Business

Environment

Business Environment

Organizations
and their Objectives

Business Environment

CATEGORIES OF
Organisation
ORGANISATION

An arrangement of people, pursuing common

goals, achieving results and standards of
performance.
performance

Business involves people and resources to do

one of two things such as make (produce) items
or goods to be sold and provide services to be
sold.
All organisations are affected by
the environment, government, individual

Legal Form

Sole Traders

Sole
Traders
Features

A one-man business - risks

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

Advantages
No formal procedures to start
Commitment and motivation
Close and quick to respond to market change
Independence and self-reliance
Disadvantages
Total personal liability
Succession and illnesses
Financial
Skill

Partnership

Partnership
Features

2 to max 20 owners or partners

No separate legal entity
A partnership agreement state the rules and avoiding
possible future disputes among the partners
Examples; dentists, lawyers accountants, architects, etc.

Advantages
More funds available & enhanced credit standing
Sharing of expertise, skills, experience, business contacts,
etc. amongst the different partners
Sharing of risks
Disadvantages
Unlimited liability
Limited life
Dilution of control - each partner is held responsible for the
decisions of the other partners. All acts by any partner are
legally binding on all the partners

Companies or Corporations

Companies or Corporations

Distinct artificial persons created in order to separate legal

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

Features

Separate legal entity

Creation by incorporation - by lodging the MOA (companys constitution),
the AOA (regulations for management of company)
Ownership by shares.
Public limited companies (plc) & Private limited companies (Ltd or
Limited)

Advantages

Limited liability of shareholders, ease of ownership transfer

perpetual life, wider source of capital
Specialised management expertise and skills.

Disadvantages

Higher cost and difficulty in running organisation

More government regulations - comply with Companies Act
Lack of secrecy information to shareholders, investors, gov., competitors,
Taxation

Companies or Corporations
Private company
ownership is limited to between 2 and 50
shareholders cannot transfer their shares without
consent of the company
shares are not sold to the public
Public company
a minimum of 7 shareholders and no limit for maximum
shares are sold in public (sold on stock exchange)

Activity:
Give 5 examples of Sole
Traders, 5 examples of
Partnership and 5
examples of Corporations
(existing businesses)

SIZE
Size can be viewed in terms of:
Numbers employed
Volume of output, sales, revenue
Assets employed
Profits earned
Net worth in real terms

Type of Businesses

Small businesses - a sole trader/partnership; sell

locally; employ less 50; e.g. computer trainers,
solicitors and accountants. Etc.
Medium-sized businesses - employ between 50
and 250; operate local and/or national level; e.g.
manufacturers, clothing, furniture, etc.
Large businesses have many factories/offices
and outlets in one or more cities/countries;
manufacturers, retail food outlets, finance
companies, etc.
National businesses - have household names;
recognisable logos; large in size (workforce 250 or
more); branches/factories in major towns/cities.
Multinational - sells worldwide and operate in
more than one country.

Advantages of a large organisation:

Sufficient resources to command a significant
market share.
Wide variety of products, customer services,
attractive career, develop high-quality personnel, for
future top management positions
Can provide for greater division of work and
specialisation
Likely continuity of goods or services, management
philosophy, customer relations, not prone to sudden
policy changes, etc.

Disadvantages of a large
organisation:

Management hierarchy -- problem of communication;

control, direction by management
Widely diversified range of products or services difficult to integrate common objective, management
philosophy and culture
Time in maintenance of organisation
administration, losing sight of setting objectives, planning
Tendency of ingrown and inbred - political, groupthink, resistance to changes and developments
Junior management tasks (routine and boring).
poor career development, earnings, rewards, promotion
information, etc.

Size Economies of Scale (EOS)

Internal EOS - arise from the more effective use of
available resources, and from increased specialisation,
when production capacity is enlarged.
Specialisation of labour
Division of labour
Larger and more specialised machinery small
company cannot afford because of obsolescence
Large buying
Stocking holding
Dimensional EOS - relationship between the volume
of output and the size of equipment (e.g. storage
tanks).

Size Economies of Scale (EOS)

Diseconomies of scale - advantage for Small & Medium
Enterprises
Operate in competitive markets - cost lower & more efficient
firms will survive
Risk takers - Innovation and entrepreneurial activity.
Management-employee relations - co-operative
Tendency to specialise - contribute efficiently towards the
division of labour.
Structure - allow flexibility
Focus normally on local market - cuts costs of transport.
Hiring expert consultants - cheaper than permanent
management specialists.

Act as suppliers / sub-contractors to larger firms.

Insufficient market demand

ECONOMIC
ACTIVITY

Economic Activity
Level of activity

primary, secondary and tertiary sectors

Gross domestic product

a measure of economic activity in a country.

De-industrialisation

often used to describe the long-term decline in the importance of

manufacturing industry and the secondary sector in general.

Trade surplus / deficit

an excess of exports over imports / when imports are greater than

exports.

Exchange rate

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

Sunrise industries:

rising new industries, such as information technology and genetics.

Their importance is increasing worldwide.

Sunset industries:

gradually dying industries. In the Western economies they include

heavy industries such as steel and shipbuilding, whose prices have
been undercut for many years by more efficient producers in Korea
and other countries in the Pacific.

THE PUBLIC AND PRIVATE

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

Public sector organisations

are usually set up in the interests of the
community and are funded wholly or
partly by the Government from public
funds and are answerable to a
government department or the Treasury.

THE PUBLIC AND PRIVATE

Co-operative
SECTORS

is the result of a voluntary linking together of consumers, producers

or retailers into a trading organisation, which is then used to
represent its constituent members in the marketplace.

Features:
Separate legal entity
Ownership by members
Management by management committee - elected by the members
Profits - divided among the members (dividends, bonus, etc.) or
allocated to other funds constituted by the co-op.
Types of cooperatives in UK Farming co-operatives, Wholesale or retail
of goods, producer co-operatives

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

Disadvantages:
Size - Many co-ops, particularly those in rural areas are too small in
terms of membership, capital resources and business turnover,
leading to many failures.
Inexperienced and incompetent management.
Keen competition from rival institutions.

THE PUBLIC SECTOR

Refers to all publicly funded or publicly owned

bodies
Characteristics
they are government owned and controlled
they are engaged in commercial (business) activities
they have socio-political goals alongside their
primary economic goals.

Organisations are owned by state (central

government and/or local government)
Some provided services paid for by taxation,
others levy charges on users directly (usually
with subsidy)
Examples: Civil service agencies, schools,
Armed forces, public libraries

The public sector - Public

Normally engaged in some form of
corporations
business related to utilities

(e.g. water, gas, electricity, transportation,

communications)

Advantages

Benefit consumers - main aim is not to earn

profits but provide services (protected from
monopolies or high prices)
Sense of responsibility to public
Large-scale enterprise (economies of scale)

Disadvantages

Lack initiatives
Bureaucracy and lack flexibility

The public sector

Reasons for the growth of the public sector and
public spending
Industrialisation and urbanisation - pressures for
increased government intervention
Population profile Changes, old people, etc.
Political parties - Competition for public support by
promising better activities, services (health care,
transport, etc.)
Pressures groups - to improve services
Welfare state - designed for society with people
having paid employment, not with high levels of
unemployment, as is now common.

Mission and
Vision

Vision
Statement

Mission
Statement

Goals

Objectives

Vision
Statement

Mission
Statement

Goals

Objectives

Importance of mission
Values and feelings are integral elements of
consumers buying decisions
People have different values and priorities
Employees are motivated by more than money. A sense
of mission and values helps to motivate them
Mission should he taken seriously for strategic
management

Mintzberg
Mission describes the organisations basic function in
society, in terms of the product and services it produces
for its clients.
Goals are the intentions behind decisions or actions, the
states of mind that drive individuals or organisations to do
what they do.

Mission and Vision

Mission Statement

Formal declarations of underlying purpose. They say what

an organisation exists to do.
Qualities of mission statements
Brevity (using only a few words) - easy Is understand and
remember
Flexibility - to accommodate change
Distinctive - to make the firm stand out

Problems with mission

Ignored in practice - not implemented, goals do not
correspond with outcome to be pursued.
More for public relations purpose
Post hoc. - produced to rationalise organisations existence
(what the organisation actually does is assumed to be
mission)
Full of generalisations. Best, quality, major: is just a
wish list

Key Elements of a Mission

Fundamental intentions
Statement
Role the company will seek to adopt
A description of what the
company hopes to accomplish
Definition of the business and
guidelines for decision-making
Means to gauge future
success
Sainsburys plc
Our mission is to be the consumers first choice for food, delivering
products of outstanding quality and great service at a
competitive cost through working faster, simpler and together.

Hierarchy of Objectives
Objectives

Should fulfil SMART criteria; Specific;

Measurable; Attainable / Achievable;
Result-oriented; Time-bounded
Flow from the goals and support them
Can be primary and secondary
Objectives can exist in finance, marketing,
production, products, human resources, or
any other area of the company
Form the basis for action planning
Should provide milestones in
achievement of strategy and tactical plan

Levels of Goals/Plans

Goals and Objectives

Do firms solely maximize profits?
Smaller firms managed by owners profit is likely to
dominate almost all firms decisions
Larger firms managers may have liltie contact with
owners (stockholders)
Managers may be more concerned with goals like
revenue maximisations (growth), short-run profits at
the expense of long-ran profit (to earn bonus,
promotion etc).

Goals and Objectives

Nature of profits

Amount for normal profit = the reward for entrepreneurship.

Normal profit is the opportunity cost of entrepreneurship (because amount of profit
or entrepreneur could earn elsewhere
Accounting profits = sales revenue - explicit costs of the business. Explicit costs are
cost clearly stated and recorded e.g., materials costs - prices paid to suppliers.
Economic profit = sales revenue (explicit costs + implicit costs). Implicit costs
(benefits foregone by not using FOP in most profitable way.
Normal profit = implicit cost.

Profit maximisation

Firm seek to make investments - in physical capital (e.g. machines), human capital,
advertising etc.
Incur casts today in order to generate returns in the future
Competition from profit-maximizing firms could form non profit maximizing firms out
of business

Return of capital employed (ROCE)

Also called Return on investment (ROI)

Calculated as [Profit / Long term capital employed] X %

Growth

Firms often grow to survive

Growth may be achieved through expanding output, buying other businesses, or
making arrangements with them for mutual benefit
Ansoff matrix

OPERATIONAL PERFORMANCE INDICATORS - The balanced

scorecard
Limitations attached to traditional financial measures:

Are backward looking and reflect yesterdays decisions

Are unable to reflect contemporary value-creating actions upon which future
financial success rests
Reinforce short-term thinking
Are sometimes of doubtful validity due to the manipulation of figures.

Balance scorecard

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

corporate success.

Defined as
a set of measures that gives top managers a fast but comprehensive view of the
business.
The balanced scorecard includes measures on financial, customer satisfaction,
internal processes, and innovation and learning.
The balanced scorecard allows managers to look at the business from four
important perspectives:

Financial perspective: reflecting measures such as asset turnover and earnings per
share.
Customer perspective: indicated by market share and customer satisfaction for
example.
Internal business processes: pointing to what the organisation must excel at,
response times and product quality for instance.
Innovation and learning: focusing on the ability to change and improve and will be
reflected in employee attitudes and morale, organisational culture and so forth.

STAKEHOLDERS
Stakeholders:
the many different groups and individuals whose interests are
affected by the activities of a firm

All organizations affect and are affected by different

stakeholders.
These are represented by interest groups (e.g. trade
union) and sometimes their power is reflected in
commercial relationships (e.g. suppliers)
3 broad types of stakeholder
Internal - employees, management
Connected - shareholders, customers, suppliers, financiers,
lenders, competitors
External - community, movement, pressure groups, special
interest groups, national and world society

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

STAKEHOLDERS
Satisfying stakeholders objectives
Qn: Do managers act in the interest of
shareholders only (profit maximization)?
Managers will not necessarily make decisions that
will maximize profits because:
no personal interests at stake in the size of profits
earned
a lack of competitive pressure in the market to be
efficient (minimizes cost, maximize profits) e.g.
when there are only a few firms.
Managers have their own interests to satisfy
career development, personal prestige, financial
rewards, psychological satisfaction (stains, job interest
dc)

Managers may choose to achieve a satisfactory

profit rather than maximising profit

STAKEHOLDERS
Satisfying stakeholders objectives
Williamsons management discretion model
Assumes that managers act to further their own interests
and so maximizes their own satisfaction or utility (in
terms of prestige, influence, other personal satisfactions)
Utility = f (manager s own salary, expenditure on staff,
amount of perks, authority)

Cyert and Marchs organisational coalition model

Shareholder, managers, employees and customers
have different goals
Need for compromise in establishing the goals of
the firm
E.g. shareholders settle for sum than maximum
profits, managers for less than maximum utility

STAKEHOLDERS
Stake Holder mapping

Key players - strategy must be acceptable to them, at least. An example

would be a major customer.
Stakeholders in Keep satisfied segment must be treated with care.
While often passive, they are capable of being key players. Large
institutional shareholders might fall into this segment.
Stakeholders in Keep informed segment do not have great ability to
influence strategy, but their views can be important in influencing more
powerful stakeholders, perhaps by lobbying. Community representatives
and charities might fall into this segment.
Minimal effort is expended on this segment.

Key performance indicators

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