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Business and theEconomic Environment
Business and theEconomic Environment
The Business Organisation
Business and the Economic Environment
The Firm as a Legal Entity
The sole proprietor limited scope for expansion unlimited liability
The partnership
Companies limited liability public limited companies (plc)
public issues of shares shares traded on the Stock Exchange
The Firm as a Legal Entity
Companies cont…
private limited companies
consortia
public corporations
cooperatives
consumer cooperatives
producer cooperatives
The Internal Organisation of the Firm
U-form
Production Fina nce Sa les Purcha sing
C hief executive
The Internal Organisation of the Firm
advantages
direct control by central executive of the firm
clear goals
problems of large U-form firms
co-ordination and communication costs
distorted information
decline in organisational efficiency
• U-form• U-form
M-form
The Internal Organisation of the Firm
Production Fina nce Sa les Purcha sing
D ivision 1 D ivision 2 D ivision 3
H ea d O ffice
The Internal Organisation of the Firm
advantages reduced length of information flows enhanced level of control
problems bureaucracy and communication problems conflicts between divisions
The flat organisationThe holding company
role of parent company and subsidiaries
• M-form• M-form
The Aims of the Firm
Goals of the firm
The traditional theory of the firm
Alternative theories
the divorce of ownership from control
the development of the joint-stock company
managerial objectives
The Aims of the Firm
The principal / agent relationship the principal – agent problem
dealing with imperfect/asymmetric information
monitoring
incentives
The goal of staying in business the willingness of firms to take risks
problems of being over cautious
The External Business Environment
Business and the Economic Environment
The External Business Environment
PEST analysis Political factors Economic factors Social / cultural factors Technological factors
STEEPLE analysis - extends PEST analysis to include: Environmental factors Legal factors Ethical factors
The External Business Environment
Social / cultural factors attitudes & composition of consumers / workers
Technological factors affect industrial structure & production
methods Economic factors
the macroeconomic environment the national and international economic environment effect of government policies
the microeconomic environment specific industries, firms, markets and individuals
The External Business Environment
Ethical factors Corporate Social Responsibility
Political factors government policies affecting business
Legal factors industrial relations, health and safety etc.
Environmental factors government policy to ‘name and shame’
businesses are increasingly affected by questions of the environment and social responsibility
The External Business Environment
Using PEST / STEEPLE analysis used for auditing the business environment
helps in developing business strategy
relations between the four sets of factors
importance of the economic factors
Globalisation and the changing business environment Social/cultural, technological, economic,
environmental, political and ethical factors
The External Business Environment
Classifying industries
Classifying production
primary production
secondary production
tertiary production
1974
54.9%
2.8%
42.3%
Secondary
Primary
Tertiary
Output of industrial sectors(as % of GDP)
19741974
54.7%
3.4%
41.9%
76.8%
3.1%
20.1%
20082008
Output of industrial sectors(as % of GDP)
Secondary
Primary
Tertiary
Secondary
Primary
Tertiary
19741974
54.7%
3.4%
41.9%
Employment by industrial sector(% of total employees)
Secondary
Primary
Tertiary
19741974
54.7%
3.4%
41.9%
80.8%
2.2%
17.0%
20082008
Employment by industrial sector(% of total employees)
Secondary
Primary
Tertiary
Secondary
Primary
Tertiary
Classifying firms into industries nature of an industry
industrial sectors why classify firms into industrial sectors?
it helps to analyse trends specific needs can be identified to understand the relationships between firms
The External Business Environment
Standard industrial classification nature of the system of classification sections, subsections
divisions, groups and classes
The External Business Environment
Standard industrial classificationStandard industrial classification
Changes in the structure of UK economy
expanding and contracting sections
by output
by employment
The External Business Environment
The Determinants of Business Performance
Structure conduct performance
relationship between business structure and business conduct (behaviour)
competitive markets and competitive behaviour
limited competition and collusion
relationship between business conduct and business performance
indicators for measuring performance
profitability, market share, growth, etc.
The structure conduct performance paradigmThe structure conduct performance paradigm
Source: based on Scherer F. M. and David Ross, Industrial Market Structure and Economic Performance (3rd ed.) (Houghton Mifflin)
ConductStructure PerformanceBasic conditions
Source: based on Scherer F. M. and David Ross, Industrial Market Structure and Economic Performance (3rd ed.) (Houghton Mifflin)
ConductStructure PerformanceBasic conditionsSupplyAvailability of inputsTechnologyProduct specificationsDemandTastesSubstitutes
The structure conduct performance paradigmThe structure conduct performance paradigm
Source: based on Scherer F. M. and David Ross, Industrial Market Structure and Economic Performance (3rd ed.) (Houghton Mifflin)
ConductStructureNumber of sellers and buyers
Barriers to entry
Cost structures
Product differentiation
PerformanceBasic conditionsSupplyAvailability of inputsTechnologyProduct specificationsDemandTastesSubstitutes
The structure conduct performance paradigmThe structure conduct performance paradigm
Source: based on Scherer F. M. and David Ross, Industrial Market Structure and Economic Performance (3rd ed.) (Houghton Mifflin)
ConductPricing behaviour
Output
Product strategy and advertising
Mergers
StructureNumber of sellers and buyers
Barriers to entry
Cost structures
Product differentiation
PerformanceBasic conditionsSupplyAvailability of inputsTechnologyProduct specificationsDemandTastesSubstitutes
The structure conduct performance paradigmThe structure conduct performance paradigm
Source: based on Scherer F. M. and David Ross, Industrial Market Structure and Economic Performance (3rd ed.) (Houghton Mifflin)
ConductPricing behaviour
Output
Product strategy and advertising
Mergers
StructureNumber of sellers and buyers
Barriers to entry
Cost structures
Product differentiation
PerformanceEfficiency
Profitability
Market share
Share price
Meeting social goals
Basic conditionsSupplyAvailability of inputsTechnologyProduct specificationsDemandTastesSubstitutes
The structure conduct performance paradigmThe structure conduct performance paradigm
The Economist’s approach to Business
Business and the Economic Environment
The Economist's Approach to Business
Tackling the problem of scarcity meaning of scarcity production and consumption
role of the business economist study of consumer behaviour study of firms
factors of production labour land and raw materials capital
The Economist's Approach to Business
Demand and supply actual and potential demand and supply the role of firms in satisfying demand business economists’ study of the supply
processMacroeconomics and microeconomics
macroeconomics the balancing of aggregate demand and supply
microeconomics the balancing of the demand and supply for
particular products
Macroeconomic issues growth unemployment inflation balance of payments problems cyclical fluctuations
Microeconomic issues choices
What? How? For whom?
The Economist's Approach to Business
The Economist's Approach to Business
Choice and opportunity cost the meaning of opportunity cost rational economic decision making
what is rationality? marginal costs and benefits
MC < MB do more MC > MB do less
Microeconomic choices and the firm