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Business and the Economic Environment

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Page 1: Topic 1 Chapter 1 -1

Business and theEconomic Environment

Business and theEconomic Environment

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The Business Organisation

Business and the Economic Environment

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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

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The Firm as a Legal Entity

Companies cont…

private limited companies

consortia

public corporations

cooperatives

consumer cooperatives

producer cooperatives

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The Internal Organisation of the Firm

U-form

Production Fina nce Sa les Purcha sing

C hief executive

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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

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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

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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

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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

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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

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The External Business Environment

Business and the Economic Environment

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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

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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

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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

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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

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The External Business Environment

Classifying industries

Classifying production

primary production

secondary production

tertiary production

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1974

54.9%

2.8%

42.3%

Secondary

Primary

Tertiary

Output of industrial sectors(as % of GDP)

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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

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19741974

54.7%

3.4%

41.9%

Employment by industrial sector(% of total employees)

Secondary

Primary

Tertiary

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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

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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

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Standard industrial classification nature of the system of classification sections, subsections

divisions, groups and classes

The External Business Environment

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Standard industrial classificationStandard industrial classification

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Changes in the structure of UK economy

expanding and contracting sections

by output

by employment

The External Business Environment

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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.

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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

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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

Page 28: Topic 1 Chapter 1 -1

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

Page 29: Topic 1 Chapter 1 -1

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

Page 30: Topic 1 Chapter 1 -1

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

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The Economist’s approach to Business

Business and the Economic Environment

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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

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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

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Macroeconomic issues growth unemployment inflation balance of payments problems cyclical fluctuations

Microeconomic issues choices

What? How? For whom?

The Economist's Approach to Business

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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