Business and the Economic Environment

Business and the Economic Environment

The Business Organisation

The Firm as a Legal Entity

The sole proprietor

limited scope for expansion unlimited liability

The partnership
Companies

limited liability public limited companies (plc)

public shares

issues of shares traded on the Stock Exchange

The Firm as a Legal Entity

Companies cont

private limited companies consortia public corporations cooperatives

consumer
producer

cooperatives

cooperatives

The Internal Organisation of the Firm

U-form

Chief executive

Production

Finance

Sales

Purchasing

The Internal Organisation of the Firm

U-form

advantages
direct clear

control by central executive of the firm

goals

problems of large U-form firms

co-ordination
distorted decline

and communication costs

information

in organisational efficiency

The Internal Organisation of the Firm

M-form
Head Office

Division 1

Division 2

Division 3

Production

Finance

Sales

Purchasing

The Internal Organisation of the Firm M-form

advantages
reduced

length of information flows enhanced level of control

problems
bureaucracy

and communication problems conflicts between divisions

The flat organisation The holding company

role of parent company and subsidiaries

The Aims of the Firm

Goals of the firm
The traditional theory of the firm Alternative theories

the divorce of ownership from control

the development of the joint-stock company

managerial objectives

The Aims of the Firm

The principal / agent relationship

the principal agent problem dealing with imperfect/asymmetric information

monitoring
incentives

The goal of staying in business

the willingness of firms to take risks problems of being over cautious

Business and the Economic Environment

The External Business Environment

The External Business Environment

PEST analysis Political factors Economic factors Social / cultural factors Technological factors
STEEPLE analysis - extends PEST analysis to

include:

Environmental factors Legal factors

Ethical factors

The External Business Environment

Social / cultural factors

attitudes

& composition of consumers / workers

Technological factors
affect

industrial structure & production methods

Economic factors
the

macroeconomic environment
the national and international economic environment effect of government policies

the

microeconomic environment
specific industries, firms, markets and individuals

The External Business Environment

Ethical factors
Corporate

Social Responsibility
policies affecting business

Political factors
government

Legal factors
industrial

relations, health and safety etc. policy to name and shame

Environmental factors
government

businesses are increasingly affected by questions of the environment and social responsibility

The External Business Environment

Using PEST / STEEPLE analysis

used for auditing the business environment helps in developing business strategy relations between the four sets of factors importance of the economic factors

Globalisation and the changing business

environment

Social/cultural, technological, economic, environmental, political and ethical factors

The External Business Environment

Classifying industries

Classifying production
primary

production production

secondary tertiary

production

Output of industrial sectors (as % of GDP)

Primary 2.8% Secondary

42.3% 54.9%

Tertiary

1974

Output of industrial sectors

(as % of GDP)

Primary 3.4% Secondary

Primary

3.1%

Secondary

20.1%
41.9% 54.7% 76.8%

Tertiary

Tertiary

1974

2008

Employment by industrial sector

(% of total employees)

Primary 3.4% Secondary

41.9% 54.7%

Tertiary

1974

Employment by industrial sector

(% of total employees)

Primary 3.4% Secondary

Primary

2.2%

Secondary

17.0%
41.9% 54.7% 80.8%

Tertiary

Tertiary

1974

2008

The External Business Environment

Classifying firms into industries

nature of an industry
industrial

sectors

why classify firms into industrial sectors?

it

helps to analyse trends specific needs can be identified to understand the relationships between firms

The External Business Environment

Standard industrial classification

nature of the system of classification sections, subsections

divisions,

groups and classes

Standard industrial classification

Section A B C D E F G H I J K L M N O P Q R S T Agriculture, forestry and fishing Mining and quarrying Manufacturing Electricity, gas, steam and air conditioning supply Water supply, sewerage, waste management Construction Wholesale and retail trade, repair of motor vehicles Transport and storage Accommodation and food service activities Information and communication Financial and insurance activities Real estate activities Professional, scientific and technical activities Administrative and support service activities Public administration and defence; compulsory social security Education Human health and social work activities Arts, entertainment and recreation Other service activities Activities of households as employers, and producers of goods and services for own use U Extra-territorial organisation and bodies

The External Business Environment

Changes in the structure of UK economy

expanding and contracting sections

by by

output employment

The Determinants of Business Performance

Structure conduct performance

relationship between business structure and business conduct (behaviour)

competitive limited

markets and competitive behaviour

competition and collusion

relationship between business conduct and business performance

indicators

for measuring performance market share, growth, etc.

profitability,

The structure conduct performance paradigm

Basic conditions

Structure

Conduct

Performance

Source: based on Scherer F. M. and David Ross, Industrial Market Structure and Economic Performance (3rd ed.) (Houghton Mifflin)

The structure conduct performance paradigm

Basic conditions
Supply Availability of inputs Technology Product specifications Demand Tastes Substitutes

Structure

Conduct

Performance

Source: based on Scherer F. M. and David Ross, Industrial Market Structure and Economic Performance (3rd ed.) (Houghton Mifflin)

The structure conduct performance paradigm

Basic conditions
Supply Availability of inputs Technology Product specifications Demand Tastes Substitutes

Structure
Number of sellers and buyers Barriers to entry Cost structures Product differentiation

Conduct

Performance

Source: based on Scherer F. M. and David Ross, Industrial Market Structure and Economic Performance (3rd ed.) (Houghton Mifflin)

The structure conduct performance paradigm

Basic conditions
Supply Availability of inputs Technology Product specifications Demand Tastes Substitutes

Structure
Number of sellers and buyers Barriers to entry Cost structures Product differentiation

Conduct
Pricing behaviour Output Product strategy and advertising Mergers

Performance

Source: based on Scherer F. M. and David Ross, Industrial Market Structure and Economic Performance (3rd ed.) (Houghton Mifflin)

The structure conduct performance paradigm

Basic conditions
Supply Availability of inputs Technology Product specifications Demand Tastes Substitutes

Structure
Number of sellers and buyers Barriers to entry Cost structures Product differentiation

Conduct
Pricing behaviour Output Product strategy and advertising Mergers

Performance
Efficiency Profitability Market share Share price Meeting social goals

Source: based on Scherer F. M. and David Ross, Industrial Market Structure and Economic Performance (3rd ed.) (Houghton Mifflin)

Business and the Economic Environment

The Economists approach to Business

The Economist's Approach to Business

Tackling the problem of scarcity

meaning of scarcity production and consumption

role

of the business economist

study of consumer behaviour study of firms

factors of production
labour land

and raw materials

capital

The Economist's Approach to Business

Demand and supply

actual and potential demand and supply the role of firms in satisfying demand business economists study of the supply process

Macroeconomics and microeconomics

macroeconomics
the

balancing of aggregate demand and supply

microeconomics
the

balancing of the demand and supply for particular products

The Economist's Approach to Business

Macroeconomic issues growth unemployment inflation balance of payments problems cyclical fluctuations

Microeconomic issues choices

What?

How?
For

whom?

The Economist's Approach to Business

Choice and opportunity cost

the meaning of opportunity cost rational economic decision making

what

is rationality?

marginal costs and benefits

MC MC

< MB do more

> MB do less

Microeconomic choices and the firm