1.4-1.6 Business

Political Factors

Political Factors

- Laws (employment, consumer, business) & policies (fiscal and monetary)

- Changes brought about by new government

- Possible effects of political unrest

Legal Factors

- Employment or contract laws

- Trade unions

- Environmental protection regulations

threats: higher compliance costs

How changes in STEEPLE factors affect a business's objective and strategy

- Changes in social norms, public opinion and ethical views --> affect company's product, activities and marketing strategies

- Changes in political or legal factors force business to operate in accordance of regulations

- Changes in technological factors results in adoption of newer technology thus efficiency

- Changes in environmental factors force companies to engage in sustainable production processes

- Change in economic factors affect costs of operations, spending attitudes of customers

Stakeholders

A group/organization with a direct interest (stake) with operations and performance of a business

ex. suppliers, customers, employees, shareholders

STEEPLE analysis

A decision making tool for understanding a business' external oppurtunities and threats

(social, technological, environmental, ethical, political, legal and economic factor)

Social Factors

- Attitude of society towards wide range of issues

- Population demographics (more young/old, more women/men, etc.)

- Roles and attitudes of people

- Cultural and religious beliefs

- Security and education

Technological Factors

-Use of tools and machines

- Information technology

- Innovations in technology

+ reduced operational costs

Economic Factors

- economic growth/decline

balance of trades - difference between value of export and import earnings

- Interest and tax rates

- Exchange rates and foreign relations

- Inflation rates, unemployment rates, etc.

Environmental Factors

- Abundance of natural resources or raw materials

- Threats from nature (or natural disasters)

- Waste disposal/recycling

- health scares/empidemics

Ethical Factors

- Client confidentiality

- Bribery and other forms unethical (and possibly illegal) business transactions

- Fair competition

Stake

Having an interest or be involved in something

Internal Stakeholders

Members of business (employees, managers, shareholders (owners) of the organization.

Employees - integral component, the connection between product quality, customer service, motivation should be compensated accordingly

Mangagers/Directiors - may aim to maximize benefits/profits which pleases shareholders, look at long-term financial health of organization

Shareholders - limited liability companies are owned by their shareholders, invest money in a comany by purchasing shares. Have voting rights, share of annual profits

--> aim to maximise dividends *proportion of business's profits to distribute to shareholders

--> achieve capital gain in the value of the company's shares

Shareholders

Owners of a limited liability company held by individuals and other organization.

External Stakeholders

Individuals/Organizations not part of the business but have a direct interest in its activies and performance (ex. customers, suppliers, government)

Customers - product quality, quality service, competitive prices

Suppliers - regular contract, healthy relationships with clients

Pressure Groups - enforce demands on organizations (ethical, environmental)

Financiers - interested in the borrowing organization's ability to generate profits and repay debts/interest, aim to establish long term relationship with the business

Government - job creation, tax payments, impact on economy

Competitors - fairness of prices, strategic plan of business, remain competitive

Stakeholders vs Shareholders.

Stakeholders are a group directly interested and affected by business activity (employees, competitors, suppliers)

Shareholders hold a stake in limited liability companies. They are entitled to a share of business's profits

Internal vs External Stakeholders

They both have a direct interest in a business's activity/performance. However external stakeholders do not share the same interests and internal stakeholders do (well-being of the business)

Stakeholder Conflict

differences in varying interest in various stakeholder groups of a business. These conflicting interests mean a business cannot meet all stakeholder objectives simultaneously.

ex. suppliers want to charge full price, business wants discounts

ex. shareholders want profit, at the expence of cutting staff benefits

Conflict Resolution (3 key issues)

1. Type of business entitiy

2. Goals and objectives

3. Influence

renumeration

payment for work done

Economies of scale

refer to lower average costs of production as a larger scale due to increase of its operation

ex. variable costs can be reduced based on suppliers

Diseconomies of scale

organization beocmes too large, causing productive inefficiences that are result in an increase in average costs of production

ex. suppliers are not able to supply large-scale, source from other outlets

Internal Economies of Scale

occur inside the control of the firm --> causes lack of control, communication problems, poorer working relationships, poor buraeucracy and poor decision making

Technical economics of scale

investing in tech. to reduct costs

Large firms can use sophisticated capital and machinery to amass produced goods. The high fixed cost of their equipment and machinery are produced in large quantities. Therefore, reduction of average costs of production.

Financial econmies of scale

large firms can borrow large sums of money easily at lower rates of interst, financiers see firms as less risky. Therefore, results in reduction of the costs of borrowing finance.

Managerial Econmies of Scale

large firms divide managerial roles by employing specialist managers resulting in higher productivity. Small firms are unable to do so.

Marketing Economies of Scale

High costs of advertising can also spread by large firms through using the same marketing campaign across the world

Purchase Econmies of Scale

large firms benefit in buying in bulk for a discount, able to purchase large quantities for the biggest discounts

External economies of scale

occur when organization's average cost falls as the industry grows. All firms in the industry benefit

Technological process

technological innovations increase productivity within an industry saving costs (e-commerce, orevents the need for rent in a physical space)

Improved transportation networks

globalized transportation networks have enabled firms to import raw materials and finished goods that have been manufactured at lower costs. Increased convenience from improved logistical networks allow for faster deliveries at lower costs.

Abundance of skilled labour

Certain locations benefit from reputable education and training facilities. Local businesses benefit from this by having a suitable pool of educated and trained labour. This reduces costs of recruitment and training.

Regional specialization

certain locations or countries have established reputations for specializing in specific goods and services. Firms in those locations benefit from having access to specialist labour or suppliers. They are able to charge a premium price for their products.

External diseconomies of scale

increase in the average costs of production as a firm grows due to factors beyond its control

Examples of External Diseconomies of Scale

higher rents, traffic congestion, offer higher pay to employees (as business expands to a large area to attract workers)

Internal vs External Growth

Internal growth: when a business grows by using its own capabilities and resources to increase scale of opperations and sales revenue

External growth: occurs when dealing with outside organizations (consulting, financial), such growth can come from mergers

External Growth Examples

Mergers & Acquisitions, Joint ventures, strategic alliances, franchising

Mergers

- two firms decide to form a new company,

takeover or acquisition: company buys a controlling interest in another firm

Pros and Cons of Mergers

+bigger market and customer base

+ increased revenue

-conflicting cultures

-poor managment, demotivation and unemployment

- might fail to synergize

Joint Ventures

two companies join to form a new venture

Strategic Alliance

like a joint venture but no legal identity is created, profit is split between the companies

Franchising

- an individual buys the right to operate under another business' name

- franchise pays a franchise fee and is given a license to operate under the business name

- franchiser provides marketing and production equipment

Pros and Cons of Franchisor

+grow quickly

+less manpower to manage

+income from royalty

- less control over quality and performance of franchise

Pros and Cons of Franchisee

+ known brand leads to easy start up sales

+ franchisor support and guidelines

+ lower costs of suuplies of EOS (economies of scale)

- little freedom

- franchise loyalty fee

Pros and Cons of JV's and SAs

+ synergy

+ compettitive advantages

+entry to new markets

-enormous expenditure on brand development

-culture clashes

- rely heavily on goodwill and resources of counterparts

Multinational Companies

MNC is an organization that operates in two or more countries. They grow considerably over time due to benefits of being such super-sized business

Reasons for MNC

- increased customer base

- cheaper production costs (ex. cheaper labour)

- economies of scale

- brand development and brand value

- avoid protectionist policies (government policies that restrict international trade to help domestic industries)

- spreak risks

Host Countries

- any nation that allows a MNC to operate

- impact on host countries can be beneficial or harmful

Pros and Cons of Host Countries

+ job creation

+ higher national income

+ knowledge and technology

+ increased competition to incentivize local firms to be more efficient

- job losses

- repartriation of profits

- vulnerability (reliance on company can lead to exploitation)

- social responisbilties

- competitive pressures

Traditional business models

- concerned about the financial costs of resources

- the focus is on producing, selling and throwing away products

Circular business models

- CBM are decision making tools that focus on the environmental impacts of business activitie

- emphasis on sustainability related to all aspects of a firm's operation (reduce, reuse, recycle, repair)

Types of circular business models

Circular supply models, resource recovery models, product life extension models, sharing models, product service system models

Circular supply models

- focus on replacing finite natural resources with renewable, recyclable, biodegradable resources

- in long run, can be more profitable for business as earth's resources become more expensive

Resource recovery models

- aim to reuse by re-proccessing waste and materials into new and usable resources

Benefits:

+ preservation of finite resources

+reduces land, water polution

Cradle-to-cradle design and manufacturing

- manufacturing refers to the design and production of products to be re-proccesed into new resources

Closed-loop recycling

- process to collect, recycle and reproduce waste to make something new

Industrial Symbiosis

- process of one industry's by-product waste is turned into raw materials for another industry

Product life extension models

- extended the life cycle of products

- reduces excess resources

- low cost,

- unique selling proposition gained from product durability --> can be used for premium pricing

Sharing models

- this offers services where customers share products rather than owning for themselves

- model relies on products with low ownership or usage rate

Benefits

+ reducing demand for resources

+ sharing under-used products

Product service system models

- function of a product rather than the physical product itself

- incentives for business to use environmentally friendly products (google drive, spotify)

Pros and Cons of Circular Business Models

+long term sustainability

+improves corporate image

+competititve advantages

- attract customers to pay for products/services that can be more expensive

- requires giving up economies of scale

- challenge to adopt against governmental intervention

Horizontal Integration

Common type of M&A which is a system of consolidating many firms in the same industry

Vertical Integration

Businesses at different stages of production amalginate

Forward vertical integration - acquisition of businesses near final stage of production

Backward vertical integration - acquisition of businesses near early stage of production

ex. forward: coffee manufacturers attain starbucks. backward: starbucks attain coffee manufacturers

Synergy

Occurs when the whole is greater than individuals parts of businesses. Created by mergers and acquisitions.