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Topic 1 Chapter 1 -1

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Business and the Economic Environment Business and the Economic Environment The Business Organisation 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  shares issues of shares traded on the Stock Exchange The Firm as a Legal Entity  Companies cont…     private limited companies consortia public corporations cooperatives  consumer  producer cooperatives cooperatives The Internal Organisation of the Firm  U-form Chief executive Production Finance Sales Purchasing The Internal Organisation of the Firm • U-form  advantages  direct  clear control by central executive of the firm goals  problems of large U-form firms  co-ordination  distorted  decline and communication costs information in organisational efficiency The Internal Organisation of the Firm  M-form Head Office Division 1 Division 2 Division 3 Production Finance Sales Purchasing The Internal Organisation of the Firm • M-form  advantages  reduced length of information flows  enhanced level of control  problems  bureaucracy and communication problems  conflicts between divisions  The flat organisation  The holding company  role of parent company and subsidiaries 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 Business and the Economic Environment The External Business 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 policies affecting business  Political factors  government  Legal factors  industrial relations, health and safety etc. policy to ‘name and shame’  Environmental factors  government  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 production  secondary  tertiary production Output of industrial sectors (as % of GDP) Primary 2.8% Secondary 42.3% 54.9% Tertiary 1974 Output of industrial sectors (as % of GDP) Primary 3.4% Secondary Primary 3.1% Secondary 20.1% 41.9% 54.7% 76.8% Tertiary Tertiary 1974 2008 Employment by industrial sector (% of total employees) Primary 3.4% Secondary 41.9% 54.7% Tertiary 1974 Employment by industrial sector (% of total employees) Primary 3.4% Secondary Primary 2.2% Secondary 17.0% 41.9% 54.7% 80.8% Tertiary Tertiary 1974 2008 The External Business Environment  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 Standard industrial classification Section A B C D E F G H I J K L M N O P Q R S T Agriculture, forestry and fishing Mining and quarrying Manufacturing Electricity, gas, steam and air conditioning supply Water supply, sewerage, waste management Construction Wholesale and retail trade, repair of motor vehicles Transport and storage Accommodation and food service activities Information and communication Financial and insurance activities Real estate activities Professional, scientific and technical activities Administrative and support service activities Public administration and defence; compulsory social security Education Human health and social work activities Arts, entertainment and recreation Other service activities Activities of households as employers, and producers of goods and services for own use U Extra-territorial organisation and bodies The External Business Environment  Changes in the structure of UK economy  expanding and contracting sections  by  by output employment The Determinants of Business Performance  Structure  conduct  performance  relationship between business structure and business conduct (behaviour)  competitive  limited markets and competitive behaviour competition and collusion  relationship between business conduct and business performance  indicators for measuring performance market share, growth, etc.  profitability, The structure conduct performance paradigm Basic conditions Structure Conduct Performance Source: based on Scherer F. M. and David Ross, Industrial Market Structure and Economic Performance (3rd ed.) (Houghton Mifflin) The structure conduct performance paradigm Basic conditions Supply Availability of inputs Technology Product specifications Demand Tastes Substitutes Structure Conduct Performance Source: based on Scherer F. M. and David Ross, Industrial Market Structure and Economic Performance (3rd ed.) (Houghton Mifflin) The structure conduct performance paradigm Basic conditions Supply Availability of inputs Technology Product specifications Demand Tastes Substitutes Structure Number of sellers and buyers Barriers to entry Cost structures Product differentiation Conduct Performance Source: based on Scherer F. M. and David Ross, Industrial Market Structure and Economic Performance (3rd ed.) (Houghton Mifflin) The structure conduct performance paradigm Basic conditions Supply Availability of inputs Technology Product specifications Demand Tastes Substitutes Structure Number of sellers and buyers Barriers to entry Cost structures Product differentiation Conduct Pricing behaviour Output Product strategy and advertising Mergers Performance Source: based on Scherer F. M. and David Ross, Industrial Market Structure and Economic Performance (3rd ed.) (Houghton Mifflin) The structure conduct performance paradigm Basic conditions Supply Availability of inputs Technology Product specifications Demand Tastes Substitutes Structure Number of sellers and buyers Barriers to entry Cost structures Product differentiation Conduct Pricing behaviour Output Product strategy and advertising Mergers Performance Efficiency Profitability Market share Share price Meeting social goals Source: based on Scherer F. M. and David Ross, Industrial Market Structure and Economic Performance (3rd ed.) (Houghton Mifflin) Business and the Economic Environment The Economist’s approach to Business 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 process   Macroeconomics and microeconomics  macroeconomics  the balancing of aggregate demand and supply  microeconomics  the balancing of the demand and supply for particular products The Economist's Approach to Business  Macroeconomic issues  growth  unemployment  inflation  balance of payments problems  cyclical fluctuations  Microeconomic issues  choices  What?  How?  For whom? 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  MC < MB  do more > MB  do less  Microeconomic choices and the firm
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