Business 9609 A2 Notes for GCE STUDENTS PDF

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PRIVATIZATIONThis is the selling off of state-owned organizations to private sector owners. Firms in the private sector have to make a profit to survive. In order to make a profit in competitive market firms must be efficient.Reasons for Privatization: The sale of state assets generates a great deal...

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A LEVEL BUSIN BUSINESS ESS 9609

PRIVATIZATION This is the selling off of state-owned organizations to private sector owners. Firms in the private sector have to make a profit to survive. In order to make a profit in competitive market firms must be efficient.

Reasons for Privatization: • The sale of state assets generates a great deal of income for the government, which can be spent on other state projects. • Nationalized industries lacked the incentive to make a profit, since their main aim is to provide a public service. As a result, their costs tended to be high and they often made losses. • Many people believed that nationalized industries are overstaffed. They argued that if they are in the private sector, they would be focus to cut costs in order to improve their service and rather a profit for the shareholders. • Once these organizations have been sold to the private sector there would be little political interference. They would be free to determine their own investment levels, prices and growth rates. • Privatization puts responsibility for success purely in the hands of the managers and staff who work in the org. this can lead to strong motivation as they have a direct involvement in the work they do. • Private businesses have access to the various sources of finance like selling of shares, debentures, loans, leasing etc.

Arguments against Privatization: • Many of the nationalized industries are important for the development of the economy such as electricity, gas, railway etc. to put them in private hands might destroy their existence. • If business conditions become move worse than private owners may not guarantee supply of services. • Ownership of industries might be transfer in the possession of foreign investors like PTCL. • Breaking up nationalized industries in several times, will reduce the benefit of economies of scale. • Private owners can exploit consumers with high prices. • Some of the newly privatized businesses have cut back on staffing level, increased rate of unemployment in an economy.

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A LEVEL BUSIN BUSINESS ESS 9609

PUBLIC PRIVATE PARTNERSHIP These are public sector services that are managed and funded through a partnership of Govt. and private sectors organization. Following are two types of PPP:

Govt. Funded: In this partnership Govt. provide finance but the management of the organizations will be controlled by the private business that will develop all policies regarding operations, H.R, marketing etc.

Private Sector Funded: In this partnership agreement financial arrangement is the responsibility of private sector but the management handed over or controlled by Govt. e.g. public transport funded by Daewoo International.

Benefits of PPP: 1. 2. 3. 4.

Speedy, efficient and cost-effective delivery of projects. It gives value for money to the taxpayer. Innovation and diversity in the provision of public services. Effective utilization of state assets to the benefits of all users of public services.

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A LEVEL BUSIN BUSINESS ESS 9609

MULTINATIONALS Firms with production bases in more than one country; they may have locations around the world but have their headquarters in one country, e.g. Unilever, Shell, Honda etc.

Reasons for Becoming Multinationals: • To make Use of Resources Abroad: Sometimes the multinational wants to locate where raw material is easily available. • Closer to Overseas Market: The companies want to locate near to the overseas markets because to attract more overseas customers and generates more sales and profit. • Restriction on Home Companies: Sometimes the government prevents the firms too big in country and through this the organization creates monopoly but a firm wants to expand and this will be possible through multinationals. • Tax Advantages or Government Grants: The companies want to save the cost of business. This is also a reason for becoming multinationals because to gain tax advantages or grants from the overseas market.

Advantages to Multinationals: 1. Transportation Cost: The multinational businesses locate close to different markets; this can cut the transportation costs. 2. Import Quotas and Tariffs: The multinational mostly locates where no limit and taxes on importing and exporting of goods.

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A LEVEL BUSIN BUSINESS ESS 9609 3. Lower Labor Cost: The multinational mostly located where cheap labor of business, so the less labor cost. 4. Raw Materials: The multinationals enjoy the quality of raw and cheap raw material. 5. Government Incentives: Sometimes government gives the incentives such as government grants, subsidies, lower taxes etc.

Disadvantages to Multinationals: 1. Geographically Distant: It is difficult to controlling bases which are geographically distant. 2. Communication Problems: Different languages used in different countries so, it is also a disadvantage to the location of business into another country due to communication problems. 3. Common Objectives: Due to geographically distant the common objective does not implement easily. 4. High Media Attention: Multinationals operates more than one country usually they face high level of media attention

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A LEVEL BUSIN BUSINESS ESS 9609

Advantages to the Country where a Multinationals Locate: 1. Provides Jobs: The multinationals provide job opportunities this will reduce the unemployment from the country and economic development in the country. 2. Pays Taxes: The multinationals pay taxes to the government and this tax government used to the development of the country such roads, hospitals, educational institutions etc. 3. Provides Skills and Management Techniques: Multinationals shares the skills and management techniques to those people or workers where multinationals locate. These skills beneficial for their local employees. 4. Provides Goods and Services: Multinationals provides standardized goods and good quality services as used at international levels. 5. Reduces the Level of Imports: It will reduce the level of imports because standardized product produce in the country, so no need to import these goods.

Disadvantages to the Country where Multinationals Locate: • May Not Share Skills or Knowledge: The disadvantages to the country where multinational locate if the company not share the skills and management techniques to the employees. • May Not Invest in A Country: Sometimes business transfers the amount to the base country and not invests in that country where located. This is the negative effect on this country where multinational located.

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A LEVEL BUSIN BUSINESS ESS 9609 • May Not Train Locals: Sometimes multinationals do not train the local employees this is a negative effect on the employees and their country. • May Pressurize Government: Sometimes the companies are too big and pressurize the government for fewer taxes.

BUSINESS GROWTH Internal Growth: It is a situation in which an existing business expands without joining hands with any other firm. Usually, a profitable firm is able to finance companion by reinvesting its retained profits. Although, internal growth is time consuming process but may less expensive as compared to external growth.

External Growth: In this strategy businesses depend by means of taking over or merging with another business such as Faysal Bank took as RBS. Although, such method is less time consuming but the proctor firm has to by more than 50% shares. 1. Vertical Integration: In this integration businesses must be within the same industry but at different stage of production. Following are two main categories of vertical integration. Following are two main categories of vertical integration. (a) Backward Vertical Integration In this integration the next stage of production integrates previous stage of production but within same industry such as Sony Company has taken over Columbia Pictures. (b) Forward Vertical Integration In this integration the previous stage of production integrates the next stage of production but within the same industry such as Nestle Kit Kat brand has takeover Chocolate retail shops in Ireland.

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A LEVEL BUSIN BUSINESS ESS 9609 2. Horizontal Integration: In this integration businesses must be within same type of industry & at same stage of production (primary, secondary, tertiary) such as bank to bank. Firm can increase market share. Firm can enjoy the benefit of economies of scale. It can eliminate at least one competitor from the industry. It might create job insecurity for the workforce and reduce their motivational level. • Horizontal integration leads limited choice for customers and creates monopoly in the market.

• • • •

3. Conglomerate / Diversification / Lateral Integration: In this type of integration businesses expand in different types of industry such as Unilever operates in number of industries like chemicals, foods, plastics & cosmetics etc. In case of diversification firms spread the risk of business failure over the different industries. • Friendly Merger: When a business is facing production problems and wants to continue under the control of a sound company. • Hostile Takeover: A takeover which goes against the wishes of the target company’s management and board of directors, it is opposite of friendly takeover. • Synergy: The term synergistic effect refers to an increased intensity caused by the combination of two substances on an organism. For example, two medications taken together might have a more potent effect on the body than either would alone, which is a synergistic effect. Another illustration of synergistic effect can be seen in the concept of teamwork. In most cases several employees working together on a project results in increased productivity and more efficient use of resources.

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A LEVEL BUSIN BUSINESS ESS 9609

STRATEGIC ALLIANCES These are agreements between firms in which each agrees to commit resources to achieve an agreed set of objectives. These alliances can also be formed with a wide variety of stakeholders. For example, a big departmental store creates a strategic alliance with bank to his credit machine and credit cards in order to increase his sales, revenue and profits. This is long terms agreement between two or more separate organizations for their mutual benefits, while preserving their separate identity A potentially good partner will have strengths that complement weaknesses of the other partner. One of the partners could not do this alone. It reduces the risk of the venture. It gives the benefits of synergy which mean more strength when combined than they have independently.

Problems Resulting From Rapid Growth: Growth is a common business objective, especially for established businesses in the private sector. However, rapid business growth is not without its problems, when these are not properly tackled. These problems can even lead to business failure. First of all, finance is the core problem for rapidly expand business. They can’t easily arrange huge amount of capital in order to support rapid growth of the business. Because firms immediately need more machinery, raw material, workforce and other resources. These factors could lead to cash flow problems and long-term borrowing. Secondly, existing management may be unable to cope with problems of controlling larger operation than before. There will be a lack of co-ordination b/w the branches of an expanding firms. Another core area of the business is marketing plan which may not be suitable if a business rapidly increases its range of products from national to international markets.

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A LEVEL BUSIN BUSINESS ESS 9609

EXTERNAL INFLUENCES An external influence is a factor beyond a firm’s control that can affect its performance. Examples include, changes in legislation, technology, demographic factors and economic factors like interest rates, inflation, taxation etc. Nearly all government passed laws regarding consumer protection, labor protection and environmental protection. Moreover, technological changes may also have positive and negative impacts on business performance. Businesses can introduce wide variety of goods with the help of CAD and CAM technology. They can also produce high quality products at cheap price due to a technical economy. Furthermore, they can reduce labor cost due to capital intensive approach but need to pay for species expertise like engineers, technician etc. A key technological change is the arrival of interact, driven 24/7 services such as online shopping so the firm can easily capture remote areas customer’s without setting-up physical outlets in those areas.

Fiscal Policy: • Tax Rate • Govt. Spending In this policy govt. uses two main instruments like tax rate and public sector spending. If govt reduces tax rates and increases its spending in public sector then that approach can positively influence activities of private sector. In this way there will be increase in product demand which will improve production scales and profit level of the firm. In this case higher spending in public sector will reduce rate of unemployment.

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A LEVEL BUSIN BUSINESS ESS 9609

Monetary Policy: • Interest Rate • Supply of Money In this policy govt considers interest rates and supply of money in order to control high rate of inflation. If govt increases interest rate then private sector business might postpone expansion plans. Due to high rate of interest it will be difficult to manage working capital of the business. In case of working capital firm may have cash flow problems due to delay in payments by debtors and early demand of payment from creditors.

Exchange Rate Policy: It means to compare the value of one currency with another currency. $ 1 1 1

Rs 85 80 (Appreciation in PKR) 90 (Depreciation in PKR)

If the value of local currency has been appreciated then imports will become cheaper but increase cost of exports. In this case importers can reduce cost of product and increase their profit margins, but on the other hand exporters will lose sales revenue and profit levels.

Trading Blocs: In this approach govt. of different countries develop specific trading blocs in order to promote trade between all these countries. Trading blocs have no trade barriers such as import duties, quota system etc. This approach plays significant role in order to improve economic stability.

Quota System: An imported quota system is a physical limit to the quantity of a product that can be imported.

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A LEVEL BUSIN BUSINESS ESS 9609

Import Tariffs: An import tariff is a tax collected on imported products.

Embargo: An embargo is the partial or complete prohibition of commerce and trade with a particular country.

Dumping: Dumping is an informal name for the practice of selling a product in a foreign country for less than either (a) the price in the domestic country, or (b) the cost of making the product. It is illegal in some countries to dump certain products into them, because they want to protect their own industries from such competition.

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A LEVEL BUSIN BUSINESS ESS 9609

CONSUMER PROTECTION LAWS • Description Law • Weight & Measure Law • Price Discrimination Law

Description Law: According to this law manufacturing firms cannot misguide their customers about components or raw material use in the finish products.

Weight & Measure Law: According to this act both the manufacturing and trading firm must not sell underweight or inaccurate measurement products in the market.

Price Discrimination Law: According to this law firms must not charge unfair prices from consumers in a particular market.

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A LEVEL BUSIN BUSINESS ESS 9609

EMPLOYEES PROTECTION LAWS • • • •

Health and Safety Law Minimum Wage Law Dismissal Law Redundancy Law

Health and Safety Law: According to this law following facilities must be exist • • • • •

Normal rate of temperature Ventilation Fire doors must not be locked Proper heat & lighting system Surface of floor must not be slippery

Minimum Wage Law According to UK minimum wage law at least £ 6.5 per hour must be paid by employer in an industry. If firm does not consider minimum wage law then the following problems might occur: • Demotivation in workforce • High labor turnover rate • Increase rate of industrial unrest (strike)

Dismissal Law: Following are provisions of fair dismissal • Illegality • When worker is physically assault (Disable). • When employee have inappropriate skills in order to perform particular task.

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A LEVEL BUSIN BUSINESS ESS 9609 Following are provisions of unfair dismissal • • • •

Being a member of trade union. When employee refuses to work on public holidays. When employee refuses to work after normal working hours. When employer adopts inaccurate procedure of dismissal.

Redundancy Law: According to redundancy law the firm must pay redundancy amount only those employees who worked as permanent employees & have worked at least one whole year in an organization.

WHY DO NEW BUSINESSES OFTEN FAIL? The most common reasons for new enterprises failing are: • • • • • • •

Lack of Capital. Less range of products. Unmotivated workforce. Below standard products. Inexperience management. Inappropriate marketing policies. Inappropriate location of premises.

ETHICAL ISSUES Ethics can be defined as a system of moral values or decide what is right and what is wrong. OR It means the behavior or attitude of an enterprise must be positive towards customers, employees and society.

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A LEVEL BUSIN BUSINESS ESS 9609 For example, advertising directed towards children might be legal but many see it as unethical. Problems in Short run: • • • •

Price will be high. Profit margins will be low. Small number of customers. Increase cost of production.

Benefits in Long run: • Good publicity. • Improve brand image. • Large number of customers.

Corporate Social Responsibility: It is responsibility of a business to consider ethical issues and fulfill its Corporate Social Responsibility. Ethics is defined as moral values or decides what is right and what is wrong. Businesses should deeply consider the effects of these ethical actions on stakeholders. A strong sense of corporate responsibility was displayed by Orange, the cell phone company, when it introduced tree shaped transmitters which blended in with the surrounding area.

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A LEVEL BUSIN BUSINESS ESS 9609 IMPACT OF TECHNOLOGY ON BUSINESS ACTIVITY 1. Investment Cost: Firms need to invest large amount of capital. 2. Improve Quality: To improve quality of products or services. 3. Enhance Brand Image: Firms might improve brand image in the industry. 4. Improve Working Skills: Management might improve working skills of workforce. 5. Wide Range of Products: Firms might introduce different range of products in market. 6. Advertise Products: Firms can effectively advertise their products and services and capture remote areas customers. 7. High Cost of Production: Investment in new technology will lead to high cost of production in short run. 8. Need Experts: Firms need to recruit some special expertise such as engineers, mechanics and technicians etc. 1. Job Insecurity: New technology could lead to job insecurity which might demotivate the wor...