BUSINESS

ENVIRONMENT

Edexcel BTEC Level5

Virangani
Saibo
Higher National Diploma in Business Management &
Human Resource Management

Table of Content
Introduction
LO1 Understand the organizational purposes of business
1.1 Identify the purposes of different types of organizations.
1.2 How should an organization approach to manage objectives of different
stakeholders? Explain using organizational example/s.
1.3 Explain the responsibilities of an organization. Identify the different
strategies used to fulfil responsibilities.
LO2 Understand the nature of the national environment in which business
operate
2.1 Discuss how different types of economic systems have been emerged to
allocate resources effectively. Discuss their validity in modern business
environment with examples.
2.2 Assess the impact of fiscal and monetary policy on business
organizations and their activities.
2.3 Management of responsibilities is a critical issue of a business. Describe
LO3 Understand the behaviour of organizations in their market environment
3.1 Explain how different market structures determine the pricing and output
decisions of businesses.
3.2 Illustrate the way in which market forces shape organizational responses
using a range of examples.
3.3 Judge how the business and cultural environments shape the behaviour
of a selected organisation.
LO4 Be able to assess the significance of the global factors that shape
national business activities
4.1 Discuss the significance of international trade to a country giving special
emphasis to Sri Lankan business organizations
4.2 Analyse the impact of global factors on businesses, giving special
emphasis to Sri Lankan context. Use relevant facts / figures / examples as
applicable.
4.3 Identify laws, rules and regulations applicable for consume protecting in
Sri Lanka
Conclusion
Reference

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INTRODUCTION
Business environment is very important to an organization which will help the firm to identify
opportunities and getting the first mover advantage. Besides that, it can also improve performance of an
organization. The companies that continuously monitor their environment and adopt suitable business
practices are the ones which not only improve their present performance but also continue to succeed in
the market for a longer period. Environmental understanding helps an organization in improving their
image by showing their sensitivity to the environment within which they are working.
Environment of a business involved the internal and external factor that influencing a business decision.
Internal environment are the factor that will affect the business directly, which involve customer,
employees, shareholders, competitors and supplier, stakeholders. External environment refers to the
factors that influence the organization indirectly, which involve political, economic, social technology,
legislation, environment and demographic.

LO1
1.1

Identify the purposes of different types of organizations

The purposes of creating an organization is to satisfy needs and wants and also to achieve a common
objective which could not be able to achieve individually and to develop the country and the society and
to create a safety environment in all terms. An organization performs its functions as an economic unit or
a system to meet the above requirements. An organization is an arrangement of people, pursuing
common goals, achieving results and standards of performance, it is also a formal structure of
relationships, responsibilities and authorities through where specific objectives are achieved. A work
organization is a social arrangement for the controlled performance of collective goal (Buchanan and
Huczynski, 2004). There are many different types of organizations that are set up to serve a number of
different purposes and to achieve variety of needs. In simple terms the purpose of an organization is to
serve our needs and wants.
However different organizations have different objectives, some organizations are profit oriented
organizations these organizations look for higher profits for the organization owners and some
organizations are non-profitable organizations this sort of organizations are more concerned in providing
a service to the society than earning profits for the organization.

The purposes of different types of organizations:

Business Organizations: To make profit in a socially standard way

Eg: Airlines, Architects, Builders and Fast Foods
Non-profit organizations: These organizations want to help all people in the society
without any profit
Eg: NHS, Universities and Red cross
Mutual-benefit organizations: Individuals join together to pursue their own self-interest
Eg: Clubs, Trade Unions
Commonweal Organizations: This sort of organizations provide their services to all
members of any given population
Eg: Fire department, Police, Local councils and Government departments

We can categorize organizations under different factors:

Ownership: Private sector organizations are usually set up for personal gain by individuals and financed
by shares, loans, overdrafts and other personal sources of finance.
Public sector organizations are usually set up in the interest of the community or the society by the
government and also public sector organizations are financed by government funds.
Control: The organizations are controlled by the owners themselves, by the people working on their
behalf or indirectly by government sponsored regulators.
What they do (Activity): Manufacturing good and providing Healthcare services
Profit or Non-profit Oriented: These organizations are Profit oriented, it means pricing strategies rely
on setting a product or a service price to attain a specific programmed net profit percentage.
Non-profit oriented organizations means in the broadest sense an organization in which no part of any
net earnings can grow for the benefit of any private shareholder or individual.
Legal Status: Sole proprietorship is an organization owned by one person normally referred to as a
proprietor. The proprietor has many different responsibilities within the organization.
Partnership organizations are usually operated by two or more individuals who want to share the costs
and responsibilities of running an organization

Corporations (Companies) are organizations that has been granted legal status rights, privileges and
liabilities that are distinct from those of the people who work for the organization.
Co-operative organizations are owned by the workers or by the members who buy the products or use
the services that the organization offers. The motive for operating a co-operative is to provide services
not to gain profit.
Size Oriented: It means to access the large scale data sources efficiently and automatically it is
necessary to classify these data sources into different domains and categories.
Medium scale demands on an intensely managed landscape which needs a regional landscape planning
system which balances the social economic needs with geo-biological conditions.
Small scale organizations of a certain size which falls below certain criteria in terms of annual income,
number of employees and total value of assets.
Source of Finance: Borrowing, Government Funding and by issuing shares to the market.
Technology: Some organizations have a high technology usage compared to other organizations for an
eg: Window cleaning company this kind of companies use very low technology regarding to
Telecommunication companies.
Formal and Informal Organizations: The formal organizations are deliberately planned and created,
concerned with the co-ordination of activities hierarchically structured with stated objectives the
specification of task and defined relationships of authority and responsibility.
The informal organizations are flexible and loosely structured and relationships may be undefined and
also the membership is spontaneous and with varying degrees of involvement.
There are some main objectives of an organization, whether its a large scale or a small scale
organization the objectives of the organization depends on the age of the organizations and also on the
prevailing environment

Survival
Relationship
with other
organizations

Break-even

Profit
Maximization

Main
Objectives of
an
Organization

Service
Provision

Profit
Satisficing

Sales
Growth
Market
Share

Survival: This is a short term objective when trading is difficult some organizations may make little or no
profit mostly small scale organizations or when new organizations enter the market or even during crisis
period when some organizations try to stay in the market until time improve.
Profit Maximization: Most of the owners and shareholders aim possibly to gain more and more profit to
their organization every year. A profit maximising organization seek to make investments in physical
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capital (eg: machines), human capital (eg: employees) and advertising etc. it would be wrong to think of
profit maximisation as a short-term motive.
Profit Satisficing: In small scale organizations owners do not like to work for longer hours so the small
scale organizations aim to make enough profit so that to keep the owners of the organization
comfortable.
Sales Growth: Most of the organizations want to sell more products every year and expand their
business as they believe that the survival of an organization depends on how large the organization
grows. When youre a large organization the organization could benefit from the economies of scale. And
also when youre a large organization the organization even might plan to open new branches, start
trading abroad or even buy out one of their competitors.
Market Share: Mostly all organizations aim to increase the market share they have each year by
winning customers away from their rivals.
Service Provision: Mainly tries to offer new services or improve the current services that the
organization has so that the organization could attract more customers, for an example online shopping,
where you do not need to visit the shop to buy what you want but instead you could go online and select
the products you want and get it delivered at the convenience of your door step.
Break-even: Means making enough money to cover the total costs of producing and selling goods and
services and running the organization although the organization has no profit or no money lost. This is
one of the methods of surviving on breaking even over a certain period.
Relationship with other organizations: Means help achieve other aims by joint initiatives.
Organizational objectives gives a clearly defined target. To achieve these targets plans could be made
so that the employees of the organization could be motivated. These targets enable the organization to
measure the progress towards the goals that the organization has stated. These goals should be set
using SMART objectives. These effective SMART organization objectives are as follows:

S Specific

The organization needs a clear statement about what the organization

does, usually it is a quantified statement which means it could be a
numerical value. Eg: During the month of October a hotel might have set
its objective as filling 60% of its hotel beds a night.

M Measurable

The organization can put a value to the objective as the achievements

can be checked, record the progress and also could keep a record of the
organization completed assessments will enable to measure the
organization achievements. Eg: 10,000 sales during the next six
months of trading.

A Attainable

All those concerned in trying to achieve a target by working hard towards

it.
There should be a time limit and a date when the objective should be
achieved or reviewed, this could act as a warning as well as a spur so
that when an organization sets a specific target to its employees they
would achieve it without falling behind. Eg: By the end of the year all
goods has to be sold out.

T Time-bounded

The objective of the target should be sensible and challenging but it

should be also achieved with the resources available.

R Realistic

Organization purposes could be categorized in many different ways as follows:

Economic objectives vs Social objectives / (Non-economic):
Organization is an economic entity which carries out different economic activities and its primary
goal is to pursue economic objectives such as profit maximization, enhancing the market share,
improving the rate of sales growth etc. Making profit or profit maximization is the most important
objective among the economic objectives of an organization. It is an absolute necessity for every
organization as for following reasons:
Profit is not only the reward for risk, but it also serves as a motivating factor.
It is the most important factor for the existence of the organizations.
Profit measures the success and failure of organizations.
Profit provides and internal source of finance for growth and development.
It indicates market position of the organization.
It also helps to encourage the employees and stakeholders.

Primary Objectives vs Secondary objectives:

The primary objectives of organizations are survival and growth, making profit has a vital role in
achieving the primary objectives. Sales maximization and growth, cost reduction are directly
related to the primary objectives. Secondary objectives of organizations include quality of
products, social welfare, employee welfare, compliance with law and regulation, goodwill and
innovations etc.

Short-term, Medium-term and Long-term Objectives:

Any objective which is to be achieved within one year or less than one year is termed as short
term objectives while medium term objective is to be achieved within five years time. Long term
objectives are connected with more than ten years of time.

1.2
How should an organization approach to manage objectives
of different stakeholders? Explain using organizational examples
There are number of groups with interest in a business organizations activities. A corporate stakeholder
is a party that can affect or can be affected by the actions of the business as a whole. Those groups
without whose support the organization would cease to exist. Any person, group, organization or system
who affects or can be affected by an organizations actions is known as stakeholder. All organizations as
in the public or private sectors, profit or non-profit organizations have stakeholders. Stakeholders are
individuals or groups who have an interest in how the organization performs because it effects them
directly as they have a stake in the organization. Traditionally the owners of the organizations for an
example shareholders in a public sector company or the government in the public service situations were
seen as the most important stakeholders and satisfying their requirements was the sole reason for the
existence of an organization. Stakeholders can be categorized in to three:

Internal Stakeholders: These stakeholders have a direct and immediate impact on the
organization (Eg: Employees and Management)
Connected Stakeholders: (Eg: Shareholders, Customers, Suppliers and Financers)
External Stakeholders: This effects the business or the organization indirectly (Eg: Government,
Local community, Pressure groups and Competitors)

Below are a few stakeholders with their objectives and how these objectives can
help to satisfy these stakeholders
Employees
Employees are the workers employed by the organization and they are individuals who are directly
involved in the production of the goods and services and also the employees directly influence the
organization profits since they are involved in the day to day operations of the organization. The
employees are also interested in the organizations survival and growth as their jobs depend on it. It is
also important to keep the organization employees satisfied with the organization services that been
provided for them. Employees satisfaction could be defined as how much the employees happy about
their work places and which could be shown by the employees loyalty and commitment towards the
organization. In order to keep the employees satisfied the organization will have to offer them with
different treatments: Secure jobs, fair treatment, benefits, salary increments, working conditions, training
and career opportunities and bonuses and prizes. The employees also want protection from the
organization in terms of security from the customers who might abuse them as a part of human rights.

Management (Managers and Directors)

Management are those who are individually involved in the day to day operations in the organization.
They are very responsible for decision making. Occupying a higher position takes on all the weight in
society and in their own eyes and they care about each of their responsibility area. The management
have a special interest in existence of the organizations. Essentially management are the once who are
responsible for planning and directing the work of a group of individuals and monitoring their work. Just
like the employees even the once who are working in the management are interested in their increase in
salaries, safe and comfortable working environment, bonuses and prizes, maximising compensation,
autonomy and responsibility. Handling top positions in the management brings income and power.

Shareholders
Shareholders are who hold an ownership interest in the organization. Their prime interest is return on
their investments whether its a short or a long term investment. The shareholders are interested in
earning capital gain of the organization and its annual dividend. If the organization shares were
purchased for speculative purposes then may be the shareholders will be interested in the growth of their
prices and they might look into further resale of shares to cash by differentiating the costs of buying and
selling. Therefore the objective of a shareholder includes share price growth not limited, growth in
dividend and growth in the value of shares. What satisfy them is by profit maximization, increase
dividends, capital gain and how the organization is been operated.

Customers
Customers are individuals who wants to buy goods and services from an organization. Customers are
very important stakeholders because they create demand in the market. Thus every organization should
ensure that they do not compromise their customer needs. The customers interest is to get the right
product at a reasonable rate with good product quality. The customers also want to get their products as
quickly as possible as they do not like waiting and also they see to the importance of guaranteed security
and health items. To satisfy customers what they look for is value for their money through quality
products, reliable services, good customer care, fair prices, good functionality of the products and quality
services.

Suppliers
Suppliers are once who supply goods and services to the other organizations. These organizations
supply raw material or semi-finished products for organizations and to provide services, interested about
what the organization ordered from them regularly and punctually paid in accordance to the terms of the
contract. Also supplier can be dependent on the products that they course locally, nationally and
internationally. Eg: mark and spencer has suppliers globally. Suppliers generally wants secure contracts,
fair prices for the products and services, maximize profits from contacts, timely payment of customer bills
and strong working relationship.

Financers
Financers issue company loans and cooperate bonds to the organization, its important to do so as the
financers help the organization to meet the capital budgeting needs. Credit rating is also the financers
primary concern as they need to guarantee that their money is secure. The financers are interested in
timely refunds and interest. The financers can keep a track of the organizations determining whether its
effective using funds received and whether they pay. To satisfy the financers financial statement, liquidity
ratio, organization investments, portfolio financing, cost of capital, receiving repayment on loan amounts
and by earning interest.

Government
Government is the various levels of geographic location where the organizations operate, the
organization should not harm the outside environment. The government plays a major role in any
business environment as it plays a role of a regulatory and supervisory. The government also makes
sure that all organizations abide by the existing legal provisions. Whether the organization establishment
legal or illegal and whether it operates according to the country rules and regulations. The local and
national government is in charge of creating more jobs for its citizens and also to pay taxes to the
government. The government also set laws and regulations for govern trading and how an organization
should act and deal with people. The government also ensures that the organizations adheres to strict
laws like companys acts, health and safety regulations, trading legally and revenue and customs. By
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paying taxes, licensing, standardization and protection of consumer welfare will satisfy the government
as the organization meet the relevant legal requirements.

Local Community
There are individuals that make up the local area for a business organizations where they start their
operations. Basically business operates in an environmentally sensitive way by engaging with the local,
national and international associations, organizations and NGOs, local and national government and the
municipalities of community. These community groups can influence the people in an area for career
opportunities, business opportunities and make an impact to the environment etc. NGOs can organise
corporate responsibility projects and charities etc. The local community around the area needs jobs,
good shopping choices and also some modernisation done to the area by the organization. For an
example if we say that there is an clothing store around a certain location the local community around
that clothing store could determine whether the store should be situated in that area or they can up hold
or tarnish the reputation of the business by not depending on their preferences. Local community is
interested in employment, environment pollution and contribution by the organization to the community.

Pressure Groups
Pressure groups are organizations that advocates certain issues such as environment and treatment of
animals etc. These stakeholders may be affected directly or indirectly by the action of the organizations.
Pressure groups can be formed to prevent an organization expand its premises or even setting it up in
the first place. Pressure groups are people who are concerned about the environment how the
organizations look up to it. They are also concerned about if the people involved in the manufacture of
products the organization sells get a fair treatment by the organization. These pressure groups look if the
organization is ethical or unethical and if the organization managers the waste and the recycle items, for
an example environment friendly pressure group makes sure if any organizations do any kind of activity
to harm the environment such as air pollution, soil pollution, noise pollution and water pollution etc.

Competitors
Competitors are organization which are competition for the customers. The main interest they have is the
survival of the organization and also their failure might help them but as well as their survival too (more
market share available), the monopolistic markets are not good as they look but there are new
technology organizations which need more competition in order for them to help with the market
development and marketing their products. These competitors make use of competitive practice used by
the organization and make an impact on their organization business success where they gain potential
mutual benefits as in they use strategic alliances and also they develop new products to be introduced to
the market. Competitors are interested in financial statements, sales, customer base, product range,
after sale facilities, market position, technology, innovation, market research, coverage, business
strategies, competitive advantage, marketing and promotions etc.

1.3
Explain the responsibilities of an organization. Identify the
different strategies used to fulfil responsibilities.
An organization cannot start any organizational operations without implementing organizational
responsibilities. To ensure that the organization operates efficiently, effectively and benefits most people
at all times by balancing the approach for a responsible organization. To achieve the organizations
stated goals the organization needs to effectively represent rationally ordered instruments. Uniformed
guidelines generally followed by organizations, but the responsibilities varies to different individual
organizations. These responsibilities could differ from each organization to organization due to different
types of organization and the manner in which way it functions. Following are the responsibilities of an
organization:

Social Responsibilities
Environment Responsibilities
Ethics and Business
Management Responsibilities
Public Relations and Corporate Image

Social
Responsibilities

Public Relations
& Corporate
Image

Environment
Responsibilities

Responsibilities
of organizations

Management
Responsibilities

Ethics and
Business

Social Responsibilities
Social responsibility means an obligation that organizations have towards people and environment in
which the organization operates. The management is concerned with the way the enterprise will interact
with the environment, as the actions of the enterprise will have to face social consequences thatll effect
different groups like stakeholders. No organization wishes to be considered as a socially irresponsible
organization but tries to act responsible on social issues. Social responsibility is expected from all types
of different organizations:
Local Government: Provides services to the local community by trying to preserve or improve the
character of that community by council tax or by business rate payers but at a fair cost.
Universities and Schools: Students who has good abilities and qualifications will prove that their
beneficial to the society. Better emphasis should be given to vocational training for students.
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Pollution Control: Industrial organizations are developing a commercial process for re-cycling waste
materials. Hospitals and schools exist because healthcare and education are seen as desirable social
objectives by the government.

Stakeholders
A stake is what the company does, shareholders are once who owns the business but an organization
also has suppliers, managers, workers and customers, and the business depends on the relationship
that the organization and these groups share with each other. When theres a need for a compromise or
a balance is required each of these groups have their own objectives.
Shareholders: The management of an organization is considered to have only one responsibility and
that is to maximise wealth for the organizations shareholders. There are two reasons in favour of this:

Since the shareholders owns the business the assets of the company are shareholders property.
Disposal of business assets, the management has no moral right on this as it effects the reducing
of the return available to the shareholders. When taking decisions for the beneficial of the
company shareholders will not be in favour with the management, as most of the shareholders
large institutions like pension funds, so their own duties adversely affect the resources on
activities that do not make profit.
Managements job is to maximise wealth as it benefits the society, maximising wealth increases
the state tax revenues that disburse on socially desirable objectives. Members of the society has
a disadvantage when theres a trickle down when trying to maximise profit. Most of the shares are
owned by pension funds because of this most of the beneficiaries may not be wealthy.

This argument has different assumptions there are two assumptions for this:

The legal ownership is paramount over all the other interests in a business and there are a few
legal or moral rights over the wealth.
The second one is that the businesses relationship with the wider social environment is with the
economy.

Organizations are rarely controlled effectively, shareholders are passive investors. Social responsibility,
forced or voluntary these are ways of recognising manipulative markets who are mostly large
corporations. The public pays for roads, infrastructure, education and health in which the businesses
benefits, the public pay a higher price although the businesses pay taxes they receive government
support. Organizations producers two outputs:

Goods and Services.

The social consequences of its activities (eg: traffic, population and stress) which are inflicted on
the wider population.

Employees: Employees are internal stakeholders, their labour keeps the organizations operational
existence and as citizens, their members of a wider society which is why the organization exists.
Employees value the certainty and regularity of wages thinking that employing organizations honour the
contact of employment. Respect for workplace and work practices, health and safety, handling
equipment or hours worked these all implies as social responsibilities.
Provision of a coherent career and training structure so that people can better themselves these are also
social responsibilities of an organization towards their employees. Training employees are beneficial as
its level of workforce skills effects the countrys economy productivity. Workplace crches are great
assistance for working women but employers will not introduce them without consequent commercial
benefits. If the cost of labour turnover is higher than the cost of running workplace crches then if the
labour turnover has reduced by a workplace crches if so then the crches can be financially justified.
Social responsibility towards the organization is constrained by the law thinking that it could benefit in
encouraging the employees loyalty and skills.
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Customers: The customers pay for the output of goods and services of an organization. Public attitude
towards some consumer goods sector to get direction from the government and lobby groups thatll
make an environmental impact of an organization activities. The reduction of CFCs in aerosol cans have
led suppliers to introduce rages of goods that are environmental friendly.
Suppliers: Social responsibilities of multinational companies are distributed over several countries, but
only the commercial objectives are override if either the inbuilt culture of the organization or the voice of
public opinion is strong in the market. A supplier of high technological items will not allow to re-export the
goods as the enemies of the nation are where the supplier is based this is called a condition of sale.
Professional Bodies: Controlling is done by the management where members of the professional body
have standards of ethics and conduct.
Neighbours: To prevent environmental pollution including noxious gas, noise, traffic disturbance efforts
should be made.
Elected Authorities: Political representatives are external stakeholders they can affect the management
in different ways, as already been mentioned by legislation, the climate of public opinion by influencing
and by trying to pursue commercial organizations to follow particular line or policy.

There are different assumptions about society and about the relationship between individuals
and organizations

The public is a stakeholder in a business and itll succeed because of the wider society and by
giving charity is one way to encourage the relationship.
By giving charitable donations and artistic sponsorships could be taken as a useful medium of
public relations by doing this itll make a good impact on the business. This is a way of promoting
like advertising by doing it this way we could bring consumer awareness to the business.

Objectives and Responsibilities

Ansoff (1987) suggested that a company has a number of different objectives:

The total resource conversion process is a primary objective which is financially or economically
aimed at the efficiency and the effectiveness of the organization.
Modifying management behaviour is social or non-economical these are secondary objectives,
this is a way of interacting socially among individual objectives of different stakeholders.
There are two more other factors that influence management behaviour other than economic and
non-economic objectives:
a. Responsibilities: Internal guidance and control mechanism are not a form of obligations
that company undertakes but charitable donations and contributions to the life of local
communities are responsibilities that theyll undertake.
b. Boundaries: these restrict the managements freedom of taking any action because of
government legislations (no pollution, health and safety at work place etc.) and
agreements with trade unions.

Social and ethical objectives are pursue by many organizations to make products that last a certain
number of years to prevent health hazards by controlling pollution and to co-operate with the authorities
to identify these in the products sold.

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Environmental Responsibilities
Legislation and Regulation
The law on environmental protection is mainly covered in the Environmental Protection Act 1997
(EPA) and the Water Resources Act 2007
The EAP act features the concept of integrated pollution control (IPC) the aims of this is to prevent
pollution and to ensure that the businesses are conducted with minimum risk to human health and the
environment. Advance technical solutions offering the best practical options to encourage the adoption of
environment. The environment can sustain the damages of pollution at some point but it also ensures
that the polluter pays for the damages caused. IPCs main objectives are to minimise the release of
pollution and to neutralise the harmful effects and to develop a pollution control for the environment. The
chief regulatory bodies under IPC is Her Majestys Inspectorate of Pollution (HMIP) for air, water and
land which is being polluted mostly by industrial processes. The Environment Agency and Local
Authorities are in charge of preventing the other sources of pollution.
Another air pollution act is Clean Air Act 1993, which consolidates earlier legislation (introduced after
some spectacular London smogs of the 1950s)

Waste
Handling and disposal of waste has been incorporated in the English Law now, waste management is
encouraging firms to:

Prevent or reduce waste production

Develop products that do not harm the environment
Develop appropriate techniques for disposing of dangerous substances
Use recycling methods
Use waste as a source of energy

Waste mustnt be treated, disposed of or kept in a way where it pollutes the environment or harm human
health. Organization are enforced to pay a landfill tax on hazardous waste through a licensing system
and to prevent toxic waste from being simply dumped on poorer countries there should be a control
over the import or export of waste.

Water
The Water Resource Act 1991 and the Water Industry Act 1999 were brought in when the UK water
industry was privatised and there are number of offences relating to discharges into controlled water.

The Goal of the Environment Agency

The Environment Agency of England and Wales and the Scottish Environment Protection Agency were
created in 1996. This was created to the new agencies to prevent or enhance the environment taken as
a whole to promote the objective of achieving sustainable development.

Responsibilities of Environment Agency

Flood Risk Management

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The agency is responsible for maintaining flood defences and providing flood warning systems. Systems
like sluices, weirs and locks are used to control the water level and also the agency issues regular flood
warnings and maintains a map of areas liable for flooding.

Waste Regulations
Licensing of sites such as landfill and incineration facilities and regulatory authority for waste
management is handled by the agency. The agency grants special license for special waste like
radioactive, chemical and medical materials. Any individual or company cause a pollution or have
infringed any license condition of theirs can be prosecuted and have waste handling licenses revoked by
the court.

Pollution Control
Discharges done to the aquatic environment, air and land is controlled by this agency, a formal consent
of discharge or case of large, complex or potential damages done by industries through a permit. Failing
to discharge without the benefit of a consent or permit can lead to criminal prosecution. Recent
legislation changed the enforcement action that a pollution event can go through Magistrates Court and
a fine of 50,000 should be payed or five years of imprisoned, if going through Crown Court then a
unlimited fine should be payed and five years of imprisoned.

Air Quality Management

This agency regulates air pollutants into the atmosphere it includes emission from large scale agricultural
activities but now the air pollutants from agricultural activities will be unregulated. Major sources of
pollutants like transport are to be measured at the national European and local level, air pollution is
controlled from the small industries by the local authorities.
UK governments air quality strategy in England and Wales Environment Act 1995, to be implemented by
the local authorities, the highway agency and the other agencies.

Ecological Issues
Ecological issues can affect the business either directly or indirectly, the costs or the availability of
resources can be affected for an example companies are not allowed to use natural habitat or special
scientific interested areas for any kind of profitable business purposes like cutting down teak trees,
coconut trees or mining areas etc. Shell was concerned because of a consumer boycotting in Germany
to sink the disused oil platform in the North Sea this means that the consumers can be affected by the
ecological issues. Balancing the effect of power between the competitors in the market, the
environmental damages can be a disadvantage to the competitors because of the additional costs
required for cleaning up the products and the processes. These can affect the business directly and the
pressure from customers or staff as a consequence over an ecological issue can be an indirect impact
on the business.

Ecological issues relevant to business as follows:

Resource Depletion
Availability of raw materials through damage soil, water, trees, plant life, energy availability, mineral
wealth, animal and marine species may influence business operations through resource depletion.

Genetic Diversity
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Firms like pharmaceuticals, biotechnology, agriculture and food industries are relevant for genetic
diversity. Genetic resources can be drawn by developing new strains of plants, new breeds of animals
and new types of medicines that depends on the availability of wild species. Developing high-yield
disease resistant plants for an example wild species are a critical resource, but organically produced
foods are becoming more profitable and the consumers are willing to pay a premium price.

Pollution Concerns
Pollution concerns are the centre of most who worries about the environment.

Businesses are under pressure curtail on activities like water table, the sea and the ocean,
quality of drinking water has a massive increase in the size of the bottled water in UK. The
success of bottle water in UK is simply a triumph of marketing.
As a result of motor car exhausts and impact of the road vehicles quality of air is a much
discussed topic. This may be an issue of bearing upon distribution policies.
The pollution of land through landfill policies and the long-term damages done by the industries to
the land it occupies are required to change some of the policies during the next few years.
Noise pollution is also an important fact this has an impact on the operations of all forms of
businesses.

To remedy these problems, the polluter pays principle was adopted by the OECD (Organization for
Economic Co-operation and Development) in the early 1970s and its been broadly accepted.

Acid Rain
Acidification of water supplies and fish bearing lakes and rivers this happen due to acid rain and because
of the damages of the forest. The pollution that occur because of the industries make a big impact on the
natural environment and the agri-system because of the political pressure to constrain the effect of
industrial production have increased enormously.

Ozone Depletion
Ozone depletion is also expressed in a similar way, use of CFC for blowing polystyrene foam used as
insulation by the building industry has been banned in some countries and its been phased out in many
countries. Instead of CFC alternatives has been developed.

Waste
Whether its nuclear waste from power stations or industrial or domestic waste in landfill sites, waste is
also in the centre of attention. The national governments target for legislation has become handling of
waste. Waste management has become the new subject to discuss about even in international
agreements arrived at governments concerned, for an example dumping waste on marine life and on the
beaches in many different countries are being discussed to bring new waste management regulations.

Climate Change
Effects of excess carbon dioxide in the atmosphere is a debatable term when unnatural weather is
produced. With average world temperature increasing and sea levels rising this could cause disastrous
effects on agriculture and flooding of low-lying areas. Modifications needed to production processes and
consumption patterns which are been identified as contributory factors.
Kyoto Treaty of 1997 was an attempt to control pollution on the environment by emission of Greenhouse
gases particularly carbon dioxide which have been linked to climate change. Existence of economic and
environmental factors carbon credit could be offered to the countries to exchange it with each other and
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some countries will increase the overall emissions and the system is open for abuse. The emphasis is
given to Improve on infrastructure and land use patterns rather than carbon emission.

Energy Resources
Concerned over climatic changes, energy resources and environmental impacts on energy usage.
Usage of energy has been controlled less of potential than seems possible for an example coal gives
only up to 40% of its potential into electricity. In the counties of the developed world energy saving
programmes are underway, development of plants and projects on combined heat and power systems
serving neighbourhoods or industrial plants. Certain scarce on potential wasteful or dangerous materials
for instance carbon tax will discourage the demand for new energy efficient products.

Green Concerns
Different sectors of the industry has vary impacts on Green issues.

The Primary Sector

Industries in the primary sector of the economy like mining directly involve with the physical environment.
Environment legislations are under scrutiny on primary legislations. Destruction of natural ecosystems
and wildlife habitats are targets of international concerns. Some of the concerns are given below:

Deforestation
Threats to wild creatures
Replacing a natural habitat containing a diversity of species with a monocular where only one
strain is bred
Pollution
Health and safety of produce

Poor working conditions and wages

Efficient and effective use of finite resources by diversification of supply and recycling are appropriate to
promote Green policies.

The Secondary Sector

Economy, building and constructions are relevant to the secondary sector.

Consumer Goods
Manufactures may be seen as:

Damaging the environment or social institutions to meet consumer demand

Producing dirty products
Using dirty processes

Using scarce raw materials

Some products which are manufactured to contribute for the environment improvement, while larger
manufactures are socially responsible.

Manufactures of washing machines and dishwashers have new models that use less water and
time
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Car manufactures are producing car models that have a high degrees of recyclability and
durability
Detergent manufactures make products that are kinder for animals or that performs more
effectively with smaller amounts.

The Tertiary Sector

Retailing
The green consumer is dealing directly with the enterprise, the enterprise acts like a filter deciding
which product will reach the customer.

Service Provider
Service providers are less relevant to green issues but they still consumes resources and generate
waste. Same decisions of choices of suppliers, investments and contribution to the welfare of staff and
customers. Environmental auditing, green training, waste management and pollution control specialists
are very proliferation of green marketing practices.

Small Businesses
By consuming large number of raw materials and producing large number of waste. Green issues are
becoming significant for small businesses.

When producing products for green niches become more effective to the large enterprises and
take flexibility to create green processes and systems.
Small businesses use traditional methods to manufacture greener modern processes, demand
for such products are increasing due to using less energy and fewer non-renewable resources.

Its difficult for the small scale businesses to compete with large scale companies as for their greater
command of power and resources that demand for green products have increased in some areas.

Ethics and Business

Ethics is a code of moral principles that people follow in respect for what is right or wrong, ethical
principles are not enforced by the law but law can incorporate moral judgment.

Ethical Practice
Organizational issues on social responsibilities and issues of business practice relates to ethics, there
are three levels of ethics:
Macro Level: Issues are about the roles of a business in the national and the international organizations
of society.
Corporate Level: When formulating and implementing strategies organizations focus on ethical issues.
Individual Level: Issues of individuals behaviour and actions in an organization
A statement of policies, principles or rules that guide behaviour is a code, companies use this as a
voluntary code of conduct. Not only in organizations but code of ethics should guide peoples behaviour
in everyday life. Ethical values, principles or rule of thumb that guide decision making is seldom taken
explicitly. But if make a list of ethics for us itll include:

Obey the law

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Be fair
Avoid harming others
Prevent harm to others
Respect the rights of others help those in need
Do not lie or cheat

The organizations should have an ethics committee which consist of internal and external directors to
institutionalise the ethical behaviour of the employees. To have effective ethical codes provisions should
be made. Unethical managers privileges and benefits should be withdrawn and sanctions should be
applied for their actions. Existence of such codes may increase the ethical behaviour but by clarifying
expectations. To prevent damaging ethical lapses into powerful human impulses of moral thoughts and
actions help operations of an organization by these ethical codes.

Business Ethics
Ethical codes are rooted in a wider value system to know what is right or wrong, following are conflicting
views and continued debates:

Criteria for distribution of profit

Relative pay and rewards for employees, directors and junior staff
Decisions about priorities for an example in respect of public expenditure
Loan chargers eg. Payment of interest to lenders of money
The sale of harmful products eg. Tobacco

Ethical dimension on how the organization and the people working in that organization brings their own
values, personal values like religious and non-religious beliefs, political opinions and personality etc. and
even professional values like code of ethics and medical ethics etc. Ethical decisions are important as
penalties in organizations now,
A compliance based approach: The letter of law and that violations are prevented, detected and
punished in organizations and the legal consequences of unethical behaviour define the idea of social
responsibility that affects the business this also avoids problems like bribery. Some of the approaches to
ethics are as follows, ethos is knuckled under to external standards and the objective is to keep it to the
law, lawyers are the originators. Methods like education, audits, control and penalties reduce employee
discretion. People have solitary self-interested behaviour. The staff are lawyers and the standard set is
also the law standard. Law education is given with compliance system. Activities are develop the
standards, train and communicate, handle reports of misconduct, investigate, enforce, oversee
compliance.
Integrity based approach: Promoting ethical behaviour in an organization makes assumptions which
people go about their work. Some of the approaches to ethics are as follows, ethos is to choose ethical
standards to enable the legal and responsible conduct of objectives and the management, lawyers and
HR specialists etc. are the originators. Leadership and organization systematic methods are included for
education, audits, control and penalties. People are socialised with values in their behaviour. The
company values the standards of aspirations (including law). Managers and the lawyers are the staff.
Values, law, compliance systems are been educated. Integrated values into company systems, provide
guidance and consultation, identify and resolve problems and oversee compliances are some of the
activities that the employees will need to develop in them.
The sale of defective products without appropriate warnings in some countries and companies trading
internationally discover infringers between human rights and legal jurisdictions are some of the
differences between legality and ethicality. Code of ethics the term is interpreted in many different ways
its also known as code of conduct, principles of conduct, guideline, operating principles, company
objectives or a staff handbook.

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Ethical Problems Facing Managers

Modern ethical standards are imposed as a duty to guard, preserve and enhance the value of
enterprises for all who are touched by it including the general public. Some of the ethical problems that
managers face during practice are very numerous. The managers have a responsibility to ensure that
the public and company employees are protected from the dangerous areas like products and production
places. Dangerous working conditions or inadequate safety standards in products by cutting down the
cost as a result of increasing profits. Product liability litigation is a legal threat that it may be more
effective deterrent than general ethical standards. The Consumer Protection Act 2007 and EU legislation
generally is beginning to ensure that ethical standards are similarly enforced in the UK. There are also
ethical issues in corporate governance and finance places.
Ethical problems also are concerned about the payments by companies to officials particularly officials in
foreign countries who have the power to help or hinder the payers operations. Following are some of the
area of distinctions:
Extortion: Suitable payments should be made in case some countries officials intend to threat
companies to complete the closure of local operations.
Bribery: Payments taken for services which companies are not legally entitled for as services there
need to be a certain distinction to be drawn.
Grease Money: Deliberate stalling by officials lead multinational companies unable to obtain services
which they are legally entitled for so by doing cash payments to the right people may allow to oil the
machinery of bureaucracy.
Gifts: Giving gifts are an essential part in some cultures as it indicates a civilised way of negotiating in
some circumstances but for the westernised people this might look like an ethically dubious way. And
some point mangers may feel liberty in adopting such local customs.
Because of undesirable political policies managers are concerned about organizational activities which
will lead to this. There is a distinction between competing aggressively and competing unethically with
other companies.

Management Responsibilities
The management is not only responsible for the owners of an organization but also to the following
stakeholders as well:

Employees
Customers
Suppliers
Competitors
The Local Community

The General Public (the government)

Responsibilities to Employees
Good pay and working conditions and good training and development schemes should be converted into
practice and this should extend into:

Recruitment Policy
Redundancy and Retirement Policies

Recruitment: When recruiting new individuals to the organization this needs to be done carefully
because if the new recruitment is bad at the job and doesnt perform well then the company will have to
sack them. Careful recruitment methods should keep demoralising incidents like dismissals as its
inevitable in any large organization.
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Retirement: The staff who are retiring should get five years of service from the organization. The
organization should have good pension schemes. Some organizations have training courses and
discussions groups for employees who are going to retire by providing these facilities it could help them
plan their future time constructively.
Redundancies: This is a difficult problem that organizations face even though the organization shows
an ethical responsibility towards their employees in case the business has to close down and if the
employees lose their jobs at times like this the organization should try to redeploy many staff as possible
without making them redundant and necessary training should be provided to the staff so that they could
improve in their skills and use them in a new job.
Organizations should take steps to help get jobs for the staff who are redundant. Measures should
include:

Counselling individuals by giving them suggestions on what they might try to do.
Provide training or fund for training so that the employees could use other skills in another
organizations or industries.
Arrange job fairs for employers to come display the job offers they have and discuss job
opportunities with redundant employees.
Providing good redundancy payment which will help employees to set up a business for them or
which will help them survive until they find a new job for themselves.

Responsibilities to Customers
Ethical responsibilities towards customers are by providing a product or a service with desired product
quality that a customer expects and dealing fairly and honestly with the customers.

Responsibilities of Suppliers
Organizations responsibility towards its suppliers are expressed in terms of trading relationships.
The organization size would give a considerable power to the buyer and one ethical guideline would be
that the organization should not use its power unscrupulously for an example by forcing the supplier to
reduce the prices and threatening to withdraw the business
Another ethical guideline is to not delay the payments to the supplier beyond the agreed credit period as
the supplier rely on getting prompt payment accordance to the terms negotiated with the customer.
All information obtaining from the supplier and potential suppliers should be kept confidential.
All suppliers should be treated fairly by giving some potential new suppliers a chance to gain some
business and by maintaining long term relationships thatve been built up over the years with some
suppliers and suppliers who are established for a long time should not be replaced unless theres a
commercial advantage to the organization.

Responsibilities to competitors
Ethical responsibilities should exist towards competitors. Responsibilities regarding competitor are solely
directed by ethics. There is a law surrounding the conduct of fair trading, monopolies, mergers, anticompetitive practices, abuses of a dominant market position and restrictive trade practices.

Responsibilities towards the Wider Community

Organizations are a part of the community that serves and it should be responsible for upholding the
social and ethical values of the community. By contributing towards the wellbeing of the community for
an example by sponsoring local events and charities or by providing facilities to the community to use
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(eg. Kiddies playground). And also by responding constructively to complaints from local residents or
politicians (eg. Organizations delivery vehicles causing local traffic)

Public Relation and Corporate Image

Corporate Image
Corporate image means the publics attitude towards the company or the image of the company in the
minds of the general public or more specifically in the minds of the companys potential customers. The
public relations, advertising, and the experience and attitudes build up by customers over the years
makes it easier to promote the desired corporate image to the customers. There are many various
reasons to why an organization might attempt to build up a corporate image as follows:
Organizations may want to strengthen customer loyalty by corporate image of good quality products and
services for customer interests this could be fostered.
Creating customer awareness by developing a corporate image would be more appropriate than
strengthening customer loyalty. A corporate image is needed because when launching a new product to
the market the customers are not aware about the product and not wanting to buy the product either so
then a corporate image will give the identity the public needs.
Because of the corporate identity an employees attachment towards its company can be strong. Most of
the people like to work in a company that has a good public image in their minds (eg. Working for MAS
or John Keells Holdings).
To avoid unfavourable legislation to prevent adverse publicity or to prevent pressure from stakeholder
groups, companies develop a corporate image of social responsibility. Examples for this is:

Oil companies attempting to establish an image of caring for the environment for the future needs
of society.
The attempt British Nuclear Fuels to promote an image of deepest concern for the environment.
Fur traders attempting to counter the adverse publicity built up against them by the efforts of
animal rights activities.
The efforts of independents TV companies to promote an image of quality programme makers to
win a bid for franchises by strengthening their chances of winning.

To win public and political support companies wish to have favourable corporate image that they could
subsequently use.
A good corporate image have a variety of benefits for management to strengthen their customer loyalty.
Well established companies will encourage investors to put up more money into the business and the
suppliers to grant longer credit.

Environmental Pressure Groups

Environmental pressure groups have typically exerted pressure through three main types of activity.

Information based activity: Mounting political lobbies and publicity campaigns, gathering and
providing informations
Direct Action: From peaceful protests and the semi-legal activities of organizations such as
Greenpeace and Friends of the Earth varying through to environmental terrorism of more
extreme organizations.
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Partnership and Consultancy: To improve environmental performances groups aim to work with
businesses to pool resources.

Employees increase pressure on the businesses in which they work partly for their own safety and in
order to improve public image of the company.
Legislation growing pressure from the green or green influenced vote has led to mainstream political
parties taking these issues into the programmes. Now most countries have laws to cover land use
planning, smoke emissions, water pollution, and the destruction of animals and natural habitats.
Media Pressure mostly focuses on large scale disasters and technical issues such as global warming
and newspaper and television reports generate a wider spread on public awareness on the issues
concerned.

LO2
2.1
Discuss how different types of economic systems have
been emerged to allocate resources effectively. Discuss their
validity in modern business environment with examples.
An economic system defines how the various entities in an economy interact. People have defined
economic systems in various ways it includes government policies which is very important especially in
modern times. Ancient systems were pretty simple. Trade was done using systems like barter trade
which was very straight forward. There were few treaties and almost no real rules of engagement. You
only exchanged what you had for what you need. However in modern monetary economies the setting is
quite intricate. Huge established companies have a lot of influence in the way business is done. Treaties
and agreements are made every day and governments have made numerous laws to define trade and
warranting the need for a more comprehensive definition of what an economic system is in modern times
therefore an economic system can be described as an organized system in which a particular
government chooses to allocate goods and services in the country. Modern economic systems are about
more than just trade. They define the values of a society or a country as well as the political structure of
that society.
There are three basic questions in economic system. Which goods are to be produced? How are the
goods going to be produced? Who is going to get those goods and services that have been produced?
Effectively the structure of an economic system seeks to answer these questions. The system sets the
rules of play for all participants in an economy and defines how they are going to interact with each
other.
Basically there are three main economic systems. Many governments actually have their own peculiar
systems which suit their needs and their aspirations. But consensus has it that all these systems can be
classified into just three main ones and those three economic systems are as follows:

Market Economy
Command Economy (Planned Economy)
Mixed Economy

Market Economy
A market economy is an economic system in which decisions on investment, production
and distribution are based on supply, demand and prices of goods and services that are determined in
a free price system which guides solely by the aggregate interactions of a country's citizens and
businesses and there is little government intervention and central planning. Government decisions are
driven through most of the aspects of a countrys economic activity and this is the opposite of a centrally
planned activity. Market negotiations are mainly made by investment decisions and allocation of
producer goods these are some of the characteristics that defines market. Market economy assumes
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that the market forces such as supply and demand are the best determinants for a nation. Market
economies can range from hypothetical laissez-faire and free market variants to regulated
markets and interventionist variants. Most of the developed nations have mixed economies, most of the
market economic activities are allowed to driven by market forces. Engaging in government intervention
to a certain extend when its needed to provide stability.
Market economies doesnt exist in the pure form in reality as the society and the government regulates
them to varying degrees. The government should have a strong role in guiding both the market economy
and the inequality of the market produces. The most existing market economy is that of economic
planning or self-directed activity which is also classified as mixed market economy. The term free
market economy is sometimes used synonymously with market economy, but it may also refer to laissez
faire or free market anarchism.
In the means of production the market economies does not logically presuppose the existence of private
property. Various types of cooperatives, collectives and autonomous state agencies that acquire and
exchange capital goods and capital markets, utilizing a free price system to allocate capital goods and
labour are few things that a market economy consist of. Employee owned enterprises based on selfmanagement are some of the variations that are involved in market socialism, and also there are models
that involve public ownership of means of production where capital goods are allocated through markets.
In the global marketplace market economy is clearly the choice of today, although the amount of
government intervention is considered to be optimal for efficient economic operations.

Characteristics of Market Economy

Private Property: Most goods and services are privately owned. Owners can make legally binding
contracts to buy, sell, lease or rent their property. In other words, they have the right to get profit from
their property ownerships. However, there are exclusions to what is considered private property.
Freedom of Choice: In a free market place owners, businesses, consumers and workers are free to
produce, sell and purchase goods and services. Their only constraint is the price they are willing to buy
or sell for, and the amount of capital they have.
Motive of Self-interest: Paying the least for the goods and services consumers need the market is
driven by everyone trying to sell their goods or services to the highest bidder. Although the motive is
selfish, it works to the benefit of the economy over the long run. Because of the auction system that fairly
prices all goods and services, accurately depicting true supply and demand at any given point in time.
Competition: The market economy uncourageous competition. Whatever the type of business you have
competition is faced in any form. More competition you face the more you have to monitor the relation of
the pricing you have with your competitors. Because of the competitive pressure keeps prices moderate,
and ensure that goods and services are provided most efficiently. That's because, as soon as demand
increases of a particular item, prices rise as a result of law of demand. As competitors see that there is a
need of additional profit to be made they start production adding it to the supply. This lowers prices to a
level where only the best competitors remain. This competitive pressure also applies to workers, who are
competing with each other for the highest paying jobs, and consumers, who are competing for the best
product at the lowest price. By developing marketing campaigns we could differentiate ourselves from
our competitors so that we can carve out our own niche in the marketplace.
System of Markets and Prices: A market economy is completely dependent on an efficient market in
which to sell goods and services. In an efficient market all buyers and sellers have equal access and
same information upon which to base their decisions. Prices rise and fall freely depending purely on the
laws of supply and demand.
Limited Government: The role of government is simply to ensure that the markets are open and
working. For example, it is in charge of national defence so no other country can destroy the markets. It
also makes sure that everyone has equal access to the markets. For example, government exerts
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penalties on monopolies, which unfairly restrict competition. The government watches to make sure no
one is unfairly manipulating those markets and that all information is distributed equally.

Market Economy Advantages

Since a market economy allows the free interplay of supply and demand it also ensures that most
desired goods and services are produced. That's because consumers are willing to pay a higher price for
the things they want the most. Businesses will only produce those goods that they could gain profit from.
Good and services are produced in the most efficient way possible. The most efficient producers will
receive more profit than less efficient ones.
Innovation is rewarded and producers will come up with innovative and much more efficient methods of
production. Innovation of new products will meet the needs of consumers in better ways than existing
goods and services. This innovation will spread to other competitors so they too can gain more profits.
The businesses and individuals who are more efficient and innovative will accumulate more capital. They
can invest this in other efficient and innovative companies giving them a leg up and leading to an overall
higher quality of production.

Market Economy Disadvantages

A market economy functions through competition. However there are many people in a society who are
at a natural competitive disadvantage such as elders, children and mentally or physically challenged
people. In addition the caretakers of those people are also at a disadvantage because their energies and
skills are taken up with caretaking not competing. Even though a society based on a pure market
economy must decide whether it's in a larger self-interest to set aside resources to make sure that they
meet their needs or whether to let them just fall by the wayside.
A market economy rewards those who are good at being competitive. Therefore the society reflects the
values of those people and organizations. This explains why a market economy may produce private jets
for some while others starve and are homeless.

Command Economy (Planned Economy)

A planned economy is an economic system in which inputs are based on direct allocation. Economic
planning may be carried out in a decentralized distribution or centralized manner depending on the
specific organization of economic institutions. An economy based on economic planning (either through
state association of worker cooperatives or another economic entity that has jurisdiction over the means
of production) appropriates its resources as needed so that allocation comes in the form of internal
transfers involving the purchasing of assets by one government agency or firm by another. In a
traditional model of planning decision making would be carried out by workers and consumers on the
enterprise level.
Planned economies are held in contrast to unplanned economies such as the market economy and
proposed self-managed economy where production, distribution, pricing, and investment decisions are
made by autonomous firms based upon their individual interests rather than a macroeconomic plan.
Less extensive forms of planned economies include those that use indicative planning as components of
a market based or mixed economy in which the state employs "influence, subsidies, grants, and taxes
but does not compel." This latter is sometimes referred to as a "planned (Command) market
economy". In some instances the term planned economy has been used to refer to national economic
development plans and state directed investment in market economies.

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Planned economies are usually categorized as a particular variant of socialism and have historically
been associated with Marxist Leninist states and the Soviet economic model. But some argue that the
Soviet economic model did not actually constitute a planned economy but instead a comprehensive and
binding plan did not guide production and investment therefore the term administrative command
economy emerged as a more accurate designation for the economic system that existed in the former
Soviet Union and Eastern bloc highlighting the role of centralized hierarchy decision making in the
absence of popular control over the economy.

Characteristics of a Command Economy

The government creates a central economic plan for all sectors and regions of the country. It starts with
a five year plan to set the overriding economic and societal goals. The master plan is broken down into
shorter term plans to convert the goals into actionable objectives.
The government allocates all resources according to the central plan. The goal is to use the nation's
capital, labour and natural resources in the most efficient way possible.
That eliminates unemployment by promising to use each person's skills and abilities to their highest
capacity.
The central plan sets the priorities for the production of all goods and services. These include quotas and
price controls on all goods and services. Its goal is to supply enough food, housing, and other basics to
meet the needs of consumers in the country. It has social priorities such as mobilizing for war
or generating robust economic growth.
The government owns the monopoly business in industries deemed essential to the goals of the
economy. That usually includes finance, utilities and automotive. There is no domestic competition in
these industries.
The government creates laws, regulations and directives to implement the central plan. Businesses
follow the plan's production and hiring targets instead of responding to the free market.

Command Economy Advantages

Planned economies mobilize economic resources quickly, powerfully, and on a large scale.
They can execute massive projects, create industrial power, and meet social goals. They aren't slowed
down by lawsuits from individuals or environmental impact statements.
Command economies can wholly transform societies to conform to the government's vision. Often the
transition is violent. The previous leadership is disbanded, exiled, or executed. The new government
nationalizes private companies. Its previous owners were sent to "re-education" classes. All the workers
were assigned new jobs according to the government's assessment of their skills.

Command Economy Disadvantages

This rapid mobilization often means command economies mow down other societal needs. For an
example workers are often told what jobs they must fulfil and discouraged from moving. However people
won't ignore their needs for long. They often develop a shadow economy or black market to buy and sell
the things the command economy isn't producing. The efforts of leaders to control this market can
ultimately weaken the support for the central planning authority.
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Instead of leading to efficiency command economies often produce too much of one thing and not
enough of another. It's difficult for the central planners to get up to date information about consumer
needs. Also prices are set by the central plan and so can't be used to measure or control demand.
Instead rationing often becomes necessary.
Command economies are not good at stimulating innovation. Businesses focus on following directives
and are discouraged from making any autonomous decisions.
Centrally planned economies also have trouble producing the right exports at global market prices.
Planners have a hard time coordinating with each other to meet the needs of the domestic market.
Meeting the needs of international markets is just too complex.

Mixed Economy
A mixed economy is variously defined as an economic system consisting of a mixture of
either markets and economic planning, public ownership and private ownership or free
markets and economic intervention. But in most cases "mixed economy" refers to market
economies with strong regulatory oversight and governmental provision of public goods although some
mixed economies also feature a number of state run enterprises.
In general the mixed economy is characterised by the private ownership of the means of production the
dominance of markets for economic coordination with profit seeking enterprise and the accumulation of
capital remaining of fundamental driving force behind economic activity. But unlike a free market
economy the government would wield indirect macroeconomic influence over the economy
through fiscal and monetary policies designed to counteract economic downturns and capitalism's
tendency toward financial crises, unemployment and growing income and wealth disparities along with
interventions that promote social welfare. Subsequently some mixed economies have expanded in
scope to include a role for indicative economic planning and large public enterprise sectors.
The mixed economy is defined as a form of capitalism where most industries are privately owned with
only a minority of public utilities and essential services under public ownership. In the post war era
European social democracy became associated with this economic model.
Economies ranging from the United States to Cuba have been catalogued as mixed economies. The
term is also used to describe the economies of countries which are referred to as welfare states such as
Nordic countries. Governments in the mixed economies often provide environmental protection,
maintenance of employment standards, standardized welfare system and maintenance of competition.
Mixed economies are supported by people of various political persuasions. Supporters view on mixed
economy as a compromise between state socialism and free market capitalism that is superior in net
effect to either of those. Around the world the most prosperous countries with the highest
average standard of living tend to have mixed economic systems with democratically elected
governments.

Characteristics of Mixed Economy

Co-existence of private and public sector: In public sector industries like defence, power, energy,
basic industries etc. are set up. And in private sector industries all the consumer goods industries,
agriculture, small scale industries are developed. The government encourages both the sectors to
develop simultaneously.
Personal Freedom: Under mixed economy there is full freedom of choice of occupation. Although the
consumer doesnt get the complete liberty but at the same time the government can regulate the prices
in public interest through public distribution system.
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Private property is allowed: In the mixed economy it must be remembered that there must be equal
distribution of wealth and income. It must be ensured that the profit and property doesnt concentrate in a
few pockets.
Economic Planning: In a mixed economy the government is always trying to promote economic
development of the country. Because of this economic planning is adopted. Thus economic planning is
very essential under this system.
Price mechanism and controlled price: In this system price mechanism and regulated price operate
simultaneously. In the consumer goods industry price mechanism is generally followed. But in case of a
big shortages or during national emergencies prices are controlled and public distribution system has to
be effective.
Profit motive and social welfare: In the mixed economic system we could find both profit motive like
capitalism and social welfare just like in a socialist economy.
Check on economic inequality: The government take several measures to reduce the gap between
rich and poor through progressive tax on income and wealth. The subsidies are given to the poor people
and also job opportunities are provided for them. Other steps like concessions, old age pension, free
medical facilities and free education are also taken to improve the standards of poor people. However all
these helps to reduce economic inequality.
Control of monopoly power: The government take huge initiatives to control monopoly practices
among the private entrepreneurs through effective legislation measures. As well as government can also
fake over these services in the public interest.

Advantages of a Mixed Economy

It can efficiently allocate goods and services when its needed by allowing prices to measure supply and
demand.
It also rewards the most efficient producers with the highest profit ensuring that customers are getting
the best value for their rupee.
It also encourages innovation that meets customer needs more creatively, cheaply or efficiently.
The mixed economy automatically allocates capital to the most innovative and efficient producers. In
return they invest this capital in more business like them.

Disadvantages of a Mixed Economy

A mixed economy can also take on all the disadvantages of the other types of economies depending on
which characteristics are emphasized. If it has too much free market it can reward the competitive
members of society and leave others without any government support. Central planning might do
extremely well in mobilizing forces for defence creating government subsidized monopoly or oligarchy
system. This could also put the country into debt slowing down economic growth in the long run. But the
businesses that are already successful can lobby the government for more subsidies and tax breaks.
The government role of protecting the operation of the free markets might not have enough regulation
and ultimately taxpayer funded bailouts of businesses that took on too much risk.

What to produce?
This decision matters for both government and the private sector. The government has to decide what
goods and services to provide and how much of each goods and services to provide. As we know more
27

of one thing generally means less of another (opportunity cost) so some difficult decisions arises at this
point.
The private sector also has to decide what to produce but this will tend to be decided by the market.
Firms will examine demand and try to produce goods where there is the greatest level of demand. This
question is then answered by the market forces of demand and supply.

For whom to produce?

This look at the distribution of the goods and services we produce. Factors of production earn incomes.
These incomes can be used to purchase goods and services. So the higher the level of income is the
more goods and services can be demanded. In the market sector of the economy this question is
therefore decided by relative rewards to factors of production. Different criteria will be applied in the case
of government provided services such as Free State education.

How to produce?
Firms will decide it on the basis of cost. Their aims as we have seen is to make a profit in fact the
maximum profit possible. To help them do this they need to produce as efficiently as possible. The more
efficiently they produce the more lowly the cost of production is going to be. So how much they use of
each factor of production will depend on how much that factor costs and how productive it is. If labour is
cheap but nevertheless nearly as productive as more expensive machinery then the firms will
choose labour intensive production. If machines are more productive per rupee spent then they may
choose capital intensive production.
Economies approach these questions in different ways. Some may choose to have a large government
sector (perhaps even total state control) whereas other may choose to leave things almost totally to the
private sector and markets. This means that economists consider three different types of economy:
mixed economies, free market economies and centrally planned economies.

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2.2
Assess the impact of fiscal and monetary policy on
business organizations and their activities.
Tools of Fiscal Policy
The government has two primary fiscal tools to influence the economy. They are revenue tools and
spending tools.

Revenue tools
Revenue tools refer to the taxes collected by the government in various forms. Taxation can be direct or
indirect. Direct taxes are levied on the income or wealth of individuals and firms. This includes income
tax, wealth tax, estate tax, corporate tax, capital gains tax, social security tax, etc.
Indirect taxes are levied on goods and services. This includes sales tax, value added tax, excise duty
etc.

Spending Tools
Spending tools refer to increasing or decreasing government spending or expenditure to influence the
economy. Government spending can be in the form of transfer payments, current spending and capital
spending.
Current spending includes expenditure on essential goods and services such as health, education,
defence etc.
Capital spending is the public investment in infrastructure such as roads, hospitals, schools etc.
The above two also include subsidy or direct provision of merit goods and public goods which would
otherwise be underprovided.
Transfer payments are the redistribution of income from taxpayers to those requiring support for an
example unemployment benefits. It also includes interest payments on government debt.

Fiscal policy tools have several advantages.

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Spending tools enable services such as defence to benefit everyone in the country and build
infrastructure that propels growth. Spending tools also ensure a minimum standard of living for the
residents. Subsidies in research and development also help in future economic growth.
Taxes help government in meeting their fiscal needs. By levying high indirect taxes. The government can
also discourage use of items such as tobacco and alcohol.

Tools of Monetary Policy

Monetary policy is used by the central bank of the country to influence the money supply and interest
rates in the economy to stimulate demand, control inflation, and stabilize currency. There are three
primary tools that a monetary policy uses.

Money supply
The first tactic manages the money supply. This mainly involves buying government bonds (expanding
the money supply) or selling them (contracting the money supply). In the Federal Reserve System these
are known as open market operations because the central bank buys and sells government bonds in
public markets. Most of the government bonds bought and sold through open market operations are
short term government bonds bought and sold from the Federal Reserve System member banks and
from large financial institutions. When the central bank disburses or collects payment for these bonds it
alters the amount of money in the economy while simultaneously affecting the price (and thereby
the yield) of short term government bonds. The change in the amount of money in the economy in turn
affects interbank interest rates.

Money demand
Demand for money like demand for most things is sensitive to price. For money the price is the interest
rates charged to borrowers. Setting banking system lending or interest rates in order to manage money
demand is a major tool used by central banks. Ordinarily a central bank conducts monetary policy by
raising or lowering its interest rate target for the interbank interest rate. If the nominal interest rate is at or
near zero the central bank cannot lower it further. Such situations are called a liquidity trap can occur for
an example during deflation or when inflation is very low.

Banking risk
Managing risk in a banking system. Banking systems use fractional reserve banking to encourage the
use of money for investment and expanding economic activity. Banks must keep banking reserves on
hand to handle actual cash needs but they can lend an amount equal to several times their actual
reserves. The money lent out by banks increases the money supply and too much money (whether lent
or printed) will lead to inflation. Central banks manage systemic risks by maintaining a balance between
expansionary economic activity through bank lending and control of inflation through reserve
requirements.
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The Impact of Fiscal and Monetary Policy on Business Organizations

Expansionary Fiscal Policy

Expansionary fiscal policies are laws passed by the legislative and executive branches to increase
government spending or on low taxes often intending to relieve the economy from a recession. When
taxes decrease for individuals the government is hoping to boost consumerism to help businesses and
the overall economy. Government spending contributes to an increase in the nation's growth rate or
gross domestic product. Less restrictive legislation on business operations contributes to increased cost
savings. Legislation passed to fund job growth, stimulus packages and business grants aids business
growth because of a resulting increase in consumer spending and business investment.

Contracting Fiscal Policy

Contracting fiscal policies are enacted by congress and the president to increase government income
while the economy is doing well and to prevent an economic bubble by stabilizing the peak of a booming
economy. When taxes are increased people have less money to spend on consumer goods. When
government spending is reduced programs and jobs are cut. Then the unemployed will seek jobs from
businesses. Sales will decline because of unemployment and higher taxes on consumers. Corporations
will also experience less government sales for military equipment and other government goods.

Increasing Monetary Policy

Expansionary monetary policy is another government tool to boost the economy through lower interest
rates and a larger money supply. The Federal Reserve can directly decrease interest rates or purchase
U.S. bonds from the Treasury to increase the money supply. As the money supply rises the government
accumulates more money without increasing taxes. And when interest rates decrease businesses and
individuals can take advantage of cheaper loans and credit rates to help pay for expensive items.
Inflation would raise the price of goods but the overall effect would be a boost in consumer activity from
business investment, government projects and individual purchases.

Decreasing Monetary Policy

Monetary policy contractions are used to prevent an economic bubble. The Federal Reserve raises the
interest rate to control the rate of money being lent and instead sells U.S. bonds for Federal Reserve
31

notes and decreases the overall money supply. This will reduce inflation but will cut spending. As the
bank's ability to lend money declines businesses and people will find it harder to get a loan. People will
make less major purchases and spend less using credit cards. Government and business investment will
also decline because of this reason.

2.3
Management of responsibilities is a critical issue of a
business. Describe
An organization cannot start any organizational operations without implementing organizational
responsibilities. To ensure that the organization operates efficiently, effectively and benefits most people
at all times by balancing the approach for a responsible organization. To achieve the organizations
stated goals the organization needs to effectively represent rationally ordered instruments. Uniformed
guidelines generally followed by organizations, but the responsibilities varies to different individual
organizations. These responsibilities could differ from each organization to organization due to different
types of organization and the manner in which way it functions. Following are the responsibilities of an
organization:

Social Responsibilities
Environment Responsibilities
Ethics and Business
Management Responsibilities
Public Relations and Corporate Image

Social Responsibilities
Social responsibility means an obligation that organizations have towards people and environment in
which the organization operates. The management is concerned with the way the enterprise will interact
with the environment, as the actions of the enterprise will have to face social consequences thatll effect
different groups like stakeholders. No organization wishes to be considered as a socially irresponsible
organization but tries to act responsible on social issues. Social responsibility is expected from all types
of different organizations:
Local Government: Provides services to the local community by trying to preserve or improve the
character of that community by council tax or by business rate payers but at a fair cost.
Universities and Schools: Students who has good abilities and qualifications will prove that their
beneficial to the society. Better emphasis should be given to vocational training for students.
Pollution Control: Industrial organizations are developing a commercial process for re-cycling waste
materials. Hospitals and schools exist because healthcare and education are seen as desirable social
objectives by the government.

Stakeholders
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A stake is what the company does, shareholders are once who owns the business but an organization
also has suppliers, managers, workers and customers, and the business depends on the relationship
that the organization and these groups share with each other. When theres a need for a compromise or
a balance is required each of these groups have their own objectives.
Shareholders: The management of an organization is considered to have only one responsibility and
that is to maximise wealth for the organizations shareholders. There are two reasons in favour of this:

Since the shareholders owns the business the assets of the company are shareholders property.
Disposal of business assets, the management has no moral right on this as it effects the reducing
of the return available to the shareholders. When taking decisions for the beneficial of the
company shareholders will not be in favour with the management, as most of the shareholders
large institutions like pension funds, so their own duties adversely affect the resources on
activities that do not make profit.
Managements job is to maximise wealth as it benefits the society, maximising wealth increases
the state tax revenues that disburse on socially desirable objectives. Members of the society has
a disadvantage when theres a trickle down when trying to maximise profit. Most of the shares are
owned by pension funds because of this most of the beneficiaries may not be wealthy.

This argument has different assumptions there are two assumptions for this:

The legal ownership is paramount over all the other interests in a business and there are a few
legal or moral rights over the wealth.
The second one is that the businesses relationship with the wider social environment is with the
economy.

Organizations are rarely controlled effectively, shareholders are passive investors. Social responsibility,
forced or voluntary these are ways of recognising manipulative markets who are mostly large
corporations. The public pays for roads, infrastructure, education and health in which the businesses
benefits, the public pay a higher price although the businesses pay taxes they receive government
support. Organizations producers two outputs:

Goods and Services.

The social consequences of its activities (eg: traffic, population and stress) which are inflicted on
the wider population.

Employees: Employees are internal stakeholders, their labour keeps the organizations operational
existence and as citizens, their members of a wider society which is why the organization exists.
Employees value the certainty and regularity of wages thinking that employing organizations honour the
contact of employment. Respect for workplace and work practices, health and safety, handling
equipment or hours worked these all implies as social responsibilities.
Provision of a coherent career and training structure so that people can better themselves these are also
social responsibilities of an organization towards their employees. Training employees are beneficial as
its level of workforce skills effects the countrys economy productivity. Workplace crches are great
assistance for working women but employers will not introduce them without consequent commercial
benefits. If the cost of labour turnover is higher than the cost of running workplace crches then if the
labour turnover has reduced by a workplace crches if so then the crches can be financially justified.
Social responsibility towards the organization is constrained by the law thinking that it could benefit in
encouraging the employees loyalty and skills.

Customers: The customers pay for the output of goods and services of an organization. Public attitude
towards some consumer goods sector to get direction from the government and lobby groups thatll
make an environmental impact of an organization activities. The reduction of CFCs in aerosol cans have
led suppliers to introduce rages of goods that are environmental friendly.
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Suppliers: Social responsibilities of multinational companies are distributed over several countries, but
only the commercial objectives are override if either the inbuilt culture of the organization or the voice of
public opinion is strong in the market. A supplier of high technological items will not allow to re-export the
goods as the enemies of the nation are where the supplier is based this is called a condition of sale.
Professional Bodies: Controlling is done by the management where members of the professional body
have standards of ethics and conduct.
Neighbours: To prevent environmental pollution including noxious gas, noise, traffic disturbance efforts
should be made.
Elected Authorities: Political representatives are external stakeholders they can affect the management
in different ways, as already been mentioned by legislation, the climate of public opinion by influencing
and by trying to pursue commercial organizations to follow particular line or policy.

There are different assumptions about society and about the relationship between individuals
and organizations

The public is a stakeholder in a business and itll succeed because of the wider society and by
giving charity is one way to encourage the relationship.
By giving charitable donations and artistic sponsorships could be taken as a useful medium of
public relations by doing this itll make a good impact on the business. This is a way of promoting
like advertising by doing it this way we could bring consumer awareness to the business.

Objectives and Responsibilities

Ansoff (1987) suggested that a company has a number of different objectives:

The total resource conversion process is a primary objective which is financially or economically
aimed at the efficiency and the effectiveness of the organization.
Modifying management behaviour is social or non-economical these are secondary objectives,
this is a way of interacting socially among individual objectives of different stakeholders.
There are two more other factors that influence management behaviour other than economic and
non-economic objectives:
c. Responsibilities: Internal guidance and control mechanism are not a form of obligations
that company undertakes but charitable donations and contributions to the life of local
communities are responsibilities that theyll undertake.
d. Boundaries: these restrict the managements freedom of taking any action because of
government legislations (no pollution, health and safety at work place etc.) and
agreements with trade unions.

Social and ethical objectives are pursue by many organizations to make products that last a certain
number of years to prevent health hazards by controlling pollution and to co-operate with the authorities
to identify these in the products sold.

Environmental Responsibilities
Legislation and Regulation
The law on environmental protection is mainly covered in the Environmental Protection Act 1997
(EPA) and the Water Resources Act 2007
The EAP act features the concept of integrated pollution control (IPC) the aims of this is to prevent
pollution and to ensure that the businesses are conducted with minimum risk to human health and the
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environment. Advance technical solutions offering the best practical options to encourage the adoption of
environment. The environment can sustain the damages of pollution at some point but it also ensures
that the polluter pays for the damages caused. IPCs main objectives are to minimise the release of
pollution and to neutralise the harmful effects and to develop a pollution control for the environment. The
chief regulatory bodies under IPC is Her Majestys Inspectorate of Pollution (HMIP) for air, water and
land which is being polluted mostly by industrial processes. The Environment Agency and Local
Authorities are in charge of preventing the other sources of pollution.
Another air pollution act is Clean Air Act 1993, which consolidates earlier legislation (introduced after
some spectacular London smogs of the 1950s)

Waste
Handling and disposal of waste has been incorporated in the English Law now, waste management is
encouraging firms to:

Prevent or reduce waste production

Develop products that do not harm the environment
Develop appropriate techniques for disposing of dangerous substances
Use recycling methods
Use waste as a source of energy

Waste mustnt be treated, disposed of or kept in a way where it pollutes the environment or harm human
health. Organization are enforced to pay a landfill tax on hazardous waste through a licensing system
and to prevent toxic waste from being simply dumped on poorer countries there should be a control
over the import or export of waste.

Water
The Water Resource Act 1991 and the Water Industry Act 1999 were brought in when the UK water
industry was privatised and there are number of offences relating to discharges into controlled water.

Ecological issues relevant to business as follows:

Resource Depletion
Availability of raw materials through damage soil, water, trees, plant life, energy availability, mineral
wealth, animal and marine species may influence business operations through resource depletion.

Genetic Diversity
Firms like pharmaceuticals, biotechnology, agriculture and food industries are relevant for genetic
diversity. Genetic resources can be drawn by developing new strains of plants, new breeds of animals
and new types of medicines that depends on the availability of wild species. Developing high-yield
disease resistant plants for an example wild species are a critical resource, but organically produced
foods are becoming more profitable and the consumers are willing to pay a premium price.

Pollution Concerns
Pollution concerns are the centre of most who worries about the environment.

Businesses are under pressure curtail on activities like water table, the sea and the ocean,
quality of drinking water has a massive increase in the size of the bottled water in UK. The
success of bottle water in UK is simply a triumph of marketing.
35

As a result of motor car exhausts and impact of the road vehicles quality of air is a much
discussed topic. This may be an issue of bearing upon distribution policies.
The pollution of land through landfill policies and the long-term damages done by the industries to
the land it occupies are required to change some of the policies during the next few years.
Noise pollution is also an important fact this has an impact on the operations of all forms of
businesses.

To remedy these problems, the polluter pays principle was adopted by the OECD (Organization for
Economic Co-operation and Development) in the early 1970s and its been broadly accepted.

Waste
Whether its nuclear waste from power stations or industrial or domestic waste in landfill sites, waste is
also in the centre of attention. The national governments target for legislation has become handling of
waste. Waste management has become the new subject to discuss about even in international
agreements arrived at governments concerned, for an example dumping waste on marine life and on the
beaches in many different countries are being discussed to bring new waste management regulations.

Climate Change
Effects of excess carbon dioxide in the atmosphere is a debatable term when unnatural weather is
produced. With average world temperature increasing and sea levels rising this could cause disastrous
effects on agriculture and flooding of low-lying areas. Modifications needed to production processes and
consumption patterns which are been identified as contributory factors.
Kyoto Treaty of 1997 was an attempt to control pollution on the environment by emission of Greenhouse
gases particularly carbon dioxide which have been linked to climate change. Existence of economic and
environmental factors carbon credit could be offered to the countries to exchange it with each other and
some countries will increase the overall emissions and the system is open for abuse. The emphasis is
given to Improve on infrastructure and land use patterns rather than carbon emission.

Energy Resources
Concerned over climatic changes, energy resources and environmental impacts on energy usage.
Usage of energy has been controlled less of potential than seems possible for an example coal gives
only up to 40% of its potential into electricity. In the counties of the developed world energy saving
programmes are underway, development of plants and projects on combined heat and power systems
serving neighbourhoods or industrial plants. Certain scarce on potential wasteful or dangerous materials
for instance carbon tax will discourage the demand for new energy efficient products.

Ethics and Business

Ethics is a code of moral principles that people follow in respect for what is right or wrong, ethical
principles are not enforced by the law but law can incorporate moral judgment.

Business Ethics
Ethical codes are rooted in a wider value system to know what is right or wrong, following are conflicting
views and continued debates:

Criteria for distribution of profit

Relative pay and rewards for employees, directors and junior staff
Decisions about priorities for an example in respect of public expenditure
36

Loan chargers eg. Payment of interest to lenders of money

The sale of harmful products eg. Tobacco

Ethical dimension on how the organization and the people working in that organization brings their own
values, personal values like religious and non-religious beliefs, political opinions and personality etc. and
even professional values like code of ethics and medical ethics etc. Ethical decisions are important as
penalties in organizations now,
A compliance based approach: The letter of law and that violations are prevented, detected and
punished in organizations and the legal consequences of unethical behaviour define the idea of social
responsibility that affects the business this also avoids problems like bribery. Some of the approaches to
ethics are as follows, ethos is knuckled under to external standards and the objective is to keep it to the
law, lawyers are the originators. Methods like education, audits, control and penalties reduce employee
discretion. People have solitary self-interested behaviour. The staff are lawyers and the standard set is
also the law standard. Law education is given with compliance system. Activities are develop the
standards, train and communicate, handle reports of misconduct, investigate, enforce, oversee
compliance.
Integrity based approach: Promoting ethical behaviour in an organization makes assumptions which
people go about their work. Some of the approaches to ethics are as follows, ethos is to choose ethical
standards to enable the legal and responsible conduct of objectives and the management, lawyers and
HR specialists etc. are the originators. Leadership and organization systematic methods are included for
education, audits, control and penalties. People are socialised with values in their behaviour. The
company values the standards of aspirations (including law). Managers and the lawyers are the staff.
Values, law, compliance systems are been educated. Integrated values into company systems, provide
guidance and consultation, identify and resolve problems and oversee compliances are some of the
activities that the employees will need to develop in them.
The sale of defective products without appropriate warnings in some countries and companies trading
internationally discover infringers between human rights and legal jurisdictions are some of the
differences between legality and ethicality. Code of ethics the term is interpreted in many different ways
its also known as code of conduct, principles of conduct, guideline, operating principles, company
objectives or a staff handbook.

Ethical Problems Facing Managers

Modern ethical standards are imposed as a duty to guard, preserve and enhance the value of
enterprises for all who are touched by it including the general public. Some of the ethical problems that
managers face during practice are very numerous. The managers have a responsibility to ensure that
the public and company employees are protected from the dangerous areas like products and production
places. Dangerous working conditions or inadequate safety standards in products by cutting down the
cost as a result of increasing profits. Product liability litigation is a legal threat that it may be more
effective deterrent than general ethical standards. The Consumer Protection Act 2007 and EU legislation
generally is beginning to ensure that ethical standards are similarly enforced in the UK. There are also
ethical issues in corporate governance and finance places.
Ethical problems also are concerned about the payments by companies to officials particularly officials in
foreign countries who have the power to help or hinder the payers operations. Following are some of the
area of distinctions:
Extortion: Suitable payments should be made in case some countries officials intend to threat
companies to complete the closure of local operations.
Bribery: Payments taken for services which companies are not legally entitled for as services there
need to be a certain distinction to be drawn.
Grease Money: Deliberate stalling by officials lead multinational companies unable to obtain services
which they are legally entitled for so by doing cash payments to the right people may allow to oil the
machinery of bureaucracy.
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Gifts: Giving gifts are an essential part in some cultures as it indicates a civilised way of negotiating in
some circumstances but for the westernised people this might look like an ethically dubious way. And
some point mangers may feel liberty in adopting such local customs.
Because of undesirable political policies managers are concerned about organizational activities which
will lead to this. There is a distinction between competing aggressively and competing unethically with
other companies.

Management Responsibilities
The management is not only responsible for the owners of an organization but also to the following
stakeholders as well:

Employees
Customers
Suppliers
Competitors
The Local Community

The General Public (the government)

Responsibilities to Employees
Good pay and working conditions and good training and development schemes should be converted into
practice and this should extend into:

Recruitment Policy
Redundancy and Retirement Policies

Recruitment: When recruiting new individuals to the organization this needs to be done carefully
because if the new recruitment is bad at the job and doesnt perform well then the company will have to
sack them. Careful recruitment methods should keep demoralising incidents like dismissals as its
inevitable in any large organization.
Retirement: The staff who are retiring should get five years of service from the organization. The
organization should have good pension schemes. Some organizations have training courses and
discussions groups for employees who are going to retire by providing these facilities it could help them
plan their future time constructively.
Redundancies: This is a difficult problem that organizations face even though the organization shows
an ethical responsibility towards their employees in case the business has to close down and if the
employees lose their jobs at times like this the organization should try to redeploy many staff as possible
without making them redundant and necessary training should be provided to the staff so that they could
improve in their skills and use them in a new job.
Organizations should take steps to help get jobs for the staff who are redundant. Measures should
include:

Counselling individuals by giving them suggestions on what they might try to do.
Provide training or fund for training so that the employees could use other skills in another
organizations or industries.
Arrange job fairs for employers to come display the job offers they have and discuss job
opportunities with redundant employees.
Providing good redundancy payment which will help employees to set up a business for them or
which will help them survive until they find a new job for themselves.

Responsibilities to Customers
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Ethical responsibilities towards customers are by providing a product or a service with desired product
quality that a customer expects and dealing fairly and honestly with the customers.

Responsibilities of Suppliers
Organizations responsibility towards its suppliers are expressed in terms of trading relationships.
The organization size would give a considerable power to the buyer and one ethical guideline would be
that the organization should not use its power unscrupulously for an example by forcing the supplier to
reduce the prices and threatening to withdraw the business
Another ethical guideline is to not delay the payments to the supplier beyond the agreed credit period as
the supplier rely on getting prompt payment accordance to the terms negotiated with the customer.
All information obtaining from the supplier and potential suppliers should be kept confidential.
All suppliers should be treated fairly by giving some potential new suppliers a chance to gain some
business and by maintaining long term relationships thatve been built up over the years with some
suppliers and suppliers who are established for a long time should not be replaced unless theres a
commercial advantage to the organization.

Responsibilities to competitors
Ethical responsibilities should exist towards competitors. Responsibilities regarding competitor are solely
directed by ethics. There is a law surrounding the conduct of fair trading, monopolies, mergers, anticompetitive practices, abuses of a dominant market position and restrictive trade practices.

Responsibilities towards the Wider Community

Organizations are a part of the community that serves and it should be responsible for upholding the
social and ethical values of the community. By contributing towards the wellbeing of the community for
an example by sponsoring local events and charities or by providing facilities to the community to use
(eg. Kiddies playground). And also by responding constructively to complaints from local residents or
politicians (eg. Organizations delivery vehicles causing local traffic)

Responsibilities of Managers
Hire great people: Who are talented and passionate about their jobs. Managers often take short-cuts
when it comes to sourcing, screening, and selection or they overly rely on HR or recruiters instead of
seeing selection as a critical part of his/her job.
Performance management: Is a broad category and covers the people management aspect of a
managers job. It includes clarifying and setting expectations and goals, coaching, measuring and
monitoring employees work, addressing performance problems, providing feedback and recognition,
coaching, developing, training, and doing performance reviews. Depending on the number of direct
reports a manager has this can take up the majority of a managers week.
Team development: In addition to individual employee management and development a manager is
responsible for the development of a high performing team. An interdependent team is usually more
productive than a group of individuals working independently.
Setting overall direction: A manager sets the long and short term direction of the team or organization.
This includes the vision, mission, goals and objectives in other words strategy. Strategic managers
spend a lot of time thinking about mission and direction always on the lookout for the need to change
priorities or reinvent. There are others involved including their team members but they take ultimate
responsibilities for final decisions.
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Being an important and supportive team member: Patrick Lencioini author of the bestselling book
The Five Dysfunctions of a Team, says that team number one should be your managers team not
your own. He says We all know that if there is any daylight between executive team members, it
ultimately results in unwinnable battles that those lower in the organization are left to fight.
Doing unique work that no one else could or should do: Every manager no matter what level has
their own set of individual contributor responsibilities. The higher the level the fewer there are but even
CEOs have to do things that just cannot be delegated. However managers should be very careful to
make sure that they are really doing work and that they do work what they are really good at or dont
trust their team to do.
Manage resources: Managers have to make sure the team has the resources they need to do them
work while at the same time making sure that a team does not overspend or waste resources.
Improve processes and quality: While individual should take responsibility for the quality of their own
work managers are usually in the best position to see the overall workflow and make adjustments and
improvements.
Self-development: Managers are not just responsible for the development of their employees and
teams they are responsible for their own development as a manager as well. That includes taking on
stress, developmental assignments, participating in management training, seeking mentors, asking for
feedback and reading about management and leadership. By doing so they are role modelling
continuous improvement.
Communicate information: They make sure information is flowing from above, sideways and upwards.
They are never the bottleneck in the information highway.

Responsibilities of Employee
Technical Expert: Employees and business partners may have the role of technical expert. They must
be able to perform the work properly. This means that they play the role of individuals with all the
requisite skills and competencies to undertake their various tasks. In the role of technical expert both
employees and business partners incur several responsibilities such as ensuring that they perform
according to mission, goals, objectives and expectations of the organization.
Team Playing: Employees and business partners work in a team. As such they have the responsibility of
contributing to the success of the team. Employees and business partners fulfil this responsibility by
attending meetings, contributing to decision making and problem solving and participating in
organizational projects. Additionally through task delegation business partners and employees are able
to accomplish more tasks effectively and within a shorter period of time.
Managing: Employees and business partners in their different levels are responsible for managing one
or more business aspects. In their various roles employees have the responsibility to manage those
processes that they are assigned for. For an example employees working in the financial department are
responsible for managing the financials of the company. Business partners are responsible for managing
the decision making processes and overseeing business operations for the best interest of the business.
Development: Both employees and business partners have the role of business developers. This
means that they have the responsibility of growing the organization especially in terms of profitability.
The main objective or bottom line of business is to make profits. Employees and partners are the
greatest assets that make a business profitable. When employees and partners neglect their roles and
responsibility then the profitability of a business is substantially threatened.

40

Responsibilities of Customers
Treat your customers as kings and do not think of them only when you have a pressure to meet
your targets within the stipulated time frame.
There are organizations that do not bother to touch base with their customers the whole month but are
active only when they fall short of their targets and they have an appraisal in the coming month.
Understand that a customer buys your products or services only when he/she trusts your brand and
most importantly believes in you. Understand the needs and requirements of your clients. Find out as to
why they need a particular product and how your product would benefit them. You need to build a strong
relationship with your customers for them not only to remain as your loyal clients but also bring more
people along with them. It is the responsibility of the organization to give correct suggestions and
feedbacks to customers. Avoid making fake promises and commitments which you yourself know are
difficult to fulfil. What is the need of selling a mobile phone with just one day battery backup when the
customer has specifically asked you for a handset with at least 3 days backup?
Never lie to your customers. It is foolish to cook false stories. In todays world where information
is just a click away everyone does his/her thorough research before purchasing something.
Unnecessarily you will lose your respect in front of them. If you cant deliver something please mention it
clearly. They might not invest in that particular product but would definitely come back to you in near
future just because you were honest and guided them correctly. It is pointless to badmouth your
competitors.
Businesses dealing with customers money need to be extra careful with clients.
Make sure their money is invested in a right way and also multiples at a rate promised to them. Do not
run away with their money. It is one of the worst things you can do to your customers. It is your
responsibility to take care of their hard earned money. Suggest them the right schemes and right plans
as per their need. Do not just think of your own selfish targets and incentives. By doing this you will
definitely meet your targets once or twice but trust me not for a very long time. The moment the
customer knows that you have cheated on him/her your game is over. He would neither come to you
again nor recommend your brand to his friends or acquaintances.
Respect your customers time. Do not decide the time and venue as per your availability and comfort. If
the customer wants to meet you at 5 in the evening make sure you are there on time. Neither reach too
early nor too late. Do not keep your customers waiting. Do not forget that there are several options
available in the market. Your loss is someone elses gain.
After sales service is essential and ensures long term growth and profits for the organization.
Organizations tend to forget their customers once the deal is done, make sure you are in touch with your
customers after the deal as well if you wish to survive the cut throat competition. Do not ignore their calls
once you have sold your product. If the customer is not satisfied with your product it is your responsibility
to replace it or provide a solution. Customer feedbacks are important and help you understand the
satisfaction level of your esteemed customers and how you can make your product better in due course
of time.

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LO3
3.1
Explain how different market structures determine the
pricing and output decisions of businesses.
There are four basic market structures: perfect competition, monopoly, monopolistic competition and
oligopoly.

Perfect competition
A perfectly competitive market is a hypothetical market where competition is at its greatest possible level.
Neo classical economists argued that perfect competition would produce the best possible outcomes for
consumers and society.

Perfectly competitive markets exhibit the following characteristics:

There is perfect knowledge with no information failure or time lags in the flow of information. Knowledge
is freely available to all participants which means that risk taking is minimal and the role of
the entrepreneur is limited.
Given that producers and consumers have perfect knowledge it is assumed that they make rational
decisions to maximise their self-interest consumers look to maximise their utility and producers look to
maximise their profits.
There are no barriers to entry into or exit out of the market.
Firms produce homogeneous, identical units of output that are not branded.
Each unit of input, such as units of labour are also homogeneous.
No single firm can influence the market price or market conditions. The single firm is said to be a price
taker from the whole industry. The single firm will not increase its price independently given that it will not
sell any goods at all. Neither will the rational producer lower price below the market price given that it
can sell all it produces at the market price.
There are many firms in the market too many to measure. This is a result of having no barriers to entry.
42

There is no need for government regulation except to make markets more competitive.
There are assumed to be no externalities that is no external costs or benefits to third parties not involved
in the transaction.
Firms can only make normal profits in the long run although they can make abnormal (super-normal)
profits in the short run.

The firm as price taker

The single firm takes its price from the industry and is consequently referred to as a price taker. The
industry is composed of all firms in the industry and the market price is where market demand is equal to
market supply. Each single firm must charge this price and cannot diverge from it.

Equilibrium in perfect competition

In the short run
Under perfect competition firms can make super-normal profits or losses.

43

In the long run

In the long run firms are attracted into the industry if the incumbent firms are making supernormal profits.
This is because there are no barriers to entry and because there is perfect knowledge. The effect of this
entry into the industry is to shift the industry supply curve to the right, which drives down price until the
point where all super normal profits are exhausted. If firms are making losses they will leave the market
as there are no exit barriers and this will shift the industry supply to the left which raises price and
enables those left in the market to derive normal profits.

The super normal profit derived by the firm in the short run acts as an incentive for new firms to enter the
market which increases industry supply and market price falls for all firms until only normal profit is made
44

Monopoly Market
In such a market there is usually just one seller. The entry barrier is very high to this kind of market. The
cost of investment copyright or holds over resources are some examples of high entry barrier. The
railway network of any country is an example of a monopoly. When it makes natural sense to have one
firm produce a product it is called a natural monopoly. Public utilities electronic defence equipment are
government sponsored natural monopolies.

Key characteristics
Monopolies can maintain super-normal profits in the long run. As with all firms profits are maximised
when MC = MR. In general the level of profit depends upon the degree of competition in the market
which for a pure monopoly is zero. At profit maximisation MC = MR and output is Q and price P. Given
that price (AR) is above ATC at Q, supernormal profits are possible (area PABC).
With no close substitutes the monopolist can derive super-normal profits area PABC.
A monopolist with no substitutes would be able to derive the greatest monopoly power.

Evaluation of monopolies
The advantages of monopolies
They can benefit from economies of scale and may be natural monopolies so it may be argued that it is
best for them to remain monopolies to avoid the wasteful duplication of infrastructure that would happen
if new firms were encouraged to build their own infrastructure.
Domestic monopolies can become dominant in their own territory and then penetrate overseas markets
earning a country valuable export revenues. This is certainly the case with Microsoft.
According to Austrian economist Joseph Schumpeter inefficient firms including monopolies would
eventually be replaced by more efficient and effective firms through a process called creative destruction.
45

It has been consistently argued by some economists that monopoly power is required to generate
dynamic efficiency that is technological progressiveness. This is because:
High profit levels boost investment in R&D.
Innovation is more likely with large enterprises and this innovation can lead to lower costs than in
competitive markets.
A firm needs a dominant position to bear the risks associated with innovation.
Firms need to be able to protect their intellectual property by establishing barriers to entry or else there
will be a free rider problem.
Why spend large sums on R&D if ideas or designs are instantly copied by rivals who have not allocated
funds to R&D?
Monopolies are protected from competition by barriers to entry and this will generate high levels of
supernormal profits.
If some of these profits are invested in new technology costs are reduced via process innovation. This
makes the monopolists supply curve to the right of the industry supply curve. The result is lower price
and higher output in the long run.

The disadvantages of monopoly to the consumer

Monopolies can be criticised because of their potential negative effects on the consumer including:
Restricting output onto the market.
Charging a higher price than in a more competitive market.
Reducing consumer surplus and economic welfare.
Restricting choice for consumers.
Reducing consumer sovereignty.
Higher prices
The traditional view of monopoly stresses the costs to society associated with higher prices. Because of
the lack of competition the monopolist can charge a higher price (P1) than in a more competitive market
(at P).
The area of economic welfare under perfect competition is E, F, and B. The loss of consumer surplus if
the market is taken over by a monopoly is P P1 A B. The new area of producer surplus at the higher
price P1, is E, P1, A, C. Thus, the overall (net) loss of economic welfare is area A B C.
The area of deadweight loss for a monopolist can also be shown in a more simple form comparing
perfect competition with monopoly.

46

Monopolistic Competition
Many small businesses operate under conditions of monopolistic competition including independently
owned and operated high-street stores and restaurants. In the case of restaurants each one offers
something different and possesses an element of uniqueness but all are essentially competing for the
same customers.

Characteristics
Each firm makes independent decisions about price and output based on its product its market and
its costs of production.
Knowledge is widely spread between participants but it is unlikely to be perfect. For an example diners
can review all the menus available from restaurants in a town before they make their choice. Once inside
the restaurant they can view the menu again before ordering. But they cannot fully appreciate the
restaurant or the meal until after they have dined.
The entrepreneur has a more significant role than in firms that are perfectly competitive because of the
increased risks associated with decision making.
There is freedom to enter or leave the market as there are no major barriers to entry or exit.
A central feature of monopolistic competition is that products are differentiated. There are four main
types of differentiation:
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Physical product differentiation, where firms use size, design, colour, shape, performance and features
to make their products different. For an example consumer electronics can easily be physically
differentiated.
Marketing differentiation where firms try to differentiate their product by distinctive packaging and other
promotional techniques. For an example breakfast cereals can easily be differentiated through
packaging.
Human capital differentiation where the firm creates differences through the skill of its employees the
level of training received distinctive uniforms etc.
Differentiation through distribution including distribution via mail order or through internet shopping such
as ebay.com which differentiates itself from traditional bookstores by selling online.
Firms are price makers and are faced with a downward sloping demand curve. Because each firm
makes a unique product it can charge a higher or lower price than its rivals. The firm can set its own
price and does not have to take' it from the industry as a whole though the industry price may be a
guideline or becomes a constraint. This also means that the demand curve will slope downwards.
Firms operating under monopolistic competition usually have to engage in advertising. Firms are often in
fierce competition with other (local) firms offering a similar product or service and may need to advertise
on a local basis to let customers know their differences. Common methods of advertising for these firms
are through local press and radio, local cinema, posters, leaflets and special promotions.
Monopolistically competitive firms are assumed to be profit maximises because firms tend to be small
with entrepreneurs actively involved in managing the business.
There are usually a large numbers of independent firms competing in the market.

Equilibrium under monopolistic competition

In the short run supernormal profits are possible, but in the long run new firms are attracted into the
industry, because of low barriers to entry, good knowledge and an opportunity to differentiate.

Monopolistic competition in the short run

At profit maximisation, MC = MR, and output is Q and price P. Given that price (AR) is above ATC at Q,
supernormal profits are possible (area PABC).

48

As new firms enter the market, demand for the existing firms products becomes more elastic and the
demand curve shifts to the left, driving down price. Eventually, all super-normal profits are eroded away.

Monopolistic competition in the long run

Super-normal profits attract in new entrants, which shifts the demand curve for existing firm to the left.
New entrants continue until only normal profit is available. At this point, firms have reached their long run
equilibrium.

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Clearly, the firm benefits most when it is in its short run and will try to stay in the short run by innovating,
and further product differentiation.

Examples of monopolistic competition

Examples of monopolistic competition can be found in every high street.
Monopolistically competitive firms are most common in industries where differentiation is possible, such
as:

The restaurant business

Hotels and pubs
General specialist retailing
Consumer services, such as hairdressing

Oligopoly Market
There are a few players who need to keep an eye on each others strategy. The cement industry or
airline manufacturing industry are good examples. In both these industries the economies of scale are
very high making entry barriers in these segments high. The different firms differentiate on the basis of
50

some features, their offerings being good substitutes to each other. In this market structure demand
elasticity is more than that of a monopoly.

Key characteristics
The main characteristics of firms operating in a market with few close rivals include:

Interdependence
Firms that are interdependent cannot act independently of each other. A firm operating in a market with
just a few competitors must take the potential reaction of its closest rivals into account when making its
own decisions. For example, if a petrol retailer like Texaco wishes to increase its market share by
reducing price, it must take into account the possibility that close rivals, such as Shell and BP, may
reduce their price in retaliation. An understanding of game theory and the Prisoners Dilemma helps
appreciate the concept of interdependence.

Strategy
Strategy is extremely important to firms that are interdependent. Because firms cannot act
independently, they must anticipate the likely response of a rival to any given change in their price, or
their non-price activity. In other words, they need to plan, and work out a range of possible options based
on how they think rivals might react.
Oligopoly have to make critical strategic decisions, such as:

Whether to compete with rivals, or collude with them.

Whether to raise or lower price, or keep price constant.
Whether to be the first firm to implement a new strategy, or whether to wait and see what rivals
do. The advantages of going first or going second are respectively called 1st and 2nd-mover
advantage. Sometimes it pays to go first because a firm can generate head-start profits. 2nd
mover advantage occurs when it pays to wait and see what new strategies are launched by
rivals, and then try to improve on them or find ways to undermine them.

Barriers to entry
Oligopolies and monopolies frequently maintain their position of dominance in a market might because it
is too costly or difficult for potential rivals to enter the market. These hurdles are called barriers to
entry and the incumbent can erect them deliberately, or they can exploit natural barriers that exist.

Kinked demand curve

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The reaction of rivals to a price change depends on whether price is raised or lowered. The elasticity of
demand, and hence the gradient of the demand curve, will be also be different. The demand curve will
be kinked, at the current price.

Even when there is a large rise in marginal cost, price tends to stick close to its original, given the high
price elasticity of demand for any price rise.

At price P, and output Q, revenue will be maximised.

The disadvantages of oligopolies

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High concentration reduces consumer choice.

Cartel-like behaviour reduces competition and can lead to higher prices and reduced output.
Given the lack of competition, oligopoly may be free to engage in the manipulation of consumer decision
making. By making decisions more complex - such as financial decisions about mortgages - individual
consumers fall back on heuristics and rule of thumb processes, which can lead to decision making
bias and irrational behaviour, including making purchases which add no utility or even harm the
individual consumer.
Firms can be prevented from entering a market because of deliberate barriers to entry.
There is a potential loss of economic welfare.
Oligopoly may be allocative and productively inefficient.
Oligopolies tend to be both allocative and productively inefficient. At profit maximising equilibrium, P,
price is above MC, and output, Q, is less than the productively efficient output, Q1, at point A.

The advantages of oligopolies

Oligopolies may adopt a highly competitive strategy, in which case they can generate similar benefits to
more competitive market structures, such as lower prices. Even though there are a few firms, making the
market uncompetitive, their behaviour may be highly competitive.
Oligopoly may be dynamically efficient in terms of innovation and new product and process
development. The super-normal profits they generate may be used to innovate, in which case the
consumer may gain.
Price stability may bring advantages to consumers and the macro-economy because it helps consumers
plan ahead and stabilises their expenditure, which may help stabilise the trade cycle.

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3.2
Illustrate the way in which market forces shape
organizational responses using a range of examples.
Porters Five Forces
Porters 5 forces framework is used for strategic industry analysis. It was developed in 1979 by Michael
Porter, Harvard Business School professor. Michael Porters five competitive forces can be used to
examine and analyse the competitive structure of an industry by looking at 5 forces of competition that
influence and shape profit potential. Porters five forces of competition have become a central concept to
business theory.
Porters 5 forces industry analysis does more than look at a companys direct competitors, it looks at
multiple aspects of the industrys competitive structure and economic environment, including the
bargaining power of buyers, the bargaining power of suppliers, the threat of new entrants, and the threat
of substitute products. The idea is to look at each of these factors and determine the degree to which
they increase competition in the industry. If the forces are strong, they increase competition; if the forces
are weak they decrease competition. Porters five forces definition can be utilized by any business and
can be applied to any industry.
The competitive environment of an industry has a strong influence on the performance of businesses
within that industry. Porters five forces defined whether an industry is attractive or unattractive from the
perspective of a company competing in that industry. Porters 5 forces of competition provide an
excellent method to consider an industry before entrance.
An attractive industry is one which offers the potential for profitability. If a company uses Porters 5 forces
industry analysis and concludes that the competitive structure of the industry is such that there is an
opportunity for high profits, the company can elect to enter that industry or market. Or, if the company is
already competing in that industry or market, it can use the competitive forces Porter created to
determine its optimal position within the marketplace.
An unattractive industry is one which does not offer the potential for profitability. If a company uses the
five forces Porter created and concludes that the competitive forces in the industry are too strong or
unfavourable, that company may choose not to enter that industry or market. Or, if the company is
already competing in that industry or market, it can use Porters 5 forces model to find the best possible
strategic placement in it.
Michael Porters 5 competitive forces:

Threat of new entrants

Bargaining power of suppliers
Bargaining power of buyers
Threat of substitute products
Intensity of rivalry among competitors

Competitive rivalry
This force examines how intense the competition currently is in the marketplace, which is determined by
the number of existing competitors and what each is capable of doing. Rivalry competition is high when
there are just a few businesses equally selling a product or service, when the industry is growing and
when consumers can easily switch to a competitors offering for little cost. When rivalry competition is
high, advertising and price wars can ensue, which can hurt a business's bottom line. Rivalry is
quantitatively measured by the Concentration Ratio (CR), which is the percentage of market share
owned by the four largest firms in an industry.

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Bargaining power of suppliers

This force analyses how much power a business's supplier has and how much control it has over the
potential to raise its prices, which, in turn, would lower a business's profitability. In addition, it looks at the
number of suppliers available: The fewer there are, the more power they have. Businesses are in a
better position when there are a multitude of suppliers. Sources of supplier power also include the
switching costs of firms in the industry, the presence of available substitutes, and the supply purchase
cost relative to substitutes.

Bargaining power of customers

This force looks at the power of the consumer to affect pricing and quality. Consumers have power when
there aren't many of them, but lots of sellers, as well as when it is easy to switch from one business's
products or services to another. Buying power is low when consumers purchase products in small
amounts and the seller's product is very different from any of its competitors.

Threat of new entrants

This force examines how easy or difficult it is for competitors to join the marketplace in the industry being
examined. The easier it is for a competitor to join the marketplace, the greater the risk of a business's
market share being depleted. Barriers to entry include absolute cost advantages, access to inputs,
economies of scale and well-recognized brands.

Threat of substitute products or services

This force studies how easy it is for consumers to switch from a business's product or service to that of a
competitor. It looks at how many competitors there are, how their prices and quality compare to the
business being examined and how much of a profit those competitors are earning, which would
determine if they have the ability to lower their costs even more. The threat of substitutes are informed
by switching costs, both immediate and long-term, as well as a buyer's inclination to change.

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3.3
Judge how the business and cultural environments
shape the behaviour of a selected organisation.
Business and cultural environment has great impact on organizational behaviour. There are two kinds of
business environment: economic environment and non-economic environment. The economic
environment includes economic system, economic policies and economic condition. On the other hand
non-economic environment consists of natural, demographic, technological, legal, political, social
environment. McDonalds is operating more than 119 countries in the world. Their operation largely
depends on the business and cultural environment of the countries where they operate. Economic
environment is not same for all countries. For example, per capita income of UK and India are not same.
UK has higher per capita income than India. Product prices are higher in UK than India. Economic
policies like industrial policy, fiscal policy, monetary policy, foreign investment policy and export-import
policy are not same for those two countries which have great impact on the organizational behaviour.
Social environment of business includes social factors like life expectancy rate, literacy, poverty, beliefs,
values, traditions and customs. In Indian culture beef is prohibited for Hindus, so most of the people
dont eat beef. McDonalds does not sell beef in Hindu communities and pork in Muslim communities.
Political environment includes the political system, the government policies and attitude towards the
business community and the unionism. All these aspects have a bearing on the strategies adopted by
the business firms. The stability of the government also influences business and related activities to a
great extent. Legal environment refers to set of laws, regulations, which influence the business
organisations and their operations. McDonalds has to obey, and work within the framework of the law.
Technological environment include the methods, techniques and approaches adopted for production of
goods and services and its distribution. The varying technological environments of different countries
affect the designing of products. Demographic environment refers to the size, density, distribution and
growth rate of population. All these factors have a direct bearing on the demand for foods of McDonalds.
The natural environment includes geographical and ecological factors that influence the organizational
behaviour. These factors include the availability of natural resources, weather and climatic condition,
location aspect, topographical factors, etc.

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LO4
4.1
Discuss the significance of international trade to a country
giving special emphasis to Sri Lankan business organizations
International trade is the exchange of goods and services that happens across international borders.
This sort of trading arises the world economy and where the prices, supply and demand affects and are
affected by the global events. Macroeconomic measurement quantities (GDP and NDP etc.) of a country
forms a large part in the international trade. To increase trading between two countries the main reason
for this is the political relationship between the two countries.

Political changes in a country:

If a political change happens in Sri Lanka for an example itll increase the cost of labour therefore
increasing the manufacturing cost of an American sneaker company which results to increase the price
of basketball shoes that needs to be purchased from the local mall. If we decreased the cost of labour
then we need to pay a lesser price for the shoes (Sneakers) we want to purchase.

International trading and Consumers:

During the last couple of years international trading has substantially increased. International trading
gives the consumers and the countries an opportunity to expose themselves to the available goods and
services not only in their country but globally. Increase of attributes can be an advent of globalization and
industrialization. International trade is more feasible in the global market as people now are well aware of
what they want and what the products available are and which product is the best for them to choose in
the market. Because of the technological (internet and social media) advances increase in international
trading and increase in global awareness can be attributed.

International Trade and Multinational Companies:

There are more multi-national companies now than two decades ago this is another reason of increase
in international trading and multi-national companies generate more revenue not in just one country but
more than one so as a result it adds up to the international trade of a country. Almost every kind of
product can be found in the international market food, water, jewellery, shoes, clothes, spare parts, oil,
wine, tea, rice, rubber, stocks and currencies. We can find all sorts of services also been traded like;
tourism, banking, consultancy, transportation and education (Foreign universities affiliating with local
private universities). Some of the multinational companies in Sri Lanka like MAS and Brandix are huge
traders in the international market. MAS is one of the biggest companies that produce apparel
manufacturing like swim ware, intimate ware, active ware (sports ware) and fabrics. MAS has also
produce clothing for biggest brands like Victoria Secret one of the biggest and fast selling lingerie brands
in USA, Speedo Fast Skin FS-Pro swimsuit which was first worn at the 2004 Olympics and the Nike
Revolutionary Support Bra the highest selling sports bra in the USA worn by international tennis players
and athletes. MAS has also design the Sri Lanka national cricket team jersey as well.

Global Trading and using Country Resources:

If we sell a product in the global market it is an export and if we buy a product from the global market it is
an import. Exports and imports are accounted in a countrys current account in the balance of payment
(BOP). Wealthy countries are allowed to use their resources like labour technology and capital etc.
efficiently when globally trading. Because lots of countries are endowed with many different assets and
natural resources like land, labour, capital and technology etc. There are some countries that produce
the same product and one country might produce this product more efficiently than the other country and
sell it at a cheaper rate. If a country cannot produce a product efficiently that country can trade it with
another country this is called specialization in international trading. For an example if we take tea and
rice both this products are produce in Sri Lanka and India, Sri Lanka produces Tea and Rice but in the
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international market Sri Lankan tea is more expensive than the tea produce in India but Sri Lanka
produce tea more efficiently than India, in India rice is produce more efficiently and its cheaper in price,
when trading countries want not only cheaper but quality products so counties may buy Sri Lanka tea for
a higher price as Sri Lanka produce the best quality tea more efficiently and buy rice from India as its
more cheaper and its been produce in India more efficiently.

Increase of Revenue:
International trade helps increase revenues of a company and if there was no international trade
company revenues will be limited only to its countrys domestic revenues. Countrys with no international
trading will have to produce its own goods and services to its country which would be impossible
because every country has different resources available and you cannot find all resources in just one
country for an example Saudi Arabia has the biggest market for oil as thats the main resource that
country has so in order to fulfil its country peoples needs and wants they have to import almost every
other goods and services in exchange of oil. If you take Sri Lanka for an example Sri Lanka exports and
imports a lot of products in the international market. Sri Lankas export commodities are textiles and
apparel, tea and spices, diamonds, emeralds, rubies, blue sapphire, coconut products, rubber
manufactures and fish. Sri Lankas import commodities are textile fabric, mineral products, petroleum,
food and beverage, medicines (tablets, cough syrup etc.) and machinery and transportation.

International and Domestic Trading:

The international trade is more expensive than domestic trading because of imposing external tariffs and
delays in transportation from one country to another. Labour and capital which is required to produce
goods and services are not easily transferable across international borders as it is domestically,
transferring labour and capital or goods and services are easily transferred domestically than
internationally. So as a result of this international trading is confined in trading goods and services as its
against transferable factors of production (labour and capital). These are a few differences in
international trading and domestic trading.

Positive impact of International Trading:

Sri Lanka is one of the largest countys that trade gems in the international market. Sri Lankas biggest
selling markets in gems stone is Blue Sapphire. Theres no other country that produces blue sapphires
like in Sri Lanka as it comes in different sizes and in different qualities one of the recent findings of a blue
sapphire was finding the worlds largest blue star sapphire which was valued in a estimated rate of US$
100 million and the weight of this stone was 1404.49 carats. This stone was found in the city called
Rathnapura which is also known as the City of Gems and this stone was named as The Star of Adam.
Trading gems stones internationally Sri Lanka pricing for the gems stones might be at a higher price rate
but the efficiency and the quality is no like other. Other countries like India also trade gem stones their
prices are low and so are the efficiency of producing the product is low so most countries buy gem
stones from Sri Lanka.

Negative impact of International Trading:

Sri Lanka used to be one of the largest countries that use to export garments, but because of labour
costs and less capital the production of garments reduced drastically. The Sri Lankan government then
started importing garments from counties like India, Bangladesh and Pakistan etc. which led most of the
garment factories to close down their business. Importing garments from the international market was
cheaper as there were more resources available to produce the garments and the counties we bought
garments from were more efficient in producing them than us. But if we had increased our capital and
resources available for the garment factories and reduce the labour cost we wouldnt have needed to
close down the garment factories.

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International Trading and Sri Lanka as one of the Traders:

Sri Lanka was one of the contracting party to the General Agreement on Tariffs and Trade (GATT) and
also became one of the founding members of World Trade Organization (WTO) for decades Sri Lanka
assumed a proactive role as a driving force to trigger trade liberalization in the region. Sri Lanka is also a
member of South Asian Free Trade Area (SAFTA). Sri Lanka shares a very healthy trade relations with
India after the two countries signed a free trade agreement (FTA). In 2004, trade between the two
nations rises by 128% and reached USD 2.6 billion by 2006. Sri Lanka also leverages on GSP+ trade
preferences of the European Union. Australia also has strong trade ties with Sri Lanka. In the financial
year of 2008-2009, the two-way trade between these two countries amounted to $329 million. Sri Lanka
trade benefits a lot from its modern ports that were built by the British when they were ruling in Sri Lanka.
In 2009, the countrys exports were at $7 billion as compared to $8.137 billion in 2008. The imports also
fell down to $9.6 billion 2009 from $14.08 billion 2008.

International Trade and Education as a Service:

Sri Lanka is known for providing free education to the children of the country there are many state
universities that provide free education for students who cannot effort this one reason why students who
goes for state universities protest against private universities as it will reduce the importance of getting
into state universities where you need to educate yourself for almost six years where you do not get that
much of scope to gain when it comes to skills. By going to state universities you can gain knowledge but
skills which are also important as education is gained by going to private universities which are affiliated
with renowned foreign universities like Staffordshire University, Northampton University, and Monash
University etc. Students going to foreign universities not only gain knowledge but they also get the
opportunity to work while their studying as there are weekend classes available and they can improve
their skills like communication skills, presentation skills and also the ability to handle a situation as it
arises etc. Foreign universities affiliating with private local universities gives a good scope for
international trading in Sri Lanka as an educational service and this gives more space for our country to
gain more revenue to the Sri Lankan accounting system.

4.2
Analyse the impact of global factors on businesses, giving
special emphasis to Sri Lankan context. Use relevant facts /
figures / examples as applicable.
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Businesses are not only affected by external environment but also by the competitors. Global factors that
influences the business are legal, political, social, technological and economical. While developing a
business strategy it is important to understand about these factors too.

Social Factors:
This factor relates to making changes in the social structures. These factors give an insight into the
behaviour, taste and lifestyle patterns of a population. The changes in the structure of the population is
greatly influenced by the patterns and in a consumers lifestyle. These critical changes of age, gender
and nationality etc. which determine the buying patterns these need to be developed when making
strategies in line with the market situation. When designing business strategies in the global environment
its important to keep in mind the social and cultural differences that vary from country to country. For an
example promoting homosexuality is illegal in Sri Lanka as its against the culture and its found more like
a sin and the people who are homosexuals are discriminated in the public and the society doesnt accept
them. Because of this matter homosexuality is kept inside closed doors but with foreign influences
especially like foreign universities, multinational companies like unilever and franchise like delifrance put
up in Sri Lanka, and the foreign people coming to Sri Lanka and living and working here has given a lot
of scoop and it has given a kind of an opening for all homosexuals to come out in public and the younger
generation is embracing this new trend with open arms. This sort of cultural changes happens because
of international influence in Sri Lanka. For a successful business management consumer religion,
lifestyle, language patterns are very important.

Legal Factors:
Influence of business strategies have led to make changes in the government laws and regulations. For
a successful business operation when a particular situation arises the business should have the
capability to anticipate the legal issues involved and its important that the business knows because of
which changes in laws will affect the behaviour of the business. Laws keep changing and updating over
a period of time. Recently at the 2016 budget that was declared at the parliament had a few changed
done under consumer laws, its stated that the special permits that granted under different schemes,
including to parliamentarians will be cancel. According to this permit scheme parliamentarians and
doctors etc. were able to buy luxury things like especially vehicles for a cheaper rate more like tax free.
So by cancelling this permit they have to buy any luxury good by paying all taxes. Its important for a
business to know the changes in the areas of consumer protection legislation, environmental legislation,
health and safety and employment law etc.

Economic Factors:
Changes in the global economy involve these factors. Providing opportunities to make profits to the
businesses we need to set our living standard high which would ultimately imply the increase for product
demands. An economy has to face the fluctuations of economic activities. When a demand for a product
increases then the price of that product also increase this happens when an economic activity arises. In
case theres a decrease in demand then the prices decrease too. Keeping these kind of fluctuations in
mind business strategies should be developed. For an example the demand for hybrid cars increased so
the government increased the taxes for hybrid cars. If you take milk powder as another example when
the demand for milk powder increases then the price of a milk powder also increases. When there are
economic changes like interest rate, wage rates and rate of inflation these changes affects the business.
When theres an increase in demand but a lower interest rate then businesses are encouraged to
expand and take risks. Because of this businesses should have room for such fluctuations in their
business strategies.

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Political Factors:
This refers to the government and government policy changers. To operate businesses political factors
greatly influence. This has a significant importance off late. For an example at the budget proposal they
provided few bonanzas to the public sector while proposing a Rs. 2,500 salary increment to private
sector employees, who were not paid the salary increase proposed in the previous Budget. And also
they reduce the working hours of the private sector, some private companies work only the whole week
from Monday to Friday but they also work half day on Saturdays from 8.30am to 1.00pm but they decide
that private sectors will work only from Monday to Friday and no working half day on Saturdays. Political
arena has a big influence on the regulations of businesses, and spending power of consumers and other
businesses. Businesses need to consider the stability about the government policies and political
environment on the economy etc.

Technological Factors:
When businesses adopt new innovations and inventions these factors influence the business strategies
to provide business opportunities. By doing this it helps the business to reduce cost and develop new
products. Because this advent of modern technologies and technological factors have gained impetus in
the business arena. Information can be securely shared by means of databases this enables a vast cost
reduction and improvement in services. To stay competitive in the market organizations need to consider
the latest relevant technological advancement for their business. Technology helps organizations to gain
competitive advantage and its a major driver for globalization. For an example the technology in UK is
on a much higher standards than Sri Lanka the reason for this is because Sri Lanka is a small and a
developing country which has just come out of war and resources available are very limited but on the
other hand UK is a large and a developed country and they have unlimited resources. In Sri Lanka
technology is not in higher scale unlike in UK, technological products can be produce (Manufactured) in
UK but technology in Sri Lanka is not in a higher scale so we need to bring down materials from other
foreign countries in order to produce goods. When designing a business strategy organizations must
consider if the use of technology allows the firm to manufacture products and services at a lower cost
and also now organizations can select new modes to do distribution with the help of technology.
Communicating with customers all parts of the world has proven to be easier with new technology.

4.3
Identify laws, rules and regulations applicable for consume
protecting in Sri Lanka
The Consumer Affairs Authority Act was passed in the Parliament on 9th January 2003. It came into
force with the establishment of the Consumer Affairs Authority. The Consumer Affairs Authority comes
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under the purview of the Ministry of Cooperatives and Internal Trade. The new act repealed the following
acts.
Consumer Protection Act No.01 of 1979
Fair Trading Commission Act No.01 of 1987
Control of Prices Act (Cap 173)
The CAA Act consists with following parts:
Part I Establishment of the Consumer Affairs Authority
Part II Regulation of Trade
Part III Promotion of Competition and Consumer Interest
Part IV Consumer Affairs Council
Part V Fund of the Authority
Part VI Staff of the Authority
Part VII General
Most of the provisions of the repealed acts, with some innovations, have been incorporated in to the
Consumer Affairs Authority Act. It has been designed to protect the interest of the consumers. The
Consumer Affairs Authority was established with focusing attention on the consumers in the present day
context of the new economic order and trade procedures. It safeguards the rights of not only the
consumers but also the traders who are subjected to injustice. Both the goods and services are covered
within the ambit of the Act.

CONCLUSION
As a conclusion, business environment involve internal and external environment. Business environment
is important for an organization to identify the weaknesses and threats. A firm maybe strong in certain
areas and it may be weak in some other areas. The firm should identify weaknesses and threats so as to
correct it as early as possible. This helps an organization to reduce the risk of getting failure in their
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operation and development in new product. PEST analysis and Porters Five analysis is used to find out
the external environment, where, value chain analysis and SWOT analysis is used to find the internal
environment of an organization.
Strategy is about the direction in which the organization is going, the ways to achieve objective and
competitive advantage, satisfying the needs of stakeholders and responding to the environment.
Different organization develops different strategy in order to respond to the environment of their
organization. The business strategy includes Ansoffs Matrix, Boston Consulting Growth Matrix (BCG)
and Porter Generic Competitive Strategies.

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