Business Environment

Business Environment

Organizations and their Objectives

Business Environment

CATEGORIES OF ORGANISATION• Organisation

– An arrangement of people, pursuing common people, pursuing common goals, achieving results and standards of goals, achieving results and standards of performanceperformance.

• Business involves people and resources to do one of two things such as make (produce) items or goods to be sold and provide services to be sold.

• All organisations are affected by– the environment, government, individual

Legal Form

Sole Traders

Sole Traders• Features

– A one-man business - risks– No separate legal entity – Small capital base– Owner is both entrepreneur and manager of business.– Examples as grocery shops, boutiques, barbers, etc.

• Advantages– No formal procedures to start– Commitment and motivation – Close and quick to respond to market change– Independence and self-reliance

• Disadvantages– Total personal liability – Succession and illnesses– Financial– Skill

Partnership

Partnership• Features

– 2 to max 20 owners or partners– No separate legal entity– A partnership agreement state the rules and avoiding

possible future disputes among the partners– Examples; dentists, lawyers accountants, architects, etc.

• Advantages– More funds available & enhanced credit standing– Sharing of expertise, skills, experience, business contacts,

etc. amongst the different partners– Sharing of risks

• Disadvantages– Unlimited liability– Limited life – Dilution of control - each partner is held responsible for

the decisions of the other partners. All acts by any partner are legally binding on all the partners

Companies or Corporations

Companies or Corporations• Distinct artificial ‘persons’ created in order to separate legal

responsibility for the affairs of a business from the personal affairs of the individuals who own or operate it. (Limited Liability)

• Features– Separate legal entity– Creation by incorporation - by lodging the MOA (company’s

constitution), the AOA (regulations for management of company) – Ownership by shares.– Public limited companies (plc) & Private limited companies (‘Ltd’ or

‘Limited’)

• Advantages – Limited liability of shareholders, ease of ownership transfer– perpetual life, wider source of capital – Specialised management expertise and skills.

• Disadvantages – Higher cost and difficulty in running organisation– More government regulations - comply with Companies’ Act– Lack of secrecy – information to shareholders, investors, gov.,

competitors,– Taxation

Companies or Corporations• Private company

• ownership is limited to between 2 and 50• shareholders cannot transfer their shares without

consent of the company• shares are not sold to the public

• Public company• a minimum of 7 shareholders and no limit for maximum• shares are sold in public (sold on stock exchange)

Activity:Give 5 examples of Sole Traders, 5 examples of Partnership and 5 examples of Corporations

(existing businesses)

SIZESize can be viewed in terms of:

•Numbers employed•Volume of output, sales, revenue•Assets employed•Profits earned•Net worth in real terms

Type of Businesses• Small businesses - a sole trader/partnership; sell

locally; employ less 50; e.g. computer trainers, solicitors and accountants. Etc.

• Medium-sized businesses - employ between 50 and 250; operate local and/or national level; e.g. manufacturers, clothing, furniture, etc.

• Large businesses – have many factories/offices and outlets in one or more cities/countries; manufacturers, retail food outlets, finance companies, etc.

• National businesses - have household names; recognisable logos; large in size (workforce 250 or more); branches/factories in major towns/cities.

• Multinational - sells worldwide and operate in more than one country.

Advantages of a large organisation:

• Sufficient resources to command a significant market share.

• Wide variety of products, customer services, attractive career, develop high-quality personnel, for future top management positions

• Can provide for greater division of work and specialisation

• Likely continuity of goods or services, management philosophy, customer relations, not prone to sudden policy changes, etc.

Disadvantages of a large organisation:• Management hierarchy -- problem of

communication; control, direction by management

• Widely diversified range of products or services - difficult to integrate common objective, ‘management philosophy’ and culture

• Time in maintenance of organisation – administration, losing sight of setting objectives, planning

• Tendency of ‘ingrown and inbred’ - political, ‘group- think’, resistance to changes and developments

• Junior management tasks (routine and boring). – poor career development, earnings, rewards, promotion information, etc.

Size – Economies of Scale (EOS)Internal EOS - arise from the more effective use of

available resources, and from increased specialisation, when production capacity is enlarged.

• Specialisation of labour

• Division of labour

• Larger and more specialised machinery – small company cannot afford because of obsolescence

• Large buying

• Stocking holding

• Dimensional EOS - relationship between the volume of output and the size of equipment (e.g. storage tanks).

Size – Economies of Scale (EOS)Diseconomies of scale - advantage for Small & Medium

Enterprises

Operate in competitive markets - cost lower & more efficient firms will survive

Risk takers - Innovation and entrepreneurial activity.

Management-employee relations - co-operative

Tendency to specialise - contribute efficiently towards the division of labour.

Structure - allow flexibility

Focus normally on local market - cuts costs of transport.

Hiring expert consultants - cheaper than permanent management specialists.

Act as suppliers / sub-contractors to larger firms.

Insufficient market demand

ECONOMIC ACTIVITY

Economic ActivityLevel of activity

• primary, secondary and tertiary sectorsGross domestic product

• a measure of economic activity in a country. De-industrialisation

• often used to describe the long-term decline in the importance of manufacturing industry and the secondary sector in general.

Trade surplus / deficit• an excess of exports over imports / when imports are greater than

exports.Exchange rate

• the price of one currency in terms of another. If LI can buy you $1.50 in US dollars, then the pound-dollar exchange rate is 1.50.

Sunrise industries:• rising new industries, such as information technology and genetics.

Their importance is increasing worldwide.Sunset industries:

• gradually dying industries. In the Western economies they include heavy industries such as steel and shipbuilding, whose prices have been undercut for many years by more efficient producers in Korea and other countries in the Pacific.

THE PUBLIC AND PRIVATE SECTORS• Private sector organisations

• are usually set up for personal gain and are funded by shares issued, loans from banks, overdrafts etc. They are not owned by the state or run by the state.

• Public sector organisations • are usually set up in the interests of the

community and are funded wholly or partly by the Government from public funds and are answerable to a government department or the Treasury.

THE PUBLIC AND PRIVATE SECTORS• Co-operative

is the result of a voluntary linking together of consumers, producers or retailers into a trading organisation, which is then used to represent its constituent members in the marketplace.

• Features: Separate legal entity Ownership by members Management by management committee - elected by the members Profits - divided among the members (dividends, bonus, etc.) or

allocated to other funds constituted by the co-op. Types of cooperatives in UK Farming co-operatives, Wholesale or

retail of goods, producer co-operatives• Advantages:

Benefits in production - Bulk buying, cost, negotiation, etc. Marketing - Joint advertising, promotional campaigns, patron, etc.

• Disadvantages: Size - Many co-ops, particularly those in rural areas are too small in

terms of membership, capital resources and business turnover, leading to many failures.

Inexperienced and incompetent management. Keen competition from rival institutions.

THE PUBLIC SECTOR• Refers to all publicly funded or publicly owned

bodies• Characteristics

• they are government owned and controlled• they are engaged in commercial (business) activities• they have socio-political goals alongside their

primary economic goals.

• Organisations are owned by state (central government and/or local government)

• Some provided services paid for by taxation, others levy charges on users directly (usually with subsidy)

• Examples: Civil service agencies, schools, Armed forces, public libraries

The public sector - Public corporations• Normally engaged in some form of

business related to utilities• (e.g. water, gas, electricity, transportation,

communications)• Advantages

• Benefit consumers - main aim is not to earn profits but provide services (protected from monopolies or high prices)

• Sense of responsibility to public• Large-scale enterprise (economies of scale)

• Disadvantages• Lack initiatives• Bureaucracy and lack flexibility

The public sectorReasons for the growth of the public sector and

public spending

• Industrialisation and urbanisation - pressures for increased government intervention

• Population profile – Changes, ↑ old people, etc.

• Political parties - Competition for public support by promising better activities, services (health care, transport, etc.)

• Pressures groups - to improve services

• Welfare state - designed for society with people having paid employment, not with high levels of unemployment, as is now common.

Mission and Vision

VisionStatement

MissionStatement

Goals Objectives

• Importance of mission• Values and feelings are integral elements of

consumers buying decisions• People have different values and priorities• Employees are motivated by more than money. A

sense of mission and values helps to motivate them• Mission should he taken seriously for strategic

management• Mintzberg

• Mission describes the organisations basic function in society, in terms of the product and services it produces for its clients.

• Goals are the intentions behind decisions or actions, the states of mind that drive individuals or organisations to do what they do.

VisionStatement

MissionStatement

Goals Objectives

Mission and Vision• Mission Statement

• Formal declarations of underlying purpose. They say what an organisation exists to do.

• Qualities of mission statements• Brevity (using only a few words) - easy Is understand and

remember• Flexibility - to accommodate change • Distinctive - to make the firm stand out

• Problems with mission • Ignored in practice - not implemented, goals do not

correspond with outcome to be pursued.• More for public relations purpose• Post hoc. - produced to rationalise organisation’s

existence (what the organisation actually does is assumed to be mission)

• Full of generalisations. ‘Best’, ‘quality’, ‘major’: is just a wish list

Key Elements of a Mission Statement

Sainsbury’s plcOur mission is to be the consumer’s first choice for food, delivering

products of outstanding quality and great service at a competitive cost through working ‘faster, simpler and together’.

Fundamental intentions

Role the company will seek to adopt

A description of what the company hopes to accomplish

Definition of the business and guidelines for decision-making

Means to gauge futuresuccess

Hierarchy of Objectives• Objectives

• Should fulfil SMART criteria; Specific; Measurable; Attainable / Achievable; Result-oriented; Time-bounded

• Flow from the goals and support them• Can be primary and secondary • Objectives can exist in finance, marketing,

production, products, human resources, or any other area of the company

• Form the basis for action planning• Should provide “milestones” in

achievement of strategy and tactical plan

Levels of Goals/Plans

Goals and ObjectivesDo firms solely maximize profits?• Smaller firms managed by owners profit is likely to

dominate almost all firm’s decisions• Larger firms managers may have liltie contact with

owners (stockholders)• Managers may be more concerned with goals like

revenue maximisations (growth), short-run profits at the expense of long-ran profit (to earn bonus, promotion etc).

Goals and Objectives• Nature of profits

• Amount for normal profit = the reward for entrepreneurship.• Normal profit is the opportunity cost of entrepreneurship (because amount of

profit or entrepreneur could earn elsewhere • Accounting profits = sales revenue - explicit costs of the business. Explicit costs

are cost clearly stated and recorded e.g., materials costs - prices paid to suppliers.• Economic profit = sales revenue – (explicit costs + implicit costs). Implicit costs

(benefits foregone by not using FOP in most profitable way.• Normal profit = implicit cost.

• Profit maximisation• Firm seek to make investments - in physical capital (e.g. machines), human

capital, advertising etc.• Incur casts today in order to generate returns in the future• Competition from profit-maximizing firms could form non profit maximizing firms

out of business• Return of capital employed (ROCE)

• Also called Return on investment (ROI)• Calculated as [Profit / Long term capital employed] X %

• Growth• Firms often grow to survive• Growth may be achieved through expanding output, buying other businesses, or

making arrangements with them for mutual benefit• Ansoff matrix

OPERATIONAL PERFORMANCE INDICATORS - The balanced scorecard

• Limitations attached to traditional financial measures:• Are backward looking and reflect yesterday’s decisions• Are unable to reflect contemporary value-creating actions upon which future

financial success rests• Reinforce short-term thinking• Are sometimes of doubtful validity due to the manipulation of figures.

• Balance scorecard• A technique developed by Kaplan and Norton to integrate the various features of

corporate success.• Defined as• ‘a set of measures that gives top managers a fast but comprehensive view of

the business’. • The balanced scorecard includes measures on financial, customer

satisfaction, internal processes, and innovation and learning.• The balanced scorecard allows managers to look at the business from four

important perspectives:• Financial perspective: reflecting measures such as asset turnover and earnings

per share.• Customer perspective: indicated by market share and customer satisfaction for

example.• Internal business processes: pointing to what the organisation must excel at,

response times and product quality for instance.• Innovation and learning: focusing on the ability to change and improve and will

be reflected in employee attitudes and morale, organisational culture and so forth.

STAKEHOLDERS• Stakeholders:

• the many different groups and individuals whose interests are affected by the activities of a firm

• All organizations affect and are affected by different stakeholders.

• These are represented by interest groups (e.g. trade union) and sometimes their power is reflected in commercial relationships (e.g. suppliers)

• 3 broad types of stakeholder• Internal - employees, management• Connected - shareholders, customers, suppliers, financiers,

lenders, competitors• External - community, movement, pressure groups, special

interest groups, national and world society• Shareholder

• a person who owns a share of a company. A share entitles the owner to share in the company's profile. The management of a company are appointed, indirectly, by shareholders and run the company on the shareholders behalf.

STAKEHOLDERS• Satisfying stakeholders’ objectives• Qn: Do managers act in the interest of

shareholder’s only (profit maximization)?• Managers will not necessarily make decisions

that will maximize profits because:• no personal interests at stake in the size of

profits earned • a lack of competitive pressure in the market to

be efficient (minimizes cost, maximize profits) e.g. when there are only a few firms.

• Managers have their own interests to satisfy• career development, personal prestige, financial

rewards, psychological satisfaction (stains, job interest dc)

• Managers may choose to achieve a satisfactory profit rather than maximising profit

STAKEHOLDERS• Satisfying stakeholders’ objectives• Williamson’s management discretion model

• Assumes that managers act to further their own interests and so maximizes their own satisfaction or utility (in terms of prestige, influence, other personal satisfactions)

• Utility = f (manager ‘s own salary, expenditure on staff, amount of perks, authority)

• Cyert and March’s organisational coalition model• Shareholder, managers, employees and

customers have different goals• Need for compromise in establishing the goals of

the firm• E.g. shareholders settle for sum than maximum

profits, managers for less than maximum utility

STAKEHOLDERS

• Key players - strategy must be acceptable to them, at least. An example would be a major customer.

• Stakeholders in ‘Keep satisfied’ segment must be treated with care. While often passive, they are capable of being key players. Large institutional shareholders might fall into this segment.

• Stakeholders in ‘Keep informed’ segment do not have great ability to influence strategy, but their views can be important in influencing more powerful stakeholders, perhaps by lobbying. Community representatives and charities might fall into this segment.

• Minimal effort is expended on this segment.

Stake Holder mapping

Key performance indicators• Key performance indicators (KPls) are

measurements collected internally which help, in conjunction with broader information such as environmental, industry and competitor analysis, predict the future success of the business. They are collected within the business itself, but are related to the external success measurements.