The partnership ends when one of the partners dies. Limited partnership This is where some partners provide capital but take no part in the management of the business. Such partners will have limited liability. Incorporation

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The name is given to the process by which a company gains its own separate legal identity. This separate legal identity means that the company can enter into contracts, make any legal claims and face any legal claims that are made against it in the name of the business and not in the name of the owner of the business. Limited companies Limited companies have a separate legal identity and owners have limited liability. The capital of a limited company is divided into shares. Each member/shareholder owns a number of shares and can vote and cake a share of the profit. Those with more shares will also have more control. Directors who are appointed by the shareholders run limited company. The board of directors, headed by a chairperson, is accountable to shareholders and should run the company as the shareholders wish.

Forming a limited company

While forming a limited company, directors appoint a solicitor to prepare the necessary documents in accordance with the Companies Act. This documentation includes. Memorandum of association It is a compiled document, which must contain Name of the company Address of company Objectives of company Statement of limited liability Amount of share capital Number of shares to be taken by each director Statement of indent to form a limited company Articles of Association It contains the internal rules of the company like. The rights and obligations of the directors Procedures for calling a general meeting of the company Procedures for electing directors. Borrowing powers of the company Note: - Documentation process till here by which a company owns separate legal identity is known as incorporation. Statutory Declaration To confirm that all necessary legal requirements have been compiled with of signed statement from each director, signifying willingness is attached. Certificate of incorporation The registrar of companies examines the documents and if satisfied, allows the company to come as a separate legal body. 3 Private Limited Companies Limited companies must have at least two members or shareholders. Although there is no upper limit. In addition, the word limited must appear in the name of the company.

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Business and environment Shares can only be transferred privately, and all shareholders must agree on the transfer. They cannot be advertise for general sale. Advantages of private limited company The business will continue even if one of the owners dies. Control of the company cannot be lost to outsiders. More capital can be raised, as there is no limit of shareholders. Shareholders have limited liability Disadvantages of limited company Any member of the public can inspect financial information filed with registrar. Competitors could use this to their advantage. Firms are not allowed to sell shares to the public, which restricts the raised amount of capital. There is a legal procedure to set up the business Profit have to be shared out amongst larger shareholders 4 Public limited companies There has to be a minimum of two shareholders and no upper limit. The company name ends in plc. The shares of these companies can be bought or sold by the general public on the stock exchange. The company publishes a prospectus, which advertises the company to potential invertors and invites them to buy shares. A full stock exchange listing companies must comply with the rules end regulations laid down by the stock exchange. Advantages of public limited company It becomes easier to raise finances, as financial institutions are more willing to lend to plc. They enjoy economies of scale Huge amounts of money can be raised form the sale of shares to the public. The initial PLC follows the name of the business add prestige and can impress its stakeholders such as suppliers etc. A bank looks more favourable on a business which is a PLC because it is larger and therefore more stable. There can be reduction in gearing ratio. Gearing measures the ratio of borrowed money to the amount of money raised through shares and is calculated by borrowed money (debts) divided by equity. Disadvantages of public limited companies The selling up costs can be very high because company need lawyers, should have large number of glossy publication, financial institutions to process share applications, heavy advertisements and administration etc. The company may also have diseconomies of scale. As anyone can buy their share, it is possible for an outside interest to take control of the company At the end of the financial year the business publishes its annual report which contains detailed accounts of the year. Competitors are able to use information form companys accounts.

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A glorious report put the company in the most glowing of all lights so that shareholders will continue to be interested in the business and potential investors may consider buying shares. Whenever new shares are issued, total dividend must increase to meet the dividend requirements on the extra shares. The dividends are paid as long as the share is owned in the hands of the shareholder. As more shares are issued, each shareholders percentage of ownership may fall, unless the business uses a rights issue to raise more money. Because of their size they are not able to deal with their customers at a personal level. Issuing shares means the business has more shareholders to manage and to communicate with. So the business must submit an interim report, which charts the progress of the business during first six moths of the year. If the share price of a company falls, there is nothing to stop predator companies from buying up shares and putting in a takeover bid.

5 Co-operations Co-operations are organized on a regional basis. The nationalized industries are examples of public corporation, which have been privatized under a program of privatization. Members can purchase shares and each member has one vote at annual general meeting no matter how many shares are owned. Members elect a board of directors who appoint manager to run day-to-day business. The co-operation is run in the interests of its customers and part of any surplus is distributed to members as a dividend. Shares are not sold on the stock exchange, which limits the amount of money that can be raised. The co-operations movements are organized into a number of areas Retail co-operations- it is retail business organization, which is run and owned jointly by the members who have equal voting rights. The co-operation wholesale society- it acts as a manufacturer and wholesaler for retail sectors. Worker co-operations- a business organization owned by employees who contribute to production and share in profit. Q. Why might a private limited company be converted into a public limited company? Ans. A private limited company is one in which shares are sold only to friends and family while the shares of a public limited company can be sold to the general public through the Stock Exchange. This is the main reason for a private limited company to be converted into a public limited company or plc. The issue of shares to the public can raise very large sums of capital (finance). This can prove very beneficial for the owners of a rapidly expanding private ltd. company who need finance in a short period of time. This means that alongwith having all the advantages of a private limited company, like limited liability and separate legal identity, a plc. also has a Stock Exchange listing. So the business can not only sell shares to the general public but the flexibility of shares is an additional attraction to the shareholders. Due to this flexibility, the 19

Business and environment shareholders can quickly sell their shares (transferring of shares) if they wish to, which is not possible for the shareholders of a private limited company. Then finally the owners of the private limited company who are converting to a plc also know that once their aims are fulfilled, they can convert back to a private limited company. The additional capital is not only used for expansion but to increase efficiency by modernizing and buying new machinery. It could also be used to diversify by takeover and mergers or starting a different product type. Q. Why might a public limited company be converted to a private limited company? Ans. There are several reasons for a plc to be converted to a private limited. The major reason is the divorce between ownership and control. Due to the large amount of shares sold, the number of owners increase, meaning that the original owners will not be the sole investors. Then the control or management of a plc is in the hands of the board of directors (BODs) selected at the annual general meetings (AGMs). So the original owners could feel that they have lost control of the business and to regain it may wish to convert to a private limited company. The risk of takeover of a plc is very high as shares are sold to the public and if one group controls more than 51% of shares, then ownership may change hand. However this risk is very minute in a private limited company. Also the plcs trend to have short term aims due to the investors only being interested in quick gains. So if the original owners of the plc foresee the business going into losses due to damage to long-term investment plans, then they may convert back to a private limited company to minimize losses. Q. Explain the differences between a sole trader and a partnership. Ans. A sole trader is an individual or a single person who owns, controls and runs the business. The partnership, on the other hand, is a business owned and controlled by two or more (upto 20) members called partners. The sole trader invests all the capital into the business due to which the capital is limited only to the owners savings, profits and any other income source. The sole trader also gets to keep all the profits or is liable for all debts. In a partnership, more capital is available as more people are investing. The profits made and any losses incurred are shared among the partners. Also there are greater chances of expansion in a partnership as compared to sole traders. A sole trader is the only person who owns and so has to take care of all aspects like marketing, accounting i.e. he / she might have to do things he / she is not good at. But in a partnership, greater chances of specialization are available as the different partners may sepcialise in different areas of business functions. Even though both sole traders and partnerships have unlimited liability, there is a limited partnership. In this one member has unlimited liability and so runs the business while the others are sleeping partners and have limited liability. For the sole trader business, if the owner becomes sick or takes a holiday, the business stops working while in a partnership, the other partners can take care of the business and keep it running in case of unfitness or absence of a partner. Then if a problem arises for a sole trader, he has no one to discuss it with and financial costs of the consultants would be too high. But in a partnership, the partners can discuss problems amongst themselves and may come up with a solution without the need of any advisors.

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Also since partnerships are larger than sole traders and work on a greater scale so they could even benefit from the economies of scale. Therefore, it means that the average cost of running a partnership could be lower than sole traders in general. Since a sole trader is single person, he is able to establish close relations with his customers. He talks directly to them and enjoys their confidence. Therefore, a sole trader can meet the exact expectations of the customers. But in a partnership, due to greater number of people working together, the personal contact with the customers might be difficult and a subordinate would have to be employed into talk with and deal with the customers. A sole trader also is able to do a work of his own choice and gain personal satisfaction from it while in a partnership, all the different partners must agree one sort of business regardless of their personal interests and satisfaction.

1AS.3 Size of business METHODS TO MEASURE SIZE OF A BIUSINESS

There are several methods of measuring the size of a business, all of which have relevance in certain circumstances. Revenue the value of products sold. Some companies regularly quote revenue and market share to demonstrate their size and influence in the market place. Capital employed- this can be found by examining sets of company reports. Financial companies are valued not just according to their growth but according to their financial power. Volume -the marketing manager may be concerned about the value of the production while production manager is more concerned about actual volume of products. Profit- this measure is rather crude, because it depends on the accounting polices of the company. The main reason for using profit is to asses how much the business might be worth in future. Number of employees-this is relatively easy to measure and allows comparisons to be made across industries as an indication both of size and whether the business is labour intensive. Market capitalization- this is calculated by multiplying number of shares with share price. As the share price changes according to a variety of factors, the value of business alters. ADVANTAGES OF SMALL BUSINESSES Easy to look after all the operations Less capital required Less legal formalities Personal contacts with clients and quick response of consumers Easy to manage because of less technicalities involved 21

Business and environment Easy so specialize

DISADVANTAGES OF SMALL BUSINESSES Diseconomies of scale Tough time from large firms Fewer profit margins Firms may wish to become larger to increase the scale, which lower its average cost of production through the benefit of such economies of scale as being able to buy in bulk. A firm may also wish to become larger and powerful so that it can push up its prices and stop smaller firm from competing with it. Advantage to the firm: 1 - easier to control 2 - easy to set up / start 3 - personalized relationships with customers & staff 4 - higher motivation staff relations 5 - enthusiasm and excitement of being in growth state 6 - better knowledge of market conditions 7 - less taxes 8 - easier to locate problems within the business 9 - less interference of the government 10 - more independent in decision making 11 - lower management costs 12 - flexible in nature as they can charge quickly with the demand of customers 13 - monopolized in local area as are very conveniently approachable Advantages to the consumers: 1 - personalized service 2 - convenient for the buyer 3 - ease of availability 4 - credit purchasing / facility 5 - door to door service / delivery 6 - cheaper goods 7 - after sales service Advantages to the economy: 1 - increases employment 2 - increases competition for large scale firms 3 - prices controlled 4 - stable inflation 5 - improves GDP 6 - increases economic growth 7 - higher standards of living 8 - government revenue 9 - small scale firms of today are large scale firms of tomorrow future progress of economy is ensured / expected 10 - prevent situations that could lead to large scale firms monopolizing Problems: 1 - difficulty in obtaining finance 22

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2 - difficulty in marketing products - expenditure - limited products - difficult to compete - no economies of scale - capacity problems / demand satisfaction problem - lack of skilled labour - low sales / profits - difficult in producing varieties

1 2 3 4 5 6

FAMILY BUSINESSES Defined simply, a family business is any business in which a majority of the ownership or control lies within a family, and in which two or more family members are directly involved. It is also a complex, dual system consisting of the family and the business; family members involved in the business are part of a task system (the business) and part of a family system. These two systems overlap. This is where conflict may occur because each system has its own rules, roles and requirements. For example, the family system is an emotional one, stressing relationships and rewarding loyalty with love and with care. Entry into this system is by birth, and membership is permanent. The role you have in the family -- husband/father, wife/mother, child/brother/sister -- carries with it certain responsibilities and expectations. In addition, families have their own style of communicating and resolving conflicts, which they have spent years perfecting. These styles may be good for family situations but may not be the best ways to resolve business conflicts. Conversely, the business system is unemotional and contractually based. Entry is based on experience, expertise and potential. Membership is contingent upon performance, and performance is rewarded materially. Like the family system, roles in the business, such as president, manager, employee and stockholder/owner, carry specific responsibilities and expectations. And like the home environment, businesses have their own communication, conflict resolution and decisionmaking styles. Conflicts arise when roles assumed in one system intrude on roles in the other, when communication patterns used in one system are used in the other or when there are conflicts of interest between the two systems. For example, a conflict may arise between parent and child, between siblings or between a husband and wife when roles assumed in the business system carry over to the family system. The boss and employee roles a husband and wife might assume at work most likely will not be appropriate as at-home roles. Alternatively, a role assumed in the family may not work well in the business. For instance, offspring who are the peace makers at home may find themselves mediating management conflicts between family members whether or not they have the desire or qualifications to do so. A special case of role carryover may occur when an individual is continually cast in a particular role. This happens primarily to children. Everyone grows up with a label: the good one, the black sheep, the smart one. While a person may outgrow a label, the family often perceives that person as still carrying the attribute. This perception may affect the way that person operates in the business. Family communication patterns don't always affect the business, but when they do it can be very embarrassing. Often you say things to family members in a way you would never speak to other employees or managers. This problem is compounded when your communication is misread by the family member. Often parents are

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Business and environment surprised by a son's or daughter's negative reaction to a business directive or performance evaluation. This reaction is probably because the individual perceived the instructions or evaluation as orders or criticism from Dad or Mom, not from the boss. System overlap is apparent when conflicts of interest arise between the family and the business. Some families put personal concerns before business concerns instead of trying to achieve a balance between the two. It is important to understand that the family's strong emotional attachments and overriding sense of loyalty to each other create unique management situations. For example, solving a family problem, such as giving an unemployable or incompetent relative a position in the firm, ignores the company's personnel needs but meets the needs of family loyalty. Another example of conflict of interest occurs when business owners feel that giving children equal salaries is fair. Siblings who have more responsibility but receive the same pay as those with less responsibility usually resent it. In cases of sibling rivalry, it isn't unusual for one sibling to withhold information from another or try to engage in power plays, i.e., behaviors that can be detrimental to the firm. Much of this behavior can be eliminated or managed by devising policies that meet the needs of both the family and the business. Developing these policies is part of the family strategic planning process. Before discussing them, you should make sure you have identified all the issues that need to be addressed. Issues in the Family Business The list below contains the issues that most family businesses face: Participation -- who can participate in the family business and under what circumstances. Leadership and ownership -- how to prepare the next generation to assume responsibility for the business. Letting go -- how to help the entrepreneur let go of the family business. Liquidity and estate taxes. Attracting and retaining nonfamily executives. Compensation of family members -- equality versus merit. Successors -- who chooses and how to choose among multiple successors. Strengthening family harmony. Strengths and Weaknesses of Family Firms Dimension Infrastructure Strength Weakness Informal; flexible; Unclear; confusing; entrepreneurial; innovative boundary problems; indecisive; resistant to change; lack of management development; no organization charts Often play multiple roles; Role confusion; jobs don't flexible; dual get done; nepotism; dual relationships; quick roles interfere with decision making learning and objectivity; family birth right can lead to unqualified family

Role

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members in jobs Autocratic; resistant to structure and systems; avoids letting go Can't keep family issues out of business; inability to balance family's and business's need for liquidity; lack of objectivity; inward looking; emotionally charged decision-making; can't separate work and family; rivalries Family issues get in way; unwillingness to let go; inability to choose a successor May sacrifice growth for control; do not have to answer to stockholders; often no outside board of directors; high premium on privacy Founder's role stifles innovation; inefficient; highly emotional; resistant to change; reactive; high risk for conflicts Must be managed to avoid confusion; can be a drain of resources and energy

Leadership Family and investment

Creative; ambitious; informal authority; entrepreneurial Employees committed; loyal; shared values and belief system; family spirit; family name; family dream; strong sense of mission/vision

Time

Ownership/governance

Training can begin early; mentoring a life-long process; can choose when to leave Closely held; family owned; high degree of control; earnings are motivators Innovative; informal; flexible; creative; adaptable; common language; efficient communications Can foster creativity; rich interplay of roles and goals

Culture

Complexity

1AS.5

Stakeholders in a business

STAKEHOLDERS
Various groups of people have an interest in business. Such groups are referred to as stakeholders. They include:

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Business and environment

Directors- they direct strategies and major decision making of the business and retain control over it. They also aim to increase their own power and status from business growth. Shareholders- share in the success/profitability of the business through an appreciating share price. Most of them have voting right to elect board of governors for better management of a business. Owners- a business is the property of its owners. Not all owners are same. The owner of a small business may be one who tackles all business decisions while in large companies there can be thousands of joint owners. They all own shares and enjoy profit in the form of dividends. They vote to elect the directors of the company. Manager- is usually appointed by directors and is actually involved in running the business. Some time they are allowed to buy shares. Workforce- receive a fair wage. Their efforts help a lot to boost up a business. Customers- are not members of the business, but they are vital for the survival of the business. Customers buy the goods and services and in return business earns profit. Banks/lenders- provide loans for new projects or expansions and receive interest against these loans. Community- get benefit from the employment the business creates. They want to be free from environmental disadvantages the firm might generate. Competitors- compete a business by all lawful means. They try to differentiate its product from those of other businesses. Competitors usually compare and contrast performance with other businesses. Government- influences the business by introducing subsidies and taxes. Government also implements and monitor all rules and regulations to protect employees, employers and customers. 26

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Suppliers- provides resources, which allow their business to produce goods and services. These resources might include raw materials, components, equipments, energy and services. Social Responsibility Social responsibility is the duty and obligation of a business to other stakeholders. Stakeholder Example of responsibility to that stakeholder Shareholder Good return on investment Employee Fair pay and working conditions Supplier Regular business and prompt payment Customer Fair price and safe product Local community Jobs and minimum disruption Government Employment for local community Environment Less pollution Social responsibility for one group can conflict with other groups, especially between shareholders and stakeholders. Q. Discuss the conflicts of objectives amongst the stakeholders of the business. Ans. Stakeholders are individuals or groups of people who have a direct or indirect interest in the running of the business. They are the owners/shareholders, directors, workforce, customers, suppliers, competitors, government, banks and the community as a whole. Each of the groups have different objectives and are affected differently by the business activity. Due to the differences of their objectives, conflicts may arise amongst the stakeholders. One type of conflict may be between owners and directors. The directors of a company are the actual managers. They control and plan the resources and are the actual decision makers. Their main objectives would be to retain control and increase their status and power. This would be possible by increased growth of the organization. So in order to achieve their interests they might overlook the interests of the owners or shareholders who are the real risk takers as they have invested into the company. So, the shareholders would want greater returns in the form of dividends while the directors may decide that less dividends should be paid and greater percentage of profits re-invested to induce technological change. Also the directors may be paying themselves higher salaries and organizing their time to meet their own interests. This would result only in a satisfactory level of profits while the owners would want a higher level of profits. This conflict is the major reason of the divorce between ownership and control in the limited companies. Conflicts also occur between the interests of the owners and the workforce. The workforce wants higher salaries and wages. They also want good working conditions like hygiene as well as moderate temperatures which would include fans. They would want proper safety equipments and clothing if their jobs are dangerous as in nuclear power plants. All these things would increase costs of the business and reduce profits while owners want higher profits and may even be thinking of reducing the wags and salaries. This also causes a conflict of workforce and managers / directors. The directors would want to keep prices low while the costs of satisfying the objectives of the workforce would force price to increase and the sales would drop. The director whereas want sales increase. The directors and owners may also want to increase the

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Business and environment production which they may want to increase the working hours of the employees or introduce technological change and use more efficient machinery. This would again be in conflict with the objectives of the workforce who would want fever working hours and job security while more capital - intensive methods mean the redundancy of workers that lead to frustration and insecurity. Conflicts may also arise between the suppliers and the owners or directors. The directors and owners want increased working capital for the development of innovative products and upgrading of older products to increase market demand and share. For this they may wish to buy goods on credit for longer periods of time. However the suppliers on the other hand would want to receive payment on time specially if they are small business because this causes severe hardships for the small suppliers as they too have to pay their employees and return loans. There it may be that suppliers arent able to deliver the goods on time and are delayed. The owners and directors want the supplies to be delivered on time as late deliveries halt production and cause many difficulties for a business including wastage of time. Customers and business may also disagree on several aspects. The major area of conflict is the price. The owners and directors wish to maximize profits for which they may increase prices if the quality of product is good or if too many resources of production had to be used. The customers however, want to have the best quality of products at a low price. If there is competition in the market as is the case with clothes, then prices are low. However, when competition is low like in the computer market then customers are forced to pay higher prices charged by owners. Then at times customers may not be satisfied with the quality of goods they bought as they may not be what customers had expected seeing the adverts. So the customers may wish to return the goods and receive a refund. However, the owners and directors may not agree to accept the returned goods or may not wish to return the money to the customer. Also, customers like to have after sales service for certain expensive goods such as electric gadgets e.g. mobiles or MP3 player. However, the business in order to save costs may not offer these services or if the gadget breaks down after its first weak of use, conflict occurs if the owners refuse to investigate the matter or compensate the customer. One other type of conflict is between the owners and the community. The community wishes to live in a clean and pollution. free environment. It would want the industries and factories located away from residential areas and nature parks. However, conflict occurs if the owners decide to start a factory close to houses. This would cause a lot of noise pollution firstly because of construction and then because of the running of the factory. Air pollution is also possible from smoke-emitting factories that endanger the health of the community. So the community would rise against the business and may form pressure group to ruin the reputation of the business which is the last thing the owners want as it results in falling sales and profits and loss of goodwill. Also the community wishes the businesses to run in an environmentally friendly manner and dispose of its wastes clearly. This would decrease the profits as costs of the business increases a limit expansion chances which is conflict with the owners and directors objectives. The community would also want a business to run ethically and may rise against it if they use animals to do research e.g. for testing new food types. This would be against the objectives of owners who wish to research new types of products and must use the animals experimentally. A business activity would always lead to conflict due to the diverse objectives of the stakeholders. A good strong and successful management is one which is able to deal with all the stakeholders and still run the business efficiently by reaching agreements

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to minimize conflicts e.g. the owners could get employees to agree on them with good working conditions to show that they are cared for. Profit sharing with employees could be done in good years to increase their loyalty. For this the owners shouldnt chose aggressive objectives like maximizing profit but keep it at a moderate level!

1AS.4

Business objectives

MANAGEMENT BY OBJECTIVES Management by objectives (MBO) is a systematic and organized approach that allows management to focus on achievable goals and to attain the best possible results from available resources. It aims to increase organizational performance by aligning goals and subordinate objectives throughout the organization. Ideally, employees get strong input to identify their objectives, time lines for completion, etc. MBO includes ongoing tracking and feedback in the process to reach objectives. MBO was first outlined by Peter Drucker in 1954 in his book 'The Practice of Management'. In the 90s, Peter Drucker himself decreased the significance of this organization management method, when he said: "It's just another tool. It is not the great cure for management inefficiency... Management by Objectives works if you know the objectives, 90% of the time you don't." Core Concepts According to Drucker managers should "avoid the activity trap", getting so involved in their day to day activities that they forget their main purpose or objective. Instead of just a few top-managers, all managers should: participate in the strategic planning process, in order to improve the implementability of the plan, and implement a range of performance systems, designed to help the organization stay on the right track. It is all too easy for managers to fail to outline and agree with their subordinates what it is that everyone is trying to achieve. MBO is a process that requires precise written description of goals and timelines for their monitoring and completion. It is a sensible substitute for just good intentions. The process requires that the manager and the subordinate agree to what the employee must attempt to achieve in the period ahead and it is important for employees to believe in the objectives and understand what they are. Thereafter, managers and employees should regularly communicate to ensure that the objectives are being met as agreed and will be completed on time. Reliable management information systems (MIS) are needed to establish relevant objectives and monitor their penetration across the organization. Organizations have scarce resources and so MBO ultimately helps to achieve the best resource allocation effort. MBO is often achieved using set targets or goals. MBO introduced the SMART criteria i.e. objectives for MBO must be Specific, Measurable, Agreed, Realistic and Time-specific. BENEFITS OF MBO 1. Increased job enrichment and motivation 2. Strategies can be implemented quickly 3. Co-ordinated and consistent approach 4. Decreased conflicts

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Business and environment 5. Improves the understanding of the whole system 6. Monitory performance becomes easier. (deviation is identified) 7. Helps in setting priorities DRAWBACKS 1. Time consuming 2. Objectives can become outdated quickly as compared to the dynamic nature of environment. 3. Setting targets doesnt guarantee success. 4. Very careful and able leadership is required which is generally difficult to get.

CORPORATE CULTURE AND BUSINESS STRATEGY

Corporate objectives Corporate objectives are the goals of the whole organization. They are the outcomes or largest that the business wants to gain in order to achieve its aims. They are specific, agreed upon by everyone involved, measurable, realistic or achievable and are time specific. Common corporate objectives could be: Profit maximization- his is the main objective assumed for all established private sector organizations. It means to produce at the output level where there is the greatest possible difference between sales revenue and total costs. The major benefit is that greater returns are given to the investors or shareholders of the business. It means that the risk-takes of the business are satisfied so more people would be willing to invest into the business and so raise capital. Another support is that higher profits may mean greater re-investment into the business by which other objectives like growth could be achieved. Also it is thought as the most rational thing to achieve greatest possible profits as otherwise it would be a missed opportunity. However there are several limitations to it. The owners of small firms may not wish to expand to the extent of reaching profit maximization point. They would be more interested in retaining control and could be satisfied with their current level of profits and lifestyle. They could also want to keep their revenue below VAT levels as well as not employ more workers. Firms also usually opt for sales maximization and by this decide their profit targets. Profit maximization is an aggressive short-term objective that would cause competitors to enter the market and endanger long-term survival. So firms usually keep long-term profits as their objective. Also it is very difficult to gather all the information such as costs, prices and demand to determine the precise maximization point. Also the pressure of objective of other stakeholders like workers and community make profits maximization impractical. Then performance of company is divided by return on capital employed rather than profits. Growth- The growth of businesses is the increase in sales and market share of the business which is usually also an increase in the total output level of the business. There are several benefits to many stakeholders because of the growth and expansion of a business. The growth of a business results in its becoming more competitive. Growing demand leaves survival no more a concern. Larger firms are able to dominate a market, enjoy monopoly power to a certain extent and raise prices too. They are less prone to takeovers and also benefit from economies of scale. Growing businesses are able to benefit from diversification and so reduce risks. They are able to introduce new 30

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ranges of products so if one range fails, there are many others and so the entire business doesnt fails. Managers are highly motivated as they have greater status get high salaries and fringe benefits if they make the growing business work to full potential. Directors and managers also have more power and recognition. The employees part of an expanding business may find their jobs more secure (if capital intensiveness isnt used) and could also get higher wages and so may be greatly motivated. Growth may also give higher profits and so greater returns to investors (shareholders and owners). But growth has its own drawback. If business grows beyond a certain size, they may face diseconomies of scale because of poor communication and frustration amongst workers. Too rapid expansion may result in severe cash flow problems that could cause a profitable business to become insolvent. Also increase in sales may have been possible only by reduction in profit margins. So even though the business grows, it has lower profit margins. So even though the business grew, it has lower profits and so low returns to investors. Then the business may be re-investing a higher percentage of profits to grow which would result in anger amongst the owners / shareholders. Finally it may be that moving into new markets away from the core activities would result in a loss of focus and failure of the central aim of the organization leading to a loss of direction as well. This would result in inefficiency, low productivity and increased costs. Increasing market share- closely linked to overall growth of a business is the market share it enjoys within its main market. Increasing market share indicates that the marketing mix of the business is proving to be more successful than that of competitors. Retailers are always keen to stock and promote best selling brands. In this situation firms offer fewer profit margins to retainers as compare to its competitors. Social, ethical and environmental consideration- increasingly influential pressure groups are forcing businesses to consider their approach to decision making. Also, legal changes at local, national and EU level have forced businesses to refrain from certain practices. Maximizing sales revenue- this could benefit managers and staff when salaries and bonuses are dependent on sales revenue levels. Maximizing shareholder value- this could apply to Public Limited Companies and help to direct management action towards taking decisions that would increase share price and returns to shareholders. Concentrating on core objectives- the move away from huge conglomerate organisations with interests in a wide range of industries is being driven by the aim of many senior managers to concentrate on high value, high profit margin activities. Factors which determine the corporate objectives: 1 1. corporate culture 2 2. size and legal form of the business 3 3. public or private sector businesses 4 4. the age of the business 5 5. financial strength of the business

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Business and environment

CONFLICTS OF BUSINESS OBJECTIVES

It is inevitable that with so many different stakeholders interested in the affairs and performance of a business there will be times when their objectives come into conflict. Here are some common examples: Workers leaders ask for a wage rise, but managers state that this can not be afforded as they need to invest extra capital back into the business. Creditors demand early payment for debts, but the accountant does not want to reduce the bank balance of the business too much. Investors/shareholders in a company expect high dividends to be paid out to them, but managers aim to invest the profit to expand the business. The government wants to reduce unemployment by making it more difficult for businesses to make workers redundant, but the managers want to cut costs quickly. Environmental groups may campaign for the closure of a chemical factory, but the business wants to keep it open because it is profitable. Business managers have to resolve or reduce these conflicts if they aim to satisfy as many stakeholders as possible. Most businesses now have very strict code of practice ethical standards that attempt to satisfy the aim of certain stakeholders. For example, these guidelines might include: All debts to be paid within thirty days No necessary waste to be produces Installation of treatment plants for wastes Customer charter for complaints All employment laws to be put into practice Close relationship with the local community to be encouraged

CORPORATE CULTURE AND STRATEGY

There are several factors that influence the nature of the objectives established for any business. Chief amongst these is the culture of the organisation. This can be defined as the code of behaviour and attitudes that influence the decision making style of the managers and other employees of the business. Culture is a way of doing things that is shared by all those in the organisation. The cultures of a business will, itself, determined by several factors. In small firms, in particular, the personality and management style of the owner and leader will impact heavily on the approach of the rest of the staff. An aggressive, profit at all costs type of entrepreneur will quickly communicate to the organisation the attitudes to be adopted in decision-making situations. A second factor influencing culture is the structure of the organisation. A tightly centralized and rigid organizational structure based on a hierarchical system will tend to make the business more resistance to change and less able to adapt to fluctuating market trends. Only senior managers will be able to take significance decisions and a culture of fear may prevail through the organisation. Some business cultures are adaptive: they are open to change and often actively seek it. In such firms, employees will be encouraged to accept change rather than resist it, to be innovative and creative and to challenge each other. Business culture determines: The objectives of the business 32

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The way in which the objectives are expressed The involvement of the workforce in setting them How the actions required to achieve objectives ate determined and put into effect The motivation the workforce show in their efforts towards the achievement of objectives The other factors determining the culture of an organisation could be the size and legal form of the business; history of the business; divisional, departmental and individual objectives of the business etc.

CORPORATE RESPONSIBILITY
A business that accepts corporate responsibility will be prepared to be responsible for and to justify its actions. It will also consider the impact of its actions on a variety of individuals and groups, both inside and outside the organization. For example, aim of Mobile Phone Company could be a wide coverage. To do so they have to install boosters which could be injurious to health of people living near it. If company does some research and install health friendly boosters then it could be said to be accepting corporate responsibility. METHODS OF ENCOURAGING CORPORATE RESPONSIBILITY There could be number of ways in which business can encourage corporate responsibility: Government intervention- government can ensure that a business accepts the consequences of its behaviour. For this government imposes legislations i.e. government make it compulsory for every firm to install a water treatment plant and process waste water before throwing it outside the factory. Self regulations- these are voluntary organizations which aim to monitor the behaviour of relevant firms i.e. the Advertising Standard Authority and The Press complaints Authority. Market pressure- this is more popular in free market economy. The consumer behaviour force irresponsible businesses to act with greater responsibility. Businesses which refuse to act responsibility will fail. Most of the firms provide information or educate consumers through informative advertisements. Market pressure- pressure groups may impose pressure on businesses i.e. animal welfare pressure group have encourages cosmetic businesses not to test their products on animals. Barriers to corporate responsibility Cost and profit- responsible behaviour demands huge cost or cut profit. Values and belief- values and beliefs of business may not match with the society i.e. a business may continue to sale cigarette to underage. Lack of information- pressure groups may not have enough information to check activities of a business i.e. nuclear programming, activities of multinationals etc.

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TYPES OF DECISION MAKING

1Short term or operational decisions These are decisions that have to be frequently made involving shot-term, predictable operations such as ordering of new stock, prepare of transport route etc. 2Periodic control decisions These are made less frequently and are concerned with monitoring how effectively an organization is managing its resources such as decisions might include the review of the pricing strategies, problems in budgets, advertising campaign etc. 3Strategic decisions These are major decisions involving overall strategy. Such decisions require a considerable amount of analysis information etc. examples include development of new product, investment in new plant or development of new marketing strategy etc. An open and closed system decision models Many of the decisions that need to be made by individuals with in organization involve uncertainty. In a complex dynamic society changes are ever present. In such an environment an open-system approach can be useful to show how the decision making process can be made more flexible. A closed system approach would assume that organizations have clearly defined and unambiguous goals. DECISION MAKING CYCLE

BUSINESS ETHICS AND SOCIAL RESPONSIBILITY

Ethics and Social Responsibilities Ethics are moral principles and judgements that many people believe should be considered when a business makes any decision (for example, what is 'right' and 'wrong'? What is 'good' and 'bad'?). Social Responsibilities are the duties that a business has towards the people who are affected by its activities, for example, customers, employees, suppliers, and the local community.

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A 'good' business is deemed to be one which acts in a socially responsible fashion, and takes ethical decisions and actions at all times. It minimises waste, it creates wealth, it treats its employees well, it respects the environment, it does not employ 'fat cat' executives, it is efficient in its use of resources, it meets consumers' expectations and it returns some of its profit to the community in which the sales are generated. Topical ethical issues in today's business world include: 1. The exploitation of cheap labour in foreign 'sweatshops'. 2. The use of child labour. 3. Dealing with corrupt foreign governments and businesses. 4. Causing damage to the environment. There are many advantages that businesses can gain from taking a highly ethical and socially responsible stance: 1. Attracting and retaining high quality employees. 2. Attracting new consumers. 3. Generating good publicity. 4. Attracting ethically-minded investors. However, taking a highly ethical and socially responsible stance can lead to a variety of short-term problems, including increasing costs, reducing profits, and conflict between the management and the shareholders. Q Explain how a manufacturing business might be affected by ethical issues. Ethical issues are those that deal with how the business affects the amounting environment and whether its actions follow a costs of ethics. For a manufacturing businesses, it is becoming increasingly necessary to consider ethical issues such as pollution. It is important that its factories do not give out untreated black smokes if it is coal-run. Also its sewage should not be dumped into the rivers without being heated to make it harmless. Not only this, but if the factory creates too much noise pollution than it should be located away from the civilization and society. Also the manufacturing business, if producing deodorants or coolants for refrigerators shouldnt contain that harms the ozone layer. If its cosmetics producer than its products shouldnt be used on animals as pressure groups would then use such activities to run the reputation of the businesses which may result in loss of customers and goodwill. Also customers are increasingly becoming aware of the treatment that employees receive. They are increasingly supporting industries providing suitable working conditions. Therefore, those manufacturers that do not consider these see falling sales and loss of customers, lower profits and demotivated employees.

PRESSURE GROUPS
Pressure groups are organisations that develop in order to tackle a matter of vital interest to the members of the group (e.g. campaigning against businesses which cause pollution, or test their products on animals). They do not have any direct political power, but they often aim to influence the actions of local government and central government, as well as the actions of businesses. Pressure groups can generally be classified as: 1. Interest groups: These groups are established to further the interests of its members and to make the general public aware of its cause (e.g. trade unions). 35

Business and environment 2. Cause groups: These groups are established to further a particular cause (e.g. animal welfare) as to make the general public aware of this cause. The basic difference between the two groups is that interest groups are motivated by self-interest, whereas cause groups are more concerned with other people and the environment. Pressure groups try to exert influence in a number of ways, including arranging boycotts of products, creating adverse publicity for the business, holding public demonstrations, and lobbying the government (i.e. attempting to get the cause noticed and acted upon by MPs). Basically, pressure groups aim to raise as much publicity and awareness of their cause as possible, in the hope that this will stop the businesses from continuing their actions. The success of a pressure group in achieving its aim(s) will depend on a number of factors, the most important of which are: 1. Their available funds and resources. 2. Their organisational ability. 3. The level of public sympathy. 4. Their access to politicians and people in powerful positions in industry. 5. Their reputation. BUSINESS REACTION ON DEMOGRAPHIC CHANGE Demographic change poses significant practical challenges to commerce businesses of all shapes and sizes. Euro Commerce is keen to ensure that the current debate on demographic change widens business perspectives and leads to discussion of the practical implications of social change for employers and employment policy. The entire commerce sector faces the issue of demographic change daily. Changing lifestyles, as a result of social change, are reflected in changing customer and employee demands. This effects the entire commerce sector along the distribution chain i.e. retailers in their shops, commercial agencies, wholesalers, importers and exporters. However, the industrys ability to respond is influenced by, and in some ways restricted by, public policy. We set out below some ways we think policy makers can help.

Business mission statement

To compare business aims and objectives To identify a series off business aims, objectives and mission statements

RELATIONSHIP BETWEEN MISSION OBJECTIVES, STRATEGY AND TACTICS

STATEMENT,

Business aim These are what the company hopes to achieve and are usually long term goals. Possible business aims could be: Survival Break-even Profit maximisation 36

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Expand market share Customer Service Relationship with other businesses Growth

Business Mission A strategic plan starts with a clearly defined business mission. Mintzberg defines a mission as follows: A mission describes the organisations basic function in society, in terms of the products and services it produces for its customers. A clear business mission should have each of the following elements:

(1) A Purpose Why does the business exist? Is it to create wealth for shareholders? Does it exist to satisfy the needs of all stakeholders (including employees, and society at large?) (2) A Strategy and Strategic Scope A mission statement provides the commercial logic for the business and so defines two things: - The products or services it offers (and therefore its competitive position) - The competences through which it tries to succeed and its method of competing A business strategic scope defines the boundaries of its operations. These are set by management.

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Business and environment For example, these boundaries may be set in terms of geography, market, business method, product etc. The decisions management make about strategic scope define the nature of the business. (3) Policies and Standards of Behaviour A mission needs to be translated into everyday actions. For example, if the business mission includes delivering outstanding customer service, then policies and standards should be created and monitored that test delivery. These might include monitoring the speed with which telephone calls are answered in the sales call centre, the number of complaints received from customers, or the extent of positive customer feedback via questionnaires. (4) Values and Culture The values of a business are the basic, often un-stated, beliefs of the people who work in the business. These would include: Business principles (e.g. social policy, commitments to customers) Loyalty and commitment (e.g. are employees inspired to sacrifice their personal goals for the good of the business as a whole? And does the business demonstrate a high level of commitment and loyalty to its staff?) Guidance on expected behaviour a strong sense of mission helps create a work environment where there is a common purpose What role does the mission statement play in marketing planning? In practice, a strong mission statement can help in three main ways: It provides an outline of how the marketing plan should seek to fulfil the mission It provides a means of evaluating and screening the marketing plan; are marketing decisions consistent with the mission? It provides an incentive to implement the marketing plan 1 Mission Statement Mission statement is a sentence describing a company's function, markets and competitive advantages; a short written statement of your business goals and philosophies. This should be a vision of what you hope your business will be. Your ultimate aim in a catchy phrase or statement. It should give the correct image for your company. McDonalds aim to be the UKs best fast food service restaurant experience Mission Statement Characteristics A mission statement has the following key characteristics: Visionary: Above all else, a mission statement offers a vision of what a business hopes to be.

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A visionary mission statement helps people understand what the business is about and how they can contribute to the achievement of the vision. So mission statements frequently contain wording such as "to be the best", "the highest quality", and "in the world". Broad: A company cannot be all things to all people, but a mission statement should not limit a company's area of service or expertise too narrowly. Especially in the fast-paced world of electronic commerce, customer needs, and customers, can change rapidly. A mission statement should be broad enough to allow the company to meet those needs without annual revisions of the statement. Realistic: The broad vision needs to be tempered with realism, to be both practical and workable. Mission statements that include everything or promise too much will not give a clear indication of what the business is about. A lofty, unrealistic mission statement will not have great credibility. Instead the best statements are direct and powerful. Motivational: The statement should be written in such a way that it inspires commitment among employees, customers, partners, and funding agencies about what this company will do or produce. Some organizations emphasize the inspirational value of their mission statement above all else, using it to express the company's philosophy and values. Short and concise: The mission statement should be no longer than 25 words. Some consultants recommend that the mission statement be short enough that an employee can easily remember it and readily repeat it. Similarly, management guru Peter Drucker suggests it should be able to fit on a t-shirt. Easily understood: The statement should use plain language that is convincing and easy to understand. For example, a technology company's mission statement should not include jargon or technology concepts that are unfamiliar to people outside the area. Consider using the "grandmother test" on your mission statement -would your grandmother understand what your company is about if she read your mission statement? 2 Business Objectives

Objectives give the business a clearly defined target. Plans can then be made to achieve these targets. This can motivate the employees. It also enables the business to measure the progress towards to its stated aims. The most effective business objectives meet the following criteria:

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S Specific objectives are aimed at what the business does, e.g. a hotel might have an objective of filling 60% of its beds a night during October, an objective specific to that business. M - Measurable the business can put a value to the objective, e.g. 10,000 in sales in the next half year of trading. A - Agreed it should be agreed by all those concerned in trying to achieve the objective. R - Realistic the objective should be challenging, but it should also be able to be achieved by the resources available. T- Time specific they have a time limit of when the objective should be achieved, e.g. by the end of the year. The main objectives that a business might have are:

Examples of business objective To increase the market share in the future To be good to the environment To make sure the shareholder get 10% dividend this year To increase the share price value To increase the market share To increase profits by 3% in 2007 But are they SMART? Changing business objectives over time A business may change its objectives over time due to the following reasons:

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3 A business may achieve an objective and will need to move onto another one (e.g. survival in the first year may lead to an objective of increasing profit in the second year). The competitive environment might change, with the launch of new products from competitors. Technology might change product designs, so sales and production targets might need to change. Business Strategy

Johnson and Scholes (Exploring Corporate Strategy) define strategy as follows: "Strategy is the direction and scope of an organisation over the long-term: which achieves advantage for the organisation through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfil stakeholder expectations". In other words, strategy is about: Where is the business trying to get to in the long-term (direction) Which markets should a business compete in and what kinds of activities are involved in such markets? (markets; scope) How can the business perform better than the competition in those markets? (advantage)? What resources (skills, assets, finance, relationships, technical competence, and facilities) are required in order to be able to compete? (resources)? What external, environmental factors affect the businesses' ability to compete? (environment)? What are the values and expectations of those who have power in and around the business? (stakeholders) Strategy at Different Levels of a Business Strategies exist at several levels in any organisation - ranging from the overall business (or group of businesses) through to individuals working in it. Corporate Strategy - is concerned with the overall purpose and scope of the business to meet stakeholder expectations. This is a crucial level since it is heavily influenced by investors in the business and acts to guide strategic decision-making throughout the business. Corporate strategy is often stated explicitly in a "mission statement". Business Unit Strategy - is concerned more with how a business competes successfully in a particular market. It concerns strategic decisions about choice of products, meeting needs of customers, gaining advantage over competitors, exploiting or creating new opportunities etc. Operational Strategy - is concerned with how each part of the business is organised to deliver the corporate and business-unit level strategic direction. Operational strategy therefore focuses on issues of resources, processes, people etc. How Strategy is Managed - Strategic Management

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In its broadest sense, strategic management is about taking "strategic decisions" decisions that answer the questions above. In practice, a thorough strategic management process has three main components, shown in the figure below:

Strategic Analysis This is all about the analysing the strength of businesses' position and understanding the important external factors that may influence that position. The process of Strategic Analysis can be assisted by a number of tools, including: PEST Analysis - a technique for understanding the "environment" in which a business operates Scenario Planning - a technique that builds various plausible views of possible futures for a business Five Forces Analysis - a technique for identifying the forces which affect the level of competition in an industry Market Segmentation - a technique which seeks to identify similarities and differences between groups of customers or users Directional Policy Matrix - a technique which summarises the competitive strength of a businesses operations in specific markets Competitor Analysis - a wide range of techniques and analysis that seeks to summarise a businesses' overall competitive position Critical Success Factor Analysis - a technique to identify those areas in which a business must outperform the competition in order to succeed SWOT Analysis - a useful summary technique for summarising the key issues arising from an assessment of a businesses "internal" position and "external" environmental influences. Strategic Choice 42

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This process involves understanding the nature of stakeholder expectations (the "ground rules"), identifying strategic options, and then evaluating and selecting strategic options. Types of strategy

Competitive Advantage something which gives the organisation some advantage over its rivals Cost advantage A strategy to seek out and secure a cost advantage of some kind - lower average costs, lower labour costs, etc. Market Dominance: Achieved through: Internal growth Acquisitions mergers and takeovers New product development: to keep ahead of rivals and set the pace Contraction/Expansion focus on what you are good at (core competencies) or seek to expand into a range of markets? Price Leadership through dominating the industry others follow your price lead Global seeking to expand global operations Reengineering thinking outside the box looking at news ways of doing things to leverage the organisations performance 4 Tactics Tactics are the specific actions, sequences of actions, and schedules you use to fulfill your strategy. If you have more than one strategy you will have different tactics for each. Tactics should work with your strategy and they are the set of requirements need for your plan to take place. Your tactic is your device used for meeting your goals set by your strategy. Strategy and tactics should always be relative to one another because the tactics are the set of actions needed to fulfill your strategy. 1. Tactics are the tools you use to achieve your goals. 43

Business and environment 2. Tactics include things like advertising and marketing. 3. Tactics are the steps taken to achieve your goals. Strategy vs. Tactics Your strategy is the plan of action you want to take to achieve success in your business. Your business tactics are the specific steps you take to achieve those goals. It is important that you know and understand the difference between the two and how they are applied to business. When it comes to your business, before you start any marketing or advertising campaign, you need to have a strategy and you need to implement that strategy into your techniques.

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1AL.1 Enterprise
All topics from 1 AS.1 Enterprise

1AL.2 Business Structure MULTINATIONALS

A multinational company or corporation is a firm that operates in more than one country, although its headquartered may be in one particular country. These companies are some of the largest firms in the world, often selling billions of pound worth of goods and services, and employing many thousands of workers around the globe. Government often gives subsidies or good incentives to these MNCs. This is to get multinational companies to locate a plant in their countries because: They provide jobs. They bring business knowledge, skills and technology with them. They may pay heavy taxes, which boost government funds. They bring money to the country by selling goods abroad. Advantages of being a multinational The ability to setup factories to produce goods in many different countries increases the number of potential consumers of the companys products. A company that sold goods all over the world would find that it hard to pay many transport costs. By producing goods in different countries and selling them in those countries a multinational can reduce its transport cost. It can also locate its factories near to the raw materials it needs. By locating in less developed countries a multinational can often take advantage of so-called cheep labour. In some countries woman and children can be employed for very low wages. By having massive production lines and producing millions of goods, multinationals are often able to lower the average cost of producing each good below the average cost faced by companies making fewer goods. Multinationals tend to produce a wide Varity of goods so that if demand for one product falls they have other products they can fall back on. Similarly, selling to large number of countries also reduces the risk of one particular country reducing its demand for the products of the multinational company. These are known as risk bearing economies of scale. In order to improve old products and develop new ones to stay ahead of competing firms, multinationals spend large amounts of money on research and development. Disadvantage of multinationals to the host country Multinational companies can move their factories from one country to another to maximize their profit. This means that workers in multinational companies have little control over their jobs.

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Business and environment Because many countries have high employment, government in these countries do not want multinational to close their factories in their nations. These governments offer gifts/subsidies to encourage multinational to stay. Infect different governments often compete with each other over multinationals and this allows such companies to force competing countries to give them more and more favorable treatment. Often multinationals avoid paying any taxes to their host nation. This may happen in a less developed country because that country lacks the ability to collect taxes because of a poor tax service and legal framework. Multinationals may also transfer or switch their profits from countries with high tax to countries with low taxes. The sheer size of multinationals and their great wealth may allow them to force smaller firms in their host country to go bankrupt. If they cause other companies to shut down, unemployment will rise. Many multinationals locate in countries where labour is cheep. So they pay far less for doing the same, or even more work, than a worker in a developed country. Some commentators have suggested that some large powerful multinational companies have used subversive and illegal activities to try to influence the government of a country, to promote and protect their own interests.

Q. Evaluate the impact of multinationals on the host country Multinational companies are those that have their head office in one country while operating branches are spread in several countries. This means that they produce i.e. manufacture the good or service in several countries in their factories. So an exporting or importing business is not a multinational unless it produces goods in other countries. Usually the head offices of these multinationals are in developed countries like USA and Europe while their branches are in developing or third world countries. Examples of multinationals include MacDonalds, Pizza Hut, Toyota. Multinationals can be very beneficial to the host countries in many ways. The major advantage is that they provide employment to the local workforce. In developing countries there are high rates of unemployment that create a lot of burden on the government and the economy, as benefits like free food, clothes or even money has to be given to the unemployed. So by providing increased employment opportunities, unemployment rates are decreased and so burden on economy is also lessened. Since more people are working and the total number of products produced in the country is increasing so this means that the GDP (Gross Domestic Product) as the output of multinationals is now also included in the national production. Increase in GDP leads to economic growth. This leads to the increase in per capital income of the people so there is a rise in the living standards of the general population as people have more money to spend. As the multinationals are employing local people, it would result in their gaining experience. Not only this but multinationals are established companies with standard to maintain for which they require skilled workers. So they train and provide facilities to the employees which would improve the efficiency and productivity of the people. The multinationals also provide additional competition to the local firms. This increased competition and the wider variety of choice available to customers keeps the prices low while product quality increases. This also controls inflation. Also the multinationals are very efficient and technologically advanced. They have better machines as well as better production techniques. So a technology transfer 46

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takes place as the local firms, in order to increase their competitiveness try to take advantage of the new technology. Because of this the quality of the local products increase and so does the efficiency and productivity of the local firms and they would able to improve their image in the global market. New local factories and industries could be set up in order to supply certain machines or spare parts for the working multinationals. This would crate additional jobs and also an increase in the incomes. A future major advantage is the foreign investment coming into the host country by the setting up of a multinational company. This increases the foreign currency reserves of the country that could be used to pay back debts or to import goods. Not only this but the multinationals increase the revenues of the governments of the country as taxes are given by the multinationals on their sales as well as profits. Also they pay land rents for the area on which they have set up their operating base or factory. The management expertise of the local community improves as multinationals have better management ideas. So qualifications and skills of local managers are bettered and they may replace the foreign managers and supervisors and so gain experience. If the multinationals export their goods to nearby countries, then the exports of the host country increases, that could lead to additional foreign exchange earnings and also to a balance of payment surplus once the exports are more than imports. Lastly, relations with the parent country of the multinationals improves both politically as well as economically. However, multinationals also have some major drawbacks, the main being decline in domestic industries. Since multinationals are well-established industries with an excellent brand image and reputation and are highly efficient, they soon face the local businesses to close down. Local businesses may not be able to compete with the giant company as consumers are quickly attracted towards the big name of the multinational. This closure of local businesses means that hundreds of jobs are lost that cant be covered up by jobs provided by multinationals. So this would lead to an increase in unemployment that would become a burden on the countrys economy. Also as the output of local industries becomes less, this means that GDP would decrease as the total output of the country decreases. This would cause a major decrease in economic growth. So the per capita income of the people may actually fall resulting in the fall of the living standards of the people The multinationals could also form monopolies in their particular industries in the host country by eliminating competition. So they could exploit their advantageous position by controlling prices. They could charge very high prices which could lead to an increase in inflation. This again decreases economic growth as well as living standards. Then the multinationals could exploit the local labour by giving low wages to keep their profits high. They may not take care of the working conditions of the workers and could also force long working hours upon them. They know that the governments of developing countries could be forced to listen to them because multinationals are very powerful and have sales and profits exceeding the economies of countries. They know that the host country requires their investment and if they are monopolies then they have the additional advantage of being a much needed business for the host country. So they could influence government decision to a great extent. A great drawback is the depletion of the natural resources of the host country as multinationals utilize these scarce resources to carry out their production in the host

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Business and environment countries. Not only this but all the profits made by multinationals is sent back to the parent country while the profits of the closed down domestic businesses had been kept in the country. So this means that there is an overall decline in the investments in the country because profits of local businesses are re-invested and boost up the countrys economy. Also the multinationals being foreign cause major damages to the cultural identity of the host country e.g. the fast food culture in eastern countries is the result of copying the western culture. Also the adverts on T.V.s and bill boards use themes that are not a part of the host country. These may be very expensive and so result in the trade balance deficit of the host country slowing down economic growth. Concluding, I think that it would be best to let multinationals set up in a country as their benefits are very much required by developing countries. However, strong and proper measures must be taken to monitor their activity so that they dont gain too much influence over the government. In this way economic growth would occur in the country and yet the drawbacks would be minimized.

Comparison between home trade and international trade

Profit is the main purpose behind selling and buying of goods in both home trade and foreign trade. Both home trade and international trade is an extension of the principal of specialization and division of labour wherein different countries specialize in the production of commodities in which they have comparative advantage placed on account of its climate, people, national resource. Similarly, within a country the different localities will specialise in the production of different commodities in which they have a comparative cost advantage placed on account of favourable climate, soil, minerals and labour. Both types of trade require aids like insurance, warehousing, banking etc.

Difference between home trade and international trade

In case of home trade, the main mode of transport is rail, road, rivers or canals specially in case of some countries which are connected with each other by sea. The distance over which the goods have to be transported within the country is much shorter on land. The goods have to be transported over long distances and so there is an increase in cost of transport, storage, insurance and the mode of transport is usually sea or air. In case of home trade takes its place between different places within the same country which is under the same political entity. There is uniformity in the banking, legal and fiscal system and these maybe where every country sets down law and regulations to keep up its own interest. Home trade is not subjected to customs formalities as there is the movement of goods with in a particular country although excise duties may be levied on the goods whereas in case of foreign trade since the movement of goods is within different countries they are subject to custom duties, import quotas and exchange control operations. Goods exported/imported have to be fully declared on the custom declaration forms and thus is verified by the use of documents such as consular 48

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invoice, bill of lading. The packaging of the goods to be imported has to be in keeping with the customs requirements of the importing country concerned and upon the arrival of goods at their port of destination the goods have to be stored in bounded warehouses before they can be cleared by the importer. In home trade the commodity transport is facilitated by uniformity of language which helps in the understanding of informative literature, technical handouts, and packing instructions. Since all the people have knowledge of the national language whereas in foreign trade there is a communication gap which is created due to a difference in the language so there would be a difficulty in both written and oral communication between the importer and exporter as they speak different languages. In home trade there is uniformity in the weights and the measures used for. In home trade there is uniformity in the currency used to the payments and receipts can be made in the home currency whereas in foreign trade there is a problem in making payments and receipts since each country has its own currency. Although the foreign currencies can be exchanged but problem normally faced when the rate of exchange fluctuates for the currencies and this exchange rate fluctuates daily. In home trade credit and credit terms are easy modes of payment since both the creditor and debtor are in the same country. So any default of payment by the debtor can be legally tackled with ease and the same set of law applies to both. Whereas in foreign trade the means of payment is more complex as it involves documentary credit and cable transfer. All these facilities are provided by the banks of both the importing and exporting countries. Besides there is also an increased risk of nonpayment and this calls for the need of export credit guarantee. In home trade the domestic manufacturer, wholesaler and retailer is aware of the taste and preference of the local consumer and their buying behaviour. They are also aware of the rules and regulations pertaining to the sale of these goods in the local market. On the other hand an exporter while exporting goods overseas is not aware of the social standards, tastes and income levels of the people in the importing countries. Also the rules and regulations pertaining the sale of goods will vary from the exporting country and the importing country. Export trade involves a lot of complications and problems. Some of these are mentioned below:

DIFFICULTIES FACED BY EXPORTERS

A high cost of insurance, high packaging cost, high transport costs since the goods have to be transported and packaged as per the importers requirements. The goods exported must obtain the customs clearance, meet government specifications and rule about their chemical composition and technical specification. Even after obtaining all these government clearance the goods have to find a buyer i.e. whether the goods cover its cost, whether it is in keeping with the foreign customers likings and taste, whether the goods are marked in units of measurement as regards to weight, size and capacity, can the leaflet specifications in the language used be understood by the people.

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Business and environment The shipment of goods to the importing country also calls for the great expertise and skill in order to handle the complex documentation and customs procedures involved. Some goods before they can be imported or exported there is a need for license. There is also a risk of loss due to fluctuation in the exchange rate of currency. For example, if the payment is made in the currency of the importing country and there is a fall in the price of the currency of the importing country then the exporter will be at a loss as he will receive less than what he expected. Also there is an increased risk of non payment for the exports to assess the credit worthiness of the importer and any default in the payment by the foreign buyer can also arise due to change in the government policy in the importers country or due to political changes in the importing country. There might be language problem. It means communications with overseas must be carefully translated. Publicity material and instructions with accompany goods should be in the language which is understood in the other country. Cultural differences and local requirements must be taken into account when exporting goods.

PRIVATISATION AND NATIONALISATION

Privatization Privatization is the transfer of public sector resources to the private sector and is originated in the belief that the efficiency of the industries would be improved by the greater financial disciplines imposed by the private sector. Perhaps the government also wants to keep the level high by keeping its own expenditure down. The other forms of privatization are the sale of nationalized industries, the sale of parts of nationalized industries, deregulations (involves lifting restrictions that prevent private sector competition), contracting out (contractors are given a chance to bid for services previously provided by the public sector) and the sale of land and property. Nationalization It is the process by which government take firms and industries into the public sector. The objective is to run the industries concerned in the public interest. The nationalized industries include airways, steelmaking, coalmining, etc. Reasons for nationalization Financial necessities- of government- sometimes an industry may have become so run down that only vast sums of money from the government can save it. This was an important factor in the nationalization of both the coal industry and British airways after the Second World War. Strategic necessity of government- some industries are essential for national wellbeing and security. The coal industry and Rolls-Royce are good examples. In 1947 coal was the United Kingdoms only native source of power, so it was essential for the industry to be placed on a sound footing. Rolls-Royce makes an important contribution to the defence programme of the United Kingdom and other western countries, and likewise could not be allowed to go out of business when it ran into financial difficulties in 1971. 50

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Basic industries- there are some industries on which the whole economy depends: the fuel, power, transport and steel industries are examples. If these are not working efficiently, all the other industries suffer. Some governments have felt that the importance of these industries is so great that the decision about their investment programs and their rates of expansion should not be left to boards of directors who represent the interests of only a relatively small number of shareholders. They saw nationalization as the best way of protecting the interests of the community as a whole. Natural monopolies- although competition is appropriate to most industries, there are certain circumstances in which monopolist may be more efficient. At one period in the nineteenth century three different railway companies had separate lines between London and Brighton. Not one of them was profitable, for their trains were never full. In this situation it makes better economic sense to have just one operator. Industries like this need to be monopolized to avoid wasting capital. More recently government prefers to allow the business to be owned by private sector shareholders, but ensured that adequate controls over the levels of service and the prices charged to the consumers were in operation. Economies of scale- some industries need to be very large to take full advantage of economies of scale. Political belief- some people believe that the private ownership of the means of production is wrong in itself, and that the nationalization is the only way of returning industry to the people who they see as its rightful owners. So they start the process of nationalization when come in power. Forms of privatization 1. The sale of nationalized industries completely. 2. The sale of part of the nationalize industry (partial privatization) 3. De-regulations: It involves lifting restrictions and lowering down barrier to entry in a particular market. 4. Contracting out: 5. Sale of previously government owned land and property. Arguments for privatization 1. Business become more efficient due to the profit motive of the private sector than 2. they were when supported and subsidized by state. 3. Due to bureaucracy state owned businesses are faced by slow decision making. 4. Market discipline would lead to better decision making especially in relation to investment. 5. Increase motivation of managers and workers as the responsibility of success is fully in their hand. Therefore, they feel greater involvement in its running. There is a greater sense of empowerment. 6. Market forces are allowed to operate. Talking businesses would have to change or die while successful businesses expand unconstrained by the government limits on growth.

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Business and environment 7. Greater competition due tot the removal of entry barriers increases efficiency too. 8. Also privatized businesses are more responsiveness to the needs of customers. This means increased choice due to greater variety. 9. There is always temptation for governments to run state industry for political reasons or as a means of influencing national economy e.g. keeping electricity prices artificially low. Decisions not taken for commercial reasons. 10. Management will be freed from political interference. 11. Privatization races finance for the government which can be spent on other state projects. It enables reduction in public sector borrowing. 12. Regulatory bodies can be set up by the government to ensure free competition and no consumer exploitation. 13. Private businesses have access to private capital markets and this leads to increased investment in these industries. 14. Employee share schemes (promoted as part of privatization) will give workers a greater slake in the industry. Privatisation should improve accountability. The losses made by nationalized industries are put down saying that they are providing a service to the public. In the private sector they would be accountable to the shareholders and consumers. Shareholders would expect a return on their investment and consumers would expect a quality service at a fair price. ARGUMENTS AGAINST PRIVATISATION 1. Certain essential industries should be under government control and decisions related to them be taken by state. These decisions should be based on the needs of society. This may involve keeping open business activities that private companies would consider unprofitable e.g. gas supply in rural areas. 2. By competing with privately run business it will be much more difficult to achieve a coherent and co-ordinated policy for the benefit of the whole country e.g. railway system, electricity grid. 3. Through state ownership, an industry can be made accountable to the country. This is by means of a responsible minister and direct accountability to parliament. 4. Many strategic industries could be operated as private monopolies if privatized and they could exploit consumers with high prices. 5. Breaking up nationalized industries, perhaps into several competing units, will reduce the opportunities for cost saving through economies of scale. 6. Privatisation has been expensive. In particular, the amount of money spent advertising each sale is critised excause the money spent is at the taxpayers expense. 7. Nationalised industries at times have been sold off too cheaply because of the share issue being over subscribed. This shows that more people want to buy shares then there are available. Therefore, shares when begin to be sold, their prices rises sharply. 8. Natural monopolies have been sold off such as railway hire to a particular town. Some argue that they should remain state controlled because of duplication resources. 9. Share ownership arguably has not increased. Many who bought shares sold them very quickly afterwards. In addition, a significant numbers of new share owners only own very small shareholdings in one company.

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10. Many of the nationalized industries are important for the development of nation. To put them in private hands might jeopardize their existence. If business conditions change for the worse a private companies may not guarantee supply.

1AL.3 Size of Business BUSINESS GROWTH

There are two methods by which firms can grow. The first is by internal growth where the firm increases its own size by producing more under its existing structure of management and control like production, finance, technology etc. The second and more common method today, is by amalgamation (or integration). This occurs where one or more firms join together to form a larger enterprise. The firm can amalgamate or integrate in one of these two ways. 1 Take-over A take-over or acquisition occurs when one company buys all or at least 50%, of the shares in the ownership of another company. In this way, the firm being taken over by another company often loses its own identity and becomes part of the other company. Alternately an entirely new company may be formed for the sole purpose of buying up shares in the ownership of a number of other companies. This is known as holding a company. The companies acquired in this way may keep their own names and management but their overall policies are decided by their holding company. For example HSBC Holding plc is one of the biggest UK companies and owns many other companies around the world in the banking industry. 2 Merger A merger occurs when two or more firms agree to join to form a new enterprise. This is usually done by the shareholders of the two or more companies exchanging their shares for new shares in the new company. There are three main forms of merge:

Horizontal integration- this occurs when firms engaged in the production of the same type of good or service combine. For example, the joining of British Petroleum with Amoco in the oil and gas industry.

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Business and environment This type of integration may provide a number of economies of scale. For example, the employment of more specialized machines and labour, the spreading of administration costs and bulk buying. The major criticism of firms linking horizontally is that very large firms are formed which is able to dominate the market. They are able to raise prices and see off smaller competing firms. This is one reason why the government often investigates proposed mergers and take-over. Vertical integration- this occurs when firms engaged in different stages of production combine. This could be the case if an oil refinery combined with a chain of petrol stations (further process or delivery of their product). This is called forward integration. Firms can also under take backward integration when they engage to produce their raw material. For example, a bread manufacturer combines with a wheat producer. In this way a firm can assure a supply of material. Lateral integration- this happen when firms in the same stage of production, for example, primary or secondary production, but producing different products combine. This is often termed as conglomerate merger to form conglomerates, which are firms, which produce a wide range of products. This may be to reduce the risk of a fall in demand for one of their products or to seek out the profit making potential of selling other products in other markets. For example Uniliver is a firm famous for its detergents but with interest in food, chemicals, paper, plastics, animal feeds, transport and tropical plantations. Mergers and Acquisitions A merger is where two or more businesses AGREE to join together to become one larger firm. An acquisition is when one firm BUYS another firm. When a one business buys another it is possible that the acquisition or merger integrates the new product with the existing product. This integration can either be vertical or horizontal integration. Mergers and acquisitions are an important option for larger businesses that wish to grow rapidly. However, they are a high risk strategy it is easy to buy the wrong business, at the wrong price for the wrong reasons! The advantages of mergers and acquisitions are: Economies of scale, which reduces unit costs. Greater market share for horizontal integration, which means the business can often charge higher prices. Spreads risks if products different. Reduces competition if a rival is taken over. Other businesses can bring new skills and specialist departments to the business. It is easier to raise money if a larger business. The disadvantages of mergers and acquisitions are: Diseconomies of scale if business becomes too large, which leads to higher unit costs. Clashes of culture between different types of businesses can occur, reducing the effectiveness of the integration.

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May need to make some workers redundant, especially at management levels this may have an effect on motivation. May be a conflict of objectives between different businesses, meaning decisions are more difficult to make and causing disruption in the running of the business.

Constraints on Growth Though a business may wish to grow in size, there may be reasons why it cannot do this: Financial limitations a business may not be able to raise the necessary finance to grow any bigger perhaps it has not made enough profits to generate the cash or the bank is not keen to lend it more money at the moment. Size of the market there is often a limit to number of people who are willing to buy the type of product that the business is producing e.g. a printing press manufacturer will know that there are only a small number of publishers in the UK who will be able to buy the product. Government controls means that a business cannot necessarily have more than 25% of the market share. This often arises when one business joins with another. If the government thinks it is not in the public interest to have such a large business, then the joining together may not take place. Human resources are limited in terms of the skills available. Especially in more specialized areas it may be difficult to find enough qualified staff in the area to expand the business. In the South East of England, where unemployment is very low for some types of jobs, businesses have struggled to expand for this very reason.

1AL.4 Business objectives

No topic beyond 1AS.4 Business Objectives

1AL.5 Stakeholders in a Business

No topic beyond 1AS.5 Stakeholders in a Business

1AL.6 External influences on business activity CONSTRAINTS

The setting of objectives allows the business to focus on particular areas with a view of working towards the mission statement. However all companys problems which Prevent objections being fulfilled and some times these forces the business actually to change the objective. Constraints divide themselves into internal and external. The difference is that frequently a business can do something to solve the cause of the internal constraint, whereas it has to react to the external constraint.

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Business and environment Internal constraints Legal structure- frequently sole trader is unable to find the finance they need to expand the business further. This may be due to the lack of security, which sole traders offer in the event of a default on payment. Customers may also have less trust in a sole trader than in a major famous PLC. Alternatively such a difference can work in the sole traders favour, in that it can provide a personal service to the customer. Time- the Stock Exchange of London, and other financial market have been criticized in the post for their short-term approach to business i.e. investors are looking for a quick profit before exiting from the market and putting their money else where. This has led to pressure being exerted on a PLC to produce short-term profit, some times at the expense of long-term growth. Geographical location- when a firm operates in several countries it becomes difficulty to co-ordinate such operations. Market, religions and culture may be different. This may means that separate set of objectives needs to be pursued. Conflict of interests- whenever an individual manager or employee produces a new idea there is likely to be some opposition to it because it cause a conflict of interests. Finance- very few businesses can do every thing that they want to do. There is a constraint on the availability of finance, which means the business, must ration itself in some respects. External constrains An individual has very little control over the external environment, which will in turn affect whether it can achieve its objectives. A business may well be forced to alter its objectives if an external constraint proves too significant to avoid Competition- the strength of competition depends on the relative size of companies. Some companies may join each other with a view to competing more effectively against others. As one company becomes significantly larger, the other one frequently takes similar action to wipe out any competitive advantage due to an increase in size. Government policy- when a business perhaps wishes to extend its premises in order to put new machinery in and increase capacity, planning permission can take several weeks and may ultimately be refused. National government set laws, which can impinge on a business, such as raising VAT, custom duties, tariff, quota, etc. Economic- the state of the economy may mean that plans for an expansion program have to be delayed as the economy moves into recession. Ethics / Social / Environmental- businesses work within an environment where there must be consideration for needs of people in the locality e.g. pollution by waste material and by noise. Location decisions and decision about monopoly force organization to cross limits.

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Physical / Technological- constraints arise form reliance upon other business e.g. sources of raw material, change technology, market for goods, consequently change in product feature, durability, production qualities, etc.

Macro ECONOMIC OBJECTIVES OF A GOVERNMENT

Government policies are designed to improve the working of the economy. Governments will differ in the emphasis they give to particular objectives and the ways in which they try to achieve these. However, despite these differences there seems to be broad agreement on the following main aims or objectives. Economic Growth- The macro economic policies are designed and directed to achieve a desired level of economic growth. Economic growth is increases in national output. It can occur if previously unemployed resources are employed, there are more resources or existing resources improve in quality. Governments prefer stable growth rate instead of booms and recessions as these create uncertainty and can be destabilizing. Economic growth is aimed because it improves living standards as more goods and services are available. Price Stability- price stability does not mean zero inflation. Governments usually aim for a low and stable rate of inflation. In practice, in a dynamic and growing economy, the general price level is likely to rise by between 1% and 2% per year. e.g. UK government set the Bank of England the target of achieving an underlying rate of inflation of 2.5% with a margin of one percentage point either way. High level of employment- high employment and low unemployment are generally considered to be desirable. The government aims to achieve a high level of employment because it has a number of significant advantages. When employment is high, output and hence living standards are also usually high. In contrast unemployment imposes costs on the unemployed and on the society. There is also evidence of a direct link between the unemployment of young men and crime.
Impacts of Unemployment 1. lowered aggregate is demand due to decrease in purchase power as incomes are low as unemployment & . Due to this output decreases. 2. lesser tax revenues for the government government expenditure increases, burden on working population increases. 3. social costs crime rate , frustration and suicide , measures against government.

Balance of Payments- the balance of payments records a countrys transactions with other countries. A government will seek to earn as much from its sale of exports of goods and services abroad as it spends on imports of goods and foreign services. This will mean that its trade in goods and services will balance. It will not want to spend more than it earns because then the country will get into debt. It will also be unlikely to want a surplus since this will mean that the country is not purchasing all the goods and services it can afford and also living standards are not as high as possible.

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Business and environment Other Objectives- in addition to the above four major objectives a government may have other objectives for the economy. These may include a more even distribution of income and wealth, exchange rate stability and economic efficiency.

MACRO ECONOMIC POLICIES OF GOVERNMENT

Supply side policies Monitory policy Fiscal policy Exchange rate policy Supply side policies Supply-side policies are those designed to increase the economys long-term growth potential and thereby to improve the economys performance in terms not only of economic growth but also in terms of employment, inflation and balance of payment position. Supply side Policies includes: Deregulation- deregulation involves removing laws and regulations, which restrict competition. For example, government may allow private operators to compete. Government interference and involvement in the working of the economy is reduced. Privatization- this involves transferring assets from the public sector to the private sector. The privatization is likely to increase and improve the goods and services as the more competition exists in the private sector. Education- education is a merit good. Government takes measures to improve education as it raises the quality of labour force. Training- economists advocate government provision of training schemes and the subsidizing of private training schemes. A better-trained labour force will be more employable, more productive and more mobile. Cutting Income Tax- it is argued that reducing the rate of income tax will raise the supply of labour in a number of ways: It will encourage more people to seek employment, for example mothers and those who have retired early It will persuade some people to work longer hours. It will encourage the unemployed to seek work more actively as the income gap between after tax wage rates and unemployment benefits will have been increased. Cutting Corporation Tax- this increases the funds for firms to invest and also increases the financial incentives to invest. Research & Development- the government provides funds to help firms invest in new research and the development of better products and production methods. It can also 58

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encourage firms to invest in R&D by giving them tax relief on the money they spend on it. Competition Policy- competition policy concerns the removal of barriers to free competition, which in turn forces consumers to pay higher prices. The government to discourage the monopoly behaviour establishes anti-monopoly laws.

Monetary Policy
Monetary policy covers measures that seek to change the supply of money or the interest rate. The aims of the monetary policy are to check: The growth of the money supply The level and structure of interest rates The exchange rate The inflation rate Possible Monetary Policy Measures The possible monetary policy measures to control the money supply are: The Rate of Interest- interest rates are price of money. If interest rates fall, people and firms will find it cheaper to borrow, while others will be less willing to save money and will spend more. So, the fall in the interest rates will increase the aggregate demand. On the other hand, if the central bank wants to reduce the aggregate demand, it will increase the interest rates. The increase in the interest rates will reduce borrowing, increase savings and reduce consumption. Open-Market Operations- open-market operations refer to the buying and selling/reselling of government securities by the central bank in order to affect the money in circulation. If the central bank wants to decrease the money in circulation and aggregate demand, it will sell government securities (such as commercial bills, treasury bills and bonds) to the commercial banks and the general public. This will reduce the commercial banks ability to lend and the peoples ability to spend and vice versa. Special Deposits- the central bank can instruct commercial banks to place some of their liquid assets with it. This reduction in their liquid assets may mean that they will have to reduce their bank lending. If the central bank wishes to encourage bank lending, it can release any special deposits it is holding and thus increase the banks supply of liquid assets. Reserve Ratio- all the commercial banks are required to maintain the certain percentage of deposits in liquid form in order to honour the cheques drawn by the depositors. The central bank can alter this ratio. If the central bank wants to reduce the money supply, it will increase the reserve ratio. This will reduce the banks ability to lend and the money in circulation will reduce. This will reduce the aggregate demand. If the central bank wants to increase the aggregate demand, it will decrease the reserve ratio. This will increase the banks ability to lend.

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Business and environment Uses/Application of Monetary Policy The monetary policy is used in order to control the following: Inflation- the changes in money supply affect the rate of inflation. If the money supply increases people will have more to spend on goods and services. If the output of goods and services available to buy does not rise as fast as the money supply, the increase in demand will cause demand-pull inflation. The monetary policy is used to control the money supply and hence the rate of inflation. Interest Rate Changes Affect the Aggregate Demand- if interest rates fall, people and firms will find it cheaper to borrow, while others will be less willing to save money and will spend it instead. That is, as interest rates fall more people will want to spend more money. Consumer expenditure and firms investment will rise. Increased investment leads to economic growth, increase employment and reduce unemployment. Interest Rates can Change the Exchange Rate- interest rates can be used to affect the exchange rate. Interest rates can be raised to increase the value of the domestic currency compared to other countries currencies. If domestic interest rates are higher than in other countries, wealthy foreigners will prefer to keep their savings in the domestic banks to earn high rates of interest on their money. This will increase the demand for domestic currency and vice versa. Achieve Macroeconomic Objectives- monetary policy therefore involves influencing the supply of money and interest rates to control the level of inflation, unemployment, economic growth and exchange rate.

Fiscal Policy
Fiscal policy is deliberate changes in government (public) expenditure and tax collections in order to achieve desired economic and social objectives. Fiscal policy is mainly used to affect the level of aggregate demand of/in the economy. Instruments of Fiscal Policy The instruments of fiscal policy are: government spending and taxation. These instruments are explained as under. 1. Government Expenditure Government expenditure is the spending by the public sector, i.e. by the central and local governments. The main government expenditures are: Current Expenditure- this is spending on the day-to-day running of the public services e.g. spending on teachers pay, the purchase of medicines, and the pay of those in the armed forces and purchase of uniforms. Capital Expenditure- this is spending on the new infrastructure e.g. spending on new schools, new roads and new hospitals. 60

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Transfer Payments- these are payments to, e.g. pensioners, the unemployed and subsidies to producers. They are designed to provide income or increase the income and also to increase the output of particular goods and services. 2. Taxation Central and local governments impose taxes for a number of reasons. Taxes are intended to raise public revenue and lower private sector spending, to reduce the demand for demerit goods, to discourage imports and to create more even distribution of income and wealth. Taxes are classified into direct taxes (e.g. income tax, wealth tax) and indirect taxes (e.g. excise duties, tariffs and value added tax (VAT)).

Exchange rate policy

Exchange rate is the price of one currency or the value of a currency in the terms of another currency. The policy of the government would be to decide if they want it to float or to be fixed. A floating exchange rate is determined by the demand and supply of the currency in the international market. If the demand increases, then the exchange rate appreciates as its value increases e.g. when the interest rates of the country are high. This is good for the importing businesses as they buy more in the same amount of money. However, when the demand falls, then the currency depreciates and its value falls e.g. if 60 Rupees = US$1 and the US$ depreciates then 50 Rupees = US$ 1. This shows that the value of rupee appreciates as less is to be given in return of $1. This is good for exporters. However, too many fluctuations in the exchange rate prove bad for domestic industries and its the governments duty to keep the rates stable. BUSINESS AND NEW TECHNOLOGY Technological change refers to the changes in production techniques and production equipment. It could be a change in the machinery used to make a product or the computers to design a product. More recently it is the use of the computers and information technology (IT) to improve the efficiency and competitiveness of businesses that has led to technological change. Since technological is so rapid, there are important implications for businesses. A business can be affected by the following technological change: In production In provision of services In the office Technological change in production Technological change leads to improved production of goods and services due to: Computer-aided manufacturing (CAM) this reduces labour costs, is more accurate and faster and can work at any hour of the day. The computer controls the machinery.

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Business and environment Computer-integrated manufacturing (CIM) here, computers control the whole production line. Best example is in car production where robots undertake much of the work, reducing the need for labour to perform boring, routine tasks. Computer-aided design (CAD) Computers are used to help design products using computer generated models and 3D drawings. Reduces the need to build physical models to test certain conditions, known as prototypes. This can be expensive to produce just for testing purposes (e.g. aircraft or new cars). Therefore new production technology can increase the speed of production, improve the quality of the product and reduce costs per unit of production. Technological change can be seen in the shops and the provision of other services such as banking or repairs. Electronic point of sale (EPOS) and Electronic Funds Transfer at Point of Sale (EFTPOS) speed up transactions in shops and give vital information for businesses so can sort out their stock levels. EFTPOS means that shoppers can pay for goods and services using credit and debit cards. Banks can use hole in the wall machines to deliver cash or take deposits therefore remain open all hours. Repair people can use handheld computers to work out what is wrong with the machinery they are examining. Technological change in the office helps speed up the movement of information and improves the analysis of information: Communication is improved through the use of the intranet and Internet. The intranet is an internal system of computer communication while the internet can be used to communicate with customers, suppliers amongst others in the outside world (through websites and email). Workers can work away from the office using mobile technology such as phones, laptops and modems. Computers can be used to process, analyse and store vast amounts of data to give the business more quality information. E-commerce is the ability of businesses to trade with the world via websites. This means that there is a larger market and the business is now open 24 hours a day. This has provided opportunities for businesses that could only trade locally to now expand the size of the market (e.g. Amazon as world wide book and CD sellers). Customers can also shop around for the best deals for new products. The Internet can also be useful for recruitment purposes. Job vacancies can be advertised and targeted to the right audience, often costing less than print alternatives. E.g. e-teach sends free emails every week detailing teachers posts to subscribers. Technological change can be very expensive: technology involves the following additional costs: Purchasing the equipment Installation Training staff Maintenance Replacement/upgrading

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There is legislation associated with the use of technology e.g. computer screens, noise levels. In summary technological change can bring the following benefits to a business: Reduced running costs Improved productivity Improved competitiveness Lower costs per unit of product Improved quality of service (e.g. speed of service) Reduced wastage If the benefits of the above outweigh the costs, then a business should be investing in new technology. However it may need to consider the social costs of new technology: Job losses Motivation of workers worried about machines taking over their jobs (though extra training to work with machines may provide some increased motivation) Loss of traditional skills Technological advancements and impacts on todays business Technology is the creative process which uses human, scientific and material resources to solve problems and generate better efficiency. An important area of technology is IT, Information Technology which is the recording and use of information by electronic means. The advancements in technology creates new opportunities as well as threats and the major business areas affected are communication, product technology, cost of production, human resources and the market. In communication, the major impact has been caused by computers and Internal. Within an organization, people communicate via telephone, e-mails and can hold meetings across countries by video conferencing. The internet is becoming increasingly common as an interface between customers and the business and customers place orders either over the net (e-commerce) or by an interactive television technology called Teletext. Such changes have reduced the retail floor space considerably as well as made communication extremely fast. It has also meant that information is collected, stored and sent quickly which saves money and makes sure information is passed correctly. Advanced technology has had many changes in production and manufacturing. The use of (AD Computer Aided Design) CAM (Computer Aided Manufacturing), CMC (Computer Numerically Controlled) production. The designs produced are more accurate that after being viewed as 3D can be altered and tested for faults cheaply and so make them easier to be produced. Then the use of robots in production lines means that boring but essential repetitive tasks can be carried out accurately and quickly which may not be possible for humans due to lack of motivation and tiredness. The nature of the technology creates new products and new demands. The invention of the computer led to a market in computerized games. Even though technology cant be cheap due to its complexity and rise in fixed costs, the prices are falling. This is because of the volume of production that has spread fixed costs and reduced unit costs of production. It is because businesses have merged

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Business and environment for mass production for a global market and so it has become easier to be effective, efficient and fast. Since labour hasnt increased due to the machines and capital intensity, the labour productivity has increased and thus reduced unit costs. The technology industry is a big human employer and at the same time has affected human resources of many industries. There have been redundancies as certain staff (e.g. workers on production levels) arent required. Changes of methods has replaced people at all levels. But at the same time many new job opportunities have been created (e.g. computer specialists and machine operators). There is de skilling as certain skill like designing and crafts are done by computers. But workers have become multi skilled as they become flexible so that they are able to work with the needs of the new technology. It has caused changed attitudes to career choice and a rise in small organizations as redundant people get together to employee themselves. Delayering in organizational structures has occurred since computers have taken over roles of middle management alongwith team working. It has created a shortage of computer engineers and programmers while the acceptance of change has increased. In marketing there has been a change in nature of products as well as an increase in variety. The way we shop has changed like over the internet instead of going to retail outlets. Pricing ways are different. First products are expensive but once they are common in market, they become very cheap. Competition has increased and made survival difficult for low technology firms. New ways of distribution have emerged as the world becomes a single market and so delivery of products safely has become faster as well as their availability has increased, then prices reduced while they remain fresh. The high disposable income of some has meant large sales and a healthy entertainment, holiday and leisure industry. Transactions are dealt with differently as bank accounts are present and payments are made via debt and credit cards. There is an increase in home banking. Health and medicine have improved considerably as many more life saving drugs and surgeries can be done easily and so increase life spans. However technology has ve effects too. The major is the increasing need of strict data protection as our data becomes compiled like personal interests, lifestyle and work. Data legislation controls the spread of such data but has to change quickly to regulate new ways of hacking and accessing data. The cost of software has increased due to the speed with which it changes and becomes obsolete within months of being made and so there are large costs of updating software incurred. Training costs are also high. The increased dependency on computer systems mean that system failure leads to a total failure on production gives a bad reputation to business. The technology has been resisted by workers representatives due to the insecurity of jobs that they create. Skills of workers are outdated and either they are redundant or have to be retrained in other skills. There are certain ill effects to health like computer glare and an increase in dangerous radiations. There is a resistance to the continuous changes in technology from old managers as their skills become obsolete. The management of change is also difficult as it has led to management being exercised in lower levels of organization which is particularly difficult in organizations with a culture of centralized authority. Due to the increased competitiveness of markets, assets become obsolete quickly and a lot has to be invested on new ones. The management has to time carefully the purchasing of assets so that the business is at least able to cover its cost. Technological literacy is still a problem especially in third world countries where people arent even simple literates, let alone computer literates. How businesses might react to given demographic changes

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Saadat Ali Mughal

A statistical view of a population, generally including age, gender, income, schooling, occupation and so on. Understanding the demographics of your target customers is critical for the success of your business. Not only do you need to understand them in order to decide exactly what your product and services mixes will include, but this information will also affect pricing, packaging, promotion and place. Let's talk about just one of these factors to see how demographics affects your choices. In order to properly evaluate a community or neighborhood for the best location for your business, you must know the demographic profile of your potential customers. To see if the community you're considering offers a population with the demographic traits necessary to support your business, look at the community's: Purchasing power: Find out the degree of disposable income within the community. Residences. Are homes rented or owned? Means of transportation: Do prospective customers in the area own vehicles, ride buses or bicycles, and so on? Age ranges. Does the community consist primarily of young people still approaching their prime earning years, young professionals, empty nesters or retirees? Family status Are there lots of families in the area or mostly singles? Leisure activities What type of hobbies and recreational activities do people in the community participate in? Social and demographic factors are recognised to have an impact on the types of products being produced in addition to the manner in which they are made. There are a wide variety of factors which have an impact upon the way organisations operate with the main areas being identified as demographic changes and social and cultural influences. Particularly relevant to today's difficult financial climate is the affect that unemployment has on spending. For example, in the current economic crisis it is highly likely that many families will now be cutting down on non-essential or luxury items. Brindley (2008) highlights three significant UK forms of demographic trends which include an ageing population, changing household structure and geographic distribution. Since the 1960s a decline in birth rates combined with advances in health care has resulted in a larger proportion of of society being in older age. Lone parent families have also increased by as much as 50% and more people on high incomes have been moving from urban to rural areas such as those in the South of England. The demographic changes all have an affect on business as well as for voluntary organisations and the public sector. These changes may typically result in patterns of spending, employment, production, savings and investment being altered. Social and Cultural Influences Affect Business In addition to the demographic aspects highlighted above, companies need to be aware of changes to social and cultural factors in order to remain as productive and profitable as possible. Social class is recognised as being key to patterns of behaviour and this is usually classified through the identification of occupation of the main breadwinner in the household. Again, this current economic situation will also affect spending behaviour as it is more likely that people will move from one social class to another. Examples of the manner in which cultural factors impact business include the following: whether promotion/marketing methods, colours or products are acceptable and approaches to the way specific products are sold. Business Responses to Social and Cultural Factors

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Business and environment The previous two decades has seen an enormous shift in both social and cultural perspectives and opinions including greater public concern about both the environment and healthy lifestyle. This concern for the environment has had a big impact on companies and resulted in plastic bags no longer being free and more packaging which can be easily recycled. Another key area is in terms of low-fat, organic and fat-free or diet products with the dieting related pills and foods now being part of a multi-million dollar industry. As a result of single person households having significantly increased in recent years many companies have focused on creating homes, holiday packages, and meals to suit the individual. In many locations this has been identified in the number of apartments being built. As highlighted above, there are many different factors which can influence the way in which a business operates including economic, social and cultural influences as well as demographic change. In order for companies to remain as profitable as possible it is crucial that changes in these areas are recognised and where necessary or indeed practical firms must seek to adapt their products and manufacturing methods.

Social and cultural environment Environmental

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