Lecture 1

Roman Puchkov
London SMS

A Question What is Business?

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What is Business?
Business can be defined in terms of activity of
production the transformation of various inputs (or factors of production) into diverse outputs in the form of goods and services to meet particular wants or needs of people in society.
Wetherly and Otter (2008: 4)

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Business Organisations
Business activity taking place within an organisational

context Organisations can be divided by their size, type of product and market, methods of finance, scale of operations, legal status, etc But all organisations are involved in basic transformation of inputs (resources) into outputs (goods, services or processes) This allows them to earn sufficient revenues to maintain and increase their resources to produce more Transformation is taking place in external environment

How Business Works?

Input stage Raw materials Money and capital Human resources Conversion stage Machinery Computers Human skills Organization releases outputs to its environment Output stage Goods Services

Organization obtains inputs from its environment

Organization transforms inputs and adds value to them

Sales of outputs allow organization to obtain new supplies of inputs

The business organisation as a transformation system

Worthington & Britton p.5,(2006) The Business Environment
BUSINESS ORGANISA TION

INPUT

OUTPUT

Land, premises Materials Labour Technology Finance Managerial skills

Goods Services Ideas Information

Consumption

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Understanding Business Environment

Decisions taken by a company are usually influenced by:

internal factors such as strategy, goals, scope of operations, internal resources including management systems and organizational culture and factors in the external business environment

External Factors

What is meant by External Environment?

PESTEL or STEEP framework (STEEP = PESTEL + Ecology) (External major environmental drivers influencing the future developments of industry / sector) Political Economic Social Technological Ethics Legal

PESTEL Explained (Worthington, 2006)

Political: from nature of political systems and institutions

to government involvement Economic: supply and demand, inflation, structural aspects of firms and markets Social: culture and demography, social trends Technological: innovation, research and development, Internet Ethical environment: social responsibility, impact of business organisations on communities, nature, general public Legal: laws, regulations, governing relationships between customers and suppliers, incl. supranational governments

Organizational Structures
Business organizations are classified by:
Size large, medium, small Type Primary (extraction), secondary (processing),

tertiary (services) Sector private, public Legal status sole traders (no legal distinction between the owner and the business), partnerships (for-profit business owned by two or more people), ltd co, plc, co-operatives, municipal enterprises, charities
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Business in Context
Diversity of business relevance to most areas of life Internal/external the environment is both inside

and outside organisations Complexity operates in and responds to many factors, pressures and requirements Spatial levels from the local to the global Dynamic environment businesses must respond to constant change

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Business in Context cont

Interaction businesses influence and are

influenced by their environments Power and vested interests -businesses have to take account of stakeholder interests and power Values debate about business in society involves values

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Immediate or Internal Environment

Availability Accessibility Quality Reliability Terms of business Extent of threat Healthy rivalry Impact

Supplier

Compet itor

Labour Market
Availability Skills Stability

Finance

Cash flow Pricing structure Banking terms Access to capital

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The Private Sector

In capitalist market systems most business is in the private sector

private ownership is the dominant principle

The private sector is characterised by production of commodities

for sale, in a competitive environment, with the prime objective of making a profit

Competition and the profit motive are the two key drivers of

business behaviour

The profit motive means that businesses produce only goods and

services that consumers are willing to pay for at prices that yield a profit

Examples of private sector organizations?

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Public Sector
Public sector and voluntary organisations provide an

alternative mechanism for dealing with scarcity (discussed later in the lecture) some goods and services on a not-for-profit basis

There are significant advantages to society from providing E.g. as a society we may decide that access to health care

should be on the basis for equal treatment for equal need rather than whether a person can afford to pay for treatment (NHS)

The public-private mix is a focus of political controversy

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Stakeholder Theory
No single theory. The broad concept is that business is part of a complex web of mutual relationships, affected by and affecting business

Stakeholders include:

Professional associations Local community

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Shareholders Clients/customers Supply chain companies Workforce Local and national governments

Stakeholder Theory
Defined in terms of groups which are critical to the

survival of the business (Sternberg 2000) Any individual or group who can affect or is affected by the actions, decisions, policies, practices or goals of the organisation (Carroll and Buchholtz 2000) Heath and Norman (2004) propose: - attention to the needs of stakeholders will lead to better outcomes for the business - stakeholder groups should be involved in oversight of management - analyse the different rights and needs of stakeholders and use this data to develop company policies
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Stakeholders Conflicting Interests

Employees pay rates; working conditions; job security; personal

development Managers security, status, organisational profitability; organisational growth, personal development and opportunities Shareholders market value of investment; dividends, security of investment Creditors security of loan, interest on loan, liquidity of investment Suppliers security of contract; regular payments; growth and market development Society safe products; environmental sensitivity; equal opportunities; legal compliance

Worthington and Britton (2006:221)

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Stakeholder analysis matrix

Stakeholders Power High Low
Met

Expectations
Not Met

but remember, stakeholders are both external and internal.

Key stakeholders - strategies to manage their expectations Analysing stakeholders

where thinking first pays off! Lets have a look at companys founders (shareholders) they are stakeholders! Please give more examples of stakeholders
Stakeholder

Power

Expectations

Met? Satisfied?
Sometimes. Dont like new direction

Implications

Strategy to deal with them

Communicate Get them to participate & buy in

Founders

Still high but managers becoming more so

Values still followed. Returns

Still own 40% of shares. Need to keep them happy

Summary and implications, key issues arising.

matrix

Scarcity
You cant always get what you want the Rolling Stones Anything that satisfies a need, desire or want is defined

as a commodity Wetherly and Otter (2008:36) To produce commodities resources are required in a combination to satisfy a production process Resources what are they? From an economic perspective land, labour, capital, enterprise Not available in unlimited supply scarcity is the base of the economic problem in life and society What is currently scarce or in short supply? Examples

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Business in its economic environment

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Opportunity Cost
The opportunity cost of something is what you give up to get it/do it. In other words, it is cost measured in terms of the best alternative forgone (Sloman & Hinde 2007:27) The cost of the next most desirable alternative The value of the resources that an activity absorbs, because that value reflects the usefulness of those resources in other employments A farmer sells produce for 2000 dollars a month more than his expenses and depreciation amount to each month Alternative course of action lease the farm for 1500 dollars per month and take a job buying produce for 2000 dollars per month Farming is worth 1500 per month less than lease / work What other factors might the farmer consider when making his decision?
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What is the opportunity cost of studying for a degree?

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Supply and Demand

The Market Mechanism - Bringing together the

buyer and seller so that a sale takes place In economic language the household demands the good or service and the firm supplies the good or service Demand factors:
Price

Price of alternatives (if available)

Disposable income Tastes attitudes, preferences, trends
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The Law of Demand

As the price of an item goes up, generally the

quantity demanded goes down some buyers will cut down others will switch to an alternative brand known as substitutes or complements (a complement to shoes may be socks) Other examples of substitutes or complements?

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Demand for Coffee

Price per cup
90p

1.00
1.10 1.20 1.30 1.40 1.50
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Quantity Demanded Per day 83 70 58 48 40 35 32

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Demand Curve for coffee

P

1.50 R 1.40 I 1.30 C 1.20 E 1.10 / 1.00 Cup 0.90

30

40

50

60

70

80

90

Quantity Demanded
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Other Demand Factors

Price of other goods - Substitutes may be tea, fruit juice,

flavoured water, water, Fizzy drinks coke, Pepsi, fanta, etc Complementary goods people may eat a biscuit, cake or confectionary with coffee. If the price of a complement goes up, individuals may be less likely to drink coffee and demand will fall. Disposable income Economic health poor - then retail sales may suffer. Higher income leads to increased consumption of most goods. As income falls the demand for goods falls
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