BL 4 Business Environment & Economic (English) Volume I PDF

STUDY TEXT CA SRI LANKA CURRICULUM 2020  First edition 2019 ISBN 9781 5097 3119 0 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Published by BPP Learning Media Ltd BPP House, Aldine...

STUDY TEXT CA SRI LANKA CURRICULUM 2020  First edition 2019 ISBN 9781 5097 3119 0 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Published by BPP Learning Media Ltd BPP House, Aldine Place 142-144 Uxbridge Road London W12 8AA www.bpp.com/learningmedia The copyright in this publication is owned by BPP Learning Media Ltd. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of the copyright holder. The contents of this book are intended as a guide and not professional advice and every effort has been made to ensure that the contents of this book are correct at the time of going to press by CA Sri Lanka, BPP Learning Media, the Editor and the Author. Every effort has been made to contact the copyright holders of any material reproduced within this publication. If any have been inadvertently overlooked, CA Sri Lanka and BPP Learning Media will be pleased to make the appropriate credits in any subsequent reprints or editions. We are grateful to CA Sri Lanka for permission to reproduce the Learning Outcomes and past examination questions, the copyright of which is owned by CA Sri Lanka, and to the Association of Chartered Certified Accountants and Chartered Institute of Management Accountants for use of past examination questions in which they hold the copyright. © BPP Learning Media Ltd 2019 ii Contents Page Introduction iv Chapter features vi Learning outcomes vii Action verbs checklist xxv Business Level I - Business Environment and Economics Part A Business and Organisational Environment 1 An Introduction to Business Organisations 3 2 The Business Environment 17 3 Ethics and Social Responsibility 69 Part B Nature and Scope of Business Management 4 Business Management 91 Part C Functions of Management 5 Planning and Control 121 6 Organisational Structure 149 7 Leadership, Motivation and Communication 179 Part D Functional Areas of Businesses 8 Operation Management 209 9 Marketing Management 241 10 Human Resource Management 287 11 Management Information Systems and Project Management 321 Index Introduction iii  Introduction Business Level I - Business Environment and Economics At Business Level I the focus is on seeing a business and its decision making process from intrinsic and extrinsic view points. Accordingly, a detailed discussion on different organisational functions is undertaken as a precursor for a value analysis at the next level, and business economics is also pooled in to build a firm theoretical reasoning in creating value to the organisation eventually. This combination is also expected to help students to understand and appraise the interrelationship and application of economic knowledge in forging business decisions. Syllabus structure Main syllabus areas Weightings A. Business and Organisational Environment 5% B. Nature and Scope of Business Management 5% C. Functions of Management 20% D. Functional Areas of Businesses 30% E. Role of Economics in Business 5% F. Price Mechanism and Competitive Markets 10% G. Production, Cost, Price and Output Decisions 10% H. Macroeconomic Environment and Business 15% One of the key elements in examination success is practice. It is important that not only you fully understand the topics by reading carefully the information contained in this Study Text, but it is also vital that you practise the techniques and apply the principles that you have learned. In order to do this, you should:  Work through all the examples provided within the chapters and review the solutions, ensuring that you understand them;  Complete the progress test for each chapter. In addition, you should use the Practice and Revision Kit. These questions will provide you with excellent examination practice when you are in the revision phase of your studies. iv BL4 – Business Environment and Economics Pillar structure The Chartered Accountant Curriculum is structured around four progressively ascending levels of competency, namely, Business I, Business II, Corporate and Strategic Levels Business Level I provides the fundamentals of accounting and harnesses the skills and professional values needed to mould a Certified Business Accountant. The Curriculum is also subdivided into specific subject areas or knowledge pillars and learning material is delivered to meet the knowledge requirements. These Knowledge Pillars focus on imparting the technical knowledge required of a competent CA and comprise of five pillars that focus on the following subject areas: Knowledge Pillar 1: Audit, Assurance and Ethics (AA&E) Knowledge Pillar 2: Financial Accounting & Reporting (FA&R) Knowledge Pillar 3: Performance Measurement and Risk (PM&R) Knowledge Pillar 4: Taxation and Law (T&L) Knowledge Pillar 5: Business Management & Strategy (BM&S) Introduction v  Chapter features Each chapter contains a number of helpful features to guide you through each topic. Topic list This tells you what you will be studying in the chapter. The topic items form the numbered headings within the chapter. Chapter The introduction puts the chapter topic into perspective and explains why it is introduction important, both within your studies and within your practical working life. Learning The learning outcomes issued for the module by CA Sri Lanka are listed at the Outcomes beginning of the chapter, with reference to the chapter section within which coverage will be found. Key terms These are definitions of important concepts that you really need to know and understand before the exam. Examples These are illustrations of particular techniques or concepts with a worked solution or explanation provided immediately afterwards. Case study Often based on real world scenarios and contemporary issues, these examples or illustrations are designed to enrich your understanding of a topic and add practical emphasis. Questions These are questions that enable you to practise a technique or test your understanding. You will find the answer underneath the question. Formula to These are the formula that you are required to learn for the exam. learn Section This summarises the key points to remember from each section. introduction Chapter This provides a recap of the key areas covered in the chapter. roundup Progress Progress tests at the end of each chapter are designed to test your memory. Test Bold text Throughout the Study Text you will see that some of the text is in bold type. This is to add emphasis and to help you to grasp the key elements within a sentence or paragraph. vi BL4 – Business Environment and Economics Learning outcomes CA Sri Lanka's Learning outcomes for the Module are set out on the following pages. They are cross-referenced to the chapter in the Study Text where they are covered. Syllabus Area Knowledge Learning Outcomes Specific Knowledge Chapter Component A. Business and 1.1 Introduction to 1.1.1 Define the concept of organisation and Basic definitions of the 1 Organisational Organisational identify the types of business organisations organisation and types of Environment Environment business organisations 1.1.2 Identify the organisational and business Nature and scope of 1 environment and describe the nature and organisational and business types of organisational environment environment 1.1.3 Recognise the components of internal Internal environment of 2 environments and identify the importance of organisations each component in management process 1.1.4 Explain the dimensions of task environment Task environment 2 and identify how those components are influenced on the businesses 1.1.5 Explain the dimensions of general General environment 2 environment and identify how those components are influenced on the businesses 1.1.6 Explain the ethics and social responsibility Ethics and social responsibility 3 of organisations Learning outcomes vii  Syllabus Area Knowledge Learning Outcomes Specific Knowledge Chapter Component 1.1.7 Discuss the new dynamics of organisational New dynamics of organisational 2 and business environment and business environment 1.1.8 Review possible actions of organisations to Adopting to changing 2 be adopted to the dynamic environment environment 1.2 Role of 1.2.1 Identify the key stakeholders in Types and nature of 2 Stakeholders in organisations stakeholders Organisation 1.2.2 Discuss the impact of different stakeholders Stakeholder mapping 2 to the organisations (Mendelow matrix) 1.3 Industry Analysis 1.3.1 Recognise the competitiveness of the Five forces model for analysis of 2 industries industry competitiveness B. Nature and 2.1 Introduction to 2.1.1 Define management and identify the scope Definitions and scope of 4 Scope of Management of management management Business Management 2.1.2 Recognise arts and science of the The science and art of the 4 management management 2.1.3 Define the efficiency and effectiveness and Efficiency, effectiveness, and 4 relate those concept with productivity of productivity organisation 2.1.4 Explain the management process and Management process 4 interpret the interrelationship among main functions of management KE5 Commercial Insight for Management viii Syllabus Area Knowledge Learning Outcomes Specific Knowledge Chapter Component 2.2 Roles and Skills of 2.2.1 Identify who are managers in organisation Defining who is manager and 4 Managers and managerial role of an accountant managerial role of an accountant 2.2.2 Discuss the types of managers in the Types of managers and the scope 4 organisations under different bases of their responsibilities (horizontal and vertical differences) and discuss the scope of their responsibilities 2.2.3 Explain the main roles played by the Managerial roles 4 managers in the organisations 2.2.4 Identify skills needed to managers for Types and sources of managerial 4 performing managerial roles successfully skills and discuss the importance of managerial skills for different managers in organisational hierarchy 2.2.5 Recognise the skills needed for managing Skills for managing crisis and 4 crisis and unexpected events unexpected events 2.3 Challenges for 2.3.1 Explain the future challenges for the Challenges for managers in 21st 4 Managers managers in turbulent environment century 2.3.2 Discuss the application of innovative The application of innovative 4 technology in work place for improving the technology in work place productivity 2.3.3 Discuss how to manage employees who are Managing employees of different 4 representing in different generations generations (eg Generation Y and Z) Learning outcomes ix  Syllabus Area Knowledge Learning Outcomes Specific Knowledge Chapter Component 2.3.4 Identify the behavioral characteristics of Managing cross-cultural work 4 cross-cultural work teams and recognise teams effective management techniques for effectively manage them 2.3.5 Identify the behavioral characteristics of Managing multi- 4 multi-national/cultural employees and national/cultural employees recognise new management techniques for effectively manage them C. Functions of 3.1 Planning and 3.1.1 Define the planning and discuss the scope of Nature and scope of planning 5 Management Decision Making planning in the organisations 3.1.2 Recognise the type of future directions of the Planning and goal-setting 5 organisations 3.1.3 Identify the types of planning under Types of planning 5 different perspectives 3.1.4 Discuss the advantages of planning and Advantages of planning 5 importance of planning for achieving organisational effectiveness 3.1.5 Discuss the barriers of planning and ways of Barriers to planning and how to 5 overcoming those barriers in overcome the barriers of the implementing of organisational plans planning 3.1.6 Discuss the steps involved in the planning Planning process 5 process (with special reference to the strategic alternatives) KE5 Commercial Insight for Management x Syllabus Area Knowledge Learning Outcomes Specific Knowledge Chapter Component 3.1.7 Identify the principles of planning and ways Principles of planning 5 of applying those principles in the planning process 3.1.8 Recognise the challenges to the planning in Challenges to the planning in 5 dynamic environment dynamic environment 3.1.9 Explain the process of management by Management by objectives 5 objectives 3.1.10 Identify the scope of decision making and Nature of decision making and 5 importance of decision making and problem problem solving solving for the organisation 3.1.11 Identify main decision making approach of Decision making approaches 5 managers and executives 3.1.12 Identify the conditions of decision making Conditions of decision making 5 faced by managers in the different organisational settings 3.1.13 Explain different decision making models Decision making models and 5 and approaches and discuss the barriers for approaches (with special rational decision making process reference to rational decision making process) 3.1.14 Recognise the new decision making New decision making 5 approaches in turbulent environment approaches in turbulent environment Learning outcomes xi  Syllabus Area Knowledge Learning Outcomes Specific Knowledge Chapter Component 3.2 Organising 3.2.1 Identify the nature and scope of the Nature and scope of the 6 organising function in the management organising process 3.2.2 Identify the types of organisational structure Type of organisational structures 6 and discuss the positive and negative aspects of them 3.2.3 Explain key aspects of organisational Key aspects of organisational 6 structures connecting to the principles of structure (eg span of control, management centralisation vs decentralisation, unity of command etc) 3.2.4 Discuss the dynamics of organisational Dynamics of organisational 6 structure with regards to the nature of structure environment (eg tall organisation vs flat organisation, organic organisation vs mechanistic organisation etc) 3.2.5 Define the concepts of responsibility, Managerial responsibility, 6 accountability, authority and discuss the accountability and authority interrelationship among those concepts 3.2.6 Explain the process, best practices and Delegation of authority 6 barriers for delegation of authority 3.2.7 Discuss the relationship between strategy Strategy and structure 6 and organisational structure KE5 Commercial Insight for Management xii Syllabus Area Knowledge Learning Outcomes Specific Knowledge Chapter Component 3.3 Leading 3.3.1 Define leading as a key function of Nature and scope of the leading 7 management process and identify main as a management function areas of leading 3.3.2 Define organisational leadership and The organisational leadership 7 identify the characteristics and functions of and major functions of an effective leader effective leader 3.3.3 Differentiate the role of manager from the Managers vs leaders and power 7 role of leaders and identify the power sources of leaders sources of leaders 3.3.4 Discuss different leadership approaches and Leadership approaches and 7 theories in order to identify best leadership theories (including traits style for effective managers approach, behavioral approach and situational approach) 3.3.5 Define motivation as a key function of Definitions and scope of the 7 management process motivation 3.3.6 Identify the relationship between motivation Motivation and organisational 7 and organisational performances and performance discuss the factors influence on organisational performance other than motivation Learning outcomes xiii  Syllabus Area Knowledge Learning Outcomes Specific Knowledge Chapter Component 3.3.7 Identify the content and process theories of Theories of motivation 7 motivation and discuss the application of (including content theories - each motivation theory to understand Abram Maslow's hierarchy of motivational strategies of organisation and needs theory, Herzberg's two self-responsibility for the implementation of factor theory and ERG theory/ motivational strategies within the process theories, Victor Vroom's organisation expectancy theory and Adam's equity theory etc) 3.3.8 Explain signs of motivation and signs of Understanding motivation of 7 demotivation with the purpose of employees understanding motivation level of employees 3.3.9 Define the concept of communication and Nature and scope of the 7 identify the role of communication in the communication in the organisations organisations 3.3.10 Identify the difference between effective and Effective and efficient 7 efficient communication and discuss the communication conditions required for effective communication 3.3.11 Discuss how communication is taken place Basic communication model 7 in organisations in general way by using basic communication model KE5 Commercial Insight for Management xiv Syllabus Area Knowledge Learning Outcomes Specific Knowledge Chapter Component 3.3.12 Explain formal communication channels of Communication in organisations 7 organisation and discuss the ways of using informal communication in management practices 3.3.13 Identify the barriers of communication and Barriers to communication and 7 discuss the ways of breaking the ways of overcoming communication barriers communication barriers 3.3.14 Explain the communication skills to be Communication skills (eg 7 developed by the executive level employees listening, presentation, written in the organisations communication, IT application in communication etc) 3.4 Controlling 3.4.1 Define the controlling as a function of Definition and importance of the 5 management and discuss the importance of controlling controlling for the success of an organisation 3.4.2 Discuss the main steps associated with Types of controlling (eg 5 controlling process of an organisation feedback, feed forward and process etc) and steps of the controlling process 3.4.3 Recognise the role of an accountant in the Role of accountants in 5 controlling process of the organisations organisational controlling 3.4.4 Discuss the application of new technology Application of new technology 5 for organisational controlling for organisational controlling Learning outcomes xv  Syllabus Area Knowledge Learning Outcomes Specific Knowledge Chapter Component D. Functional Areas 4.1 Operation 4.1.1 Define operational management and discuss Definitions and scope of 8 of Businesses Management the role of the OM in an organisation operation management 4.1.2 Explain the ways of planning of production Planning production capacity 8 capacity in financial perspective 4.1.3 Define main production methods Production methods and lean 8 (job production, batch production, flow manufacturing production) and lean manufacturing with special reference to the role of accountants in the lean manufacturing 4.1.4 Identify the key concepts of supply chain Key concepts of supply chain 8 management applied in the organisations management 4.1.5 Identify the key concepts of total quality Total quality management 8 management and discuss the importance of TQM for improving productivity of the organisations 4.1.6 Recognise the application of new technology Application of new technology 8 for managing operations in the for managing operations in the organisations organisations 4.2 Marketing 4.2.1 Define marketing management and scope of Definitions and scope of 9 Management marketing function in the organisations marketing management 4.2.2 Discuss the role of marketing in organisation Role of marketing in 9 (marketing as a philosophy/marketing as a organisation business function) KE5 Commercial Insight for Management xvi Syllabus Area Knowledge Learning Outcomes Specific Knowledge Chapter Component 4.2.3 Discuss the different marketing philosophies Marketing philosophies and 9 and explain the importance of adopting to market orientation market orientation 4.2.4 Identify the concepts of segmentation, Element of marketing strategies 9 targeting and positioning/marketing mix for (segmentation, targeting and developing marketing strategies of the positioning/marketing mix) organisations 4.2.5 Recognise the application of new technology Application of new technology 9 for improving the productivity of marketing for marketing management management 4.3 Human Resource 4.3.1 Define human resource management (HRM) Definitions and role of HRM 10 Management and identify the importance of HRM in the function in the organisations business process 4.3.2 Identify the major concepts associated with Functions of HRM 10 main HR functions of the organisations 4.3.3 Recognise the application of new technology Application of new technology 10 for improving the productivity of HRM for HRM Learning outcomes xvii  Syllabus Area Knowledge Learning Outcomes Specific Knowledge Chapter Component 4.4 Information 4.4.1 Recognise the nature and the purpose of Nature and the purpose of 11 Management information systems adopted by the information systems Systems and organisations Project Management 4.4.2 Identify the different types of information Types of information systems 11 systems adopted by the organisations (eg transactions processing systems (TPS), management information system (MIS) and executive information system (EIS)) 4.4.3 Discuss the role and importance of Enterprise resource planning 11 enterprise resource planning (ERP) for the (ERP) management practices of the originations 4.4.4 Identify the nature and the scope of project Nature and the scope of project 11 management management 4.4.5 Discuss the models and approaches adopted Models and approaches to 11 in project management project management E. Role of 5.1 Introduction to 5.1.1 Define economics and discuss the role of Role of economics in business 12 Economics in Economics economics in managing businesses management Business KE5 Commercial Insight for Management xviii Syllabus Area Knowledge Learning Outcomes Specific Knowledge Chapter Component 5.1.2 Discuss the concept of opportunity cost and Scarcity, choice and opportunity 12 scarcity and their relevance to economic cost choice 5.1.3 Identify the difference between Kinds of economics 12 microeconomics vs macroeconomics and normative vs positive economics 5.1.4 Identify the economic resources and their Economic resources and types of 12 remuneration economics goods 5.1.5 Differentiate between economic profits Economic vs accounting profits 12 from accounting profits 5.2 Central Problem of 5.2.1 Identify the central problems of an economy Central problems of an economy 12 the Economy 5.2.2 Discuss the way of solving central problems Solving central problems in 12 in command economies, market economies different economies and mixed economies F. Price 6.1 Demand, Supply 6.1.1 Identify how the free market operates and Free market operation 13 Mechanism and and Market the merits and demerits of free market Competitive Equilibrium in a operation Markets Competitive Market 6.1.2 Discuss the concept of demand, law of Concept of demand and demand 13 demand, estimating demand curve in free curve market and its relevance for the businesses Learning outcomes xix  Syllabus Area Knowledge Learning Outcomes Specific Knowledge Chapter Component 6.1.3 Discuss the concept of supply, law of supply Concept of supply and supply 13 and estimating supply curve in free market curve and its relevance for the businesses 6.1.4 Recognise the concept of market Market equilibrium and price 13 equilibrium/disequilibrium in the price mechanism mechanism and analyse the impact of market equilibrium on business decisions 6.2 Demand Supply 6.2.1 Discuss and compute the price elasticities of The concept of elasticities 13 Analysis demand and supply, income elasticity, cross price elasticity and advertising elasticity relevant to the business decisions 6.2.2 Define and calculate consumer and producer Consumer and producer surplus 13 surplus and its implication for business 6.2.3 Demonstrate the impact of government Impact of government 13 intervention on competitive markets and intervention to free market business activities, through ceiling price, floor price, taxes, subsidies, and quotas G. Production, Cost, 7.1 Production and 7.1.1 Identify the difference between economic Economic cost and financial cost 14 Price and Output Cost Functions cost and financial cost Decisions KE5 Commercial Insight for Management xx Syllabus Area Knowledge Learning Outcomes Specific Knowledge Chapter Component 7.1.2 Define, and measure the short run total cost Short run cost concepts and 14 (TC), marginal cost (MC), average variable functions cost (AVC), average total cost (ATC), average fix cost (AFC) based on short run cost functions and discuss how those cost concepts associated with business decisions 7.1.3 Explain the importance of LATC (planning Long run cost function 14 curve) for business decisions in the long run 7.1.4 Discuss the concepts of economies of scale Economies of scale and 14 and economies of scope in the business economies of scope process 7.1.5 Define and calculate total production (TP), Short run production function 14 marginal production (MP), and average production (AP) in the short run based on short run production function 7.1.6 Identify the three stages of production in the Stages of production 14 short run and understand the rational stage in the short run business process 7.1.7 Discuss the validity of law of diminishing The law of diminishing marginal 14 marginal returns for business decisions in returns the short run 7.1.8 Discuss the long run production function Long run production function 14 and its implication for business decisions Learning outcomes xxi  Syllabus Area Knowledge Learning Outcomes Specific Knowledge Chapter Component 7.2 Profit 7.2.1 Explain the characteristics of perfect Theoretical dimensions of 15 Maximisation competition, monopolistic competition, market structures monopoly, oligopoly and their impact on businesses 7.2.2 Explain the total revenue/total cost Profit maximising conditions in 15 approach and marginal revenue/marginal competitive markets cost approach in profit maximisation by using graphical means 7.2.3 Discuss how businesses determine the Optimal output, price and profit 15 optimum output, price and profit in the decisions in competitive market short run and long run in different markets structures H. Macroeconomic 8.1 Macroeconomic 8.1.1 Identify the critical macroeconomic factors Importance of macroeconomic 2, 16 Environment Forces and affect to the business performances of forces in the businesses and Business Business Decisions competitive markets 8.1.2 Discuss the concept of national income of Concept of national income 16 the economy and its impact on business decisions 8.1.3 Discuss how to determine the economic Economic growth and 16 growth and economic development in a development country and how those concepts are influenced on business decisions KE5 Commercial Insight for Management xxii Syllabus Area Knowledge Learning Outcomes Specific Knowledge Chapter Component 8.1.4 Identify the stages of business cycle of an Business cycle 16 economy and discuss the business opportunities and threats of each stage of the business cycle 8.1.5 Discuss the ways of determining Unemployment and income 16 unemployment and income inequality and inequality explain how those concepts are influenced on business decisions 8.2 Inflation and its 8.2.1 Identify the determination of the price level Definitions and types of inflation 16 Impact on in the economy by the interaction between Business Process aggregate supply and aggregate demand in a simple AS-AD models 8.2.2 Explain demand full and cost push inflation Measuring inflation 16 and identify methods of calculating the inflation based on different price indexes 8.2.3 Discuss how business performances can be Effects of inflation on businesses 16 increased under high inflationary condition in the country 8.2.4 Discuss how demand management and Remedies for inflation 16 supply management policies control the inflation in a country 8.2.5 Identify the relationship between inflation Inflation and interest rate 16 rate and interest rate Learning outcomes xxiii  Syllabus Area Knowledge Learning Outcomes Specific Knowledge Chapter Component 8.3 Exchange Rates in 8.3.1 Explain how exchange rates are determined Impact of exchange rate on 16 Competitive and how changes in exchange rates affect on businesses Markets business performances 8.3.2 Define and discuss the controversy on Market exchange rate vs fixed 16 market versus fixed exchange rates exchange rate 8.3.3 Discuss how balance of payment is Balance of payment 16 determined and identify the impact of balance of payment on business decisions 8.3.4 Identify the actions to be taken by the Potential actions to control the 16 financial authorities to control the depreciation of currency depreciation of currency 8.4 Monitory Policy 8.4.1 Discuss the tools of monitory policy and Monitory policy and its impact 16 and Fiscal Policy explain how monitory policy impact on on businesses businesses in the competitive environments 8.4.2 Discuss the tools of fiscal policy and explain Fiscal policy and its impact on 16 how fiscal policy impact on businesses in the businesses competitive environments 8.4.3 Identify the financial markets and recent Financial market and 16 trends of financial intermediation in Sri intermediation Lanka 8.4.4 Discuss the role and responsibilities of Role and the responsibilities of 16 Central Bank in the financial system in Sri the Central Bank in the financial Lanka system KE5 Commercial Insight for Management xxiv Action verbs checklist Knowledge Process Verb List Verb Definitions Tier - 1 Remember Define Describe exactly the nature, scope or meaning Recall important information Draw Produce (a picture or diagram) Identify Recognise, establish or select after consideration List Write the connected items one below the other Relate To establish logical or causal connections State Express something definitely or clearly Tier - 2 Calculate/Compute Make a mathematical computation Comprehension Explain important Discuss Examine in detail by argument showing information different aspects, for the purpose of arriving at a conclusion Explain Make a clear description in detail revealing relevant facts Interpret Present in understandable terms or to translate Recognise To show validity or otherwise, using knowledge or contextual experience Record Enter relevant entries in detail Summarise Give a brief statement of the main points (in facts or figures) Classify Allocate into categories Describe Communicate the key features Provide Give illustrations to support or illuminate a point or assertion Tier - 3 Application Apply Put to practical use Use knowledge in a Assess Determine the value, nature, ability setting other than the or quality one in which it was learned/solve close- Demonstrate Prove, especially with examples ended problems Graph Represent by means of a graph Prepare Make ready for a particular purpose Prioritise Arrange or do in order of importance Reconcile Make consistent with another Solve To find a solution through calculations and/ or explanations Action verbs checklist xxv  Knowledge Process Verb List Verb Definitions Conduct Organize and carry out a task Communicate Transmit thoughts or knowledge Display Make evident or noticeable Perform Do or execute, usually in the sense of a complex procedure Reconcile Make or prove consistent or compatible or show differences Set Fix or establish Select Choose from a range of options or possibilities Support Assist to make decisions by providing appropriate information about respective concepts Use Apply in a practical way Undertake Commit to do or perform Tier - 4 Analysis Analyse Examine in detail in order to determine the solution or outcome Draw relations among Compare Examine for the purpose of ideas and to compare discovering similarities and Contrast Examine in order to show contrast/solve open- unlikeness or differences ended problems Construct Build or make a diagram, model or formula Differentiate Constitute a difference that distinguishes something Outline Make a summary of significant features Write Provide word descriptions to express an opinion or idea Tier - 5 Evaluate Advise Offer suggestions about the best course of Formation of action in a manner suited to the recipient judgments and Convince To persuade others to believe something decisions about the using evidence and/or argument value of methods, ideas, Criticise Form and express a judgment people or products Comment Provide written remarks expressing an opinion in both positive and negative perspectives Evaluate To determine the significance by careful appraisal Conclude Form a judgment about, or determine or resolve the outcome of, an issue through a process involving reasoning Determine Ascertain or conclude after analysis and consideration; judge xxvi Business Level I - Business Environment and Economics Knowledge Process Verb List Verb Definitions Justify Give valid reasons or evidence for Review Study critically with a view to correction or improvement Recommend A suggestion or proposal as to the best course of action Resolve Settle or find a solution to a problem or contentious matter Validate Check or prove the accuracy Tier - 6 Synthesis Compile Produce by assembling information Solve unfamiliar problems by collected from various sources combining different aspects Design Devise the form or structure according to to form a unique or novel a plan solution Develop To disclose, discover, perfect or unfold a plan or idea Propose To form or declare a plan or intention for consideration or adoption Anticipate Foresee, or experience or realise beforehand Draft Write original material for the scrutiny of others Formulate Devise and put into words Plan Devise the plan for an assurance engagement Report Give the formal final conclusion for an assurance engagement Submit Send a completed document to a particular party Suggest Put forward an idea or give reasons Synthesize Make or propose a new concepts or ideas by combining existing knowledge in different aspects Action verbs checklist xxvii xxviii Business Level I - Business Environment and Economics  PartA­ Business and Organisational Environment CAI THE INSffiUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA 2 CA Sri Lanka  CHAPTER INTRODUCTION In this chapter we introduce the concepts of business and business organisations and focus on their key features. Organisations develop out of the need to co-ordinate work, (Section 1) but this can be achieved in different ways. Section 2 looks at the different types of organisation. Sections 3 and 4 cover what businesses offer and the resources they use, and we finish the chapter by considering how businesses determine the direction they will go in the future. Knowledge Component A Business and organisational environment 1.1 Introduction to 1.1.1 Define the concept of organisation and idenfify the types of organisational business organisations environment 1.1.2 Identify the organisational and business environment and describe the nature and types of organisational environment. 3 BL4 | Chapter 1: An Introduction to Business Organisations LEARNING CHAPTER CONTENTS OUTCOME 1 Businesses and organisations 1.1.1, 1.1.2 2 Types of business organisation 1.1.1 1 Businesses and organisations Organisations can achieve results which individuals cannot achieve by themselves. A business is an organisation that is oriented towards making a profit. 1.1 Nature of businesses A business is an organisation that is oriented towards making a profit for its owners so as to maximise their wealth; it can be regarded as an entity separate from its owners. It is the primary objective of the organisation that determines whether or not it is a business. Businesses can be seen using a variety of legal structures. 1.2 Nature of organisations An organisation is a social arrangement which pursues collective goals, which controls its own performance and which has a boundary separating it from its environment. Here are some examples of organisations. A multinational car manufacturer A local authority An accountancy firm A trade union A charity An army 4 CA Sri Lanka  BL4 | Chapter 1: An Introduction to Business Organisations The common characteristics of organisations are as follows. (a) Organisations are preoccupied with performance, and meeting or improving their standards. (b) Organisations contain formal, documented systems and procedures which enable them to control what they do. (c) Different people do different things, or specialise in one activity. (d) They pursue a variety of objectives and goals. (e) Most organisations obtain inputs (eg materials), and process them into outputs (eg for others to buy). 1.3 Why do organisations exist? Organisations can achieve results which individuals cannot achieve by themselves. (a) Organisations overcome a person's individual limitations, whether physical or intellectual. (b) Organisations enable people to specialise in what they do best. (c) Organisations save time, because people can work together or do two aspects of a different task at the same time. (d) Organisations accumulate and share knowledge. (e) Organisations enable synergy: by bringing together two individuals, their combined output will exceed their output if they continued working separately. In brief, organisations enable people to be more productive. 1.4 How organisations differ The common elements of organisations were described above, but organisations also differ in many ways. Here are some possible differences. (a) Ownership Some organisations are owned by private owners or shareholders. These are private sector organisations. Public sector organisations are owned by the government. (b) Control Some organisations are controlled by the owners themselves but many are controlled by people working on their behalf. Some are indirectly controlled by government-sponsored regulators. CA Sri Lanka 5 BL4 | Chapter 1: An Introduction to Business Organisations (c) Activity What organisations actually do can vary enormously. They could be manufacturing organisations, for example, or they could be a healthcare service. (d) Profit or non-profit orientation Some organisations exist to make a profit. Others, for example the army, are not profit orientated. (e) Legal status Organisations may be limited companies or partnerships. (f) Size The organisation may be a small family business or a multinational corporation. (g) Sources of finance Businesses can raise finance by borrowing from banks or government funding or by issuing shares. Other organisations may face restrictions on how they can raise money. (h) Technology Organisations have varying degrees of technology use. For example, computer firms will have high use of technology but a corner shop will have very low use. 1.5 What the organisation does Organisations do many different types of work. Here are some examples. Industry Activity Agriculture Producing and processing food Manufacturing Acquiring raw materials and, by the application of labour and technology, turning them into a product (eg a car) Extractive/raw materials Extracting and refining raw materials (eg mining) Energy Converting one resource (eg coal) into another (eg electricity) Retailing/distribution Delivering goods to the end consumer Intellectual production Producing intellectual property (eg software, books, films, music) 6 CA Sri Lanka  BL4 | Chapter 1: An Introduction to Business Organisations Industry Activity Service industries These include retailing, distribution, transport, banking, various business services (eg accountancy, advertising) and public services such as education or medicine 2 Types of business organisation An important difference between business organisations is between those which are profit orientated ('commercial') and those which are not-for-profit orientated ('non-profit') organisations. 2.1 Profit versus not-for-profit orientation The basic difference in outlook is expressed in the diagram below. Note the distinction between primary and secondary goals. A primary goal is the most important: the other goals support it. Profit orientated Non profit orientated OWNERS PUBLIC/BENEFICIARIES PRIMARY MAXIMISE PROFIT PROVISION OF GOAL (DIVIDEND) GOODS/SERVICES PROFIT OUTPUT (GOODS/SERVICES) SECONDARY OUTPUT OF REVENUE FROM MINIMISE COST OF GOAL GOODS/SERVICES GOODS/SERVICES PRIMARY GOAL INPUTS (MATERIALS, COSTS INPUTS (MATERIALS, LABOUR, FINANCE) LABOUR, FINANCE) REVENUE (TAXATION) Figure 1.1: Profit-oriented and non-profit oriented organisations 2.2 Private vs public sector Private sector. Organisations owned by individuals or other businesses. Public sector. Organisations owned or run by central or local government or government agencies. CA Sri Lanka 7 BL4 | Chapter 1: An Introduction to Business Organisations 2.3 Private sector commercial business organisations A commercial business organisation exists to make a profit. In other words, the costs of its activities should be less than the revenues it earns from providing goods or services. Profits are not incidental to its activities but the driving factor. Business organisations come in various shapes and sizes; there is a choice of legal structure. 2.3.1 Legal status Someone setting up a business can choose to go into business alone, take on one or more partners, who also share the profits of the business, or set up a limited company. 2.3.2 Limited companies A limited company has a separate legal personality from its owners (shareholders). The shareholders cannot normally be sued for the debts of the business unless they have given some personal guarantee. Their risk is generally restricted to the amount that they have invested in the company when buying a share of it. This is called limited liability. Whereas sole traderships and partnerships are normally small or medium-sized business, limited company status is used for businesses of any size. The ownership and control of a limited company are legally separate even though they may be vested in the same individual or individuals. (a) Shareholders are the owners but have limited rights, as shareholders, over the day-to-day running of the company. They provide capital and receive a return. Shareholders could be large institutional investors (such as insurance companies and pension funds), private individuals or employees. (b) Directors are appointed by shareholders to run the company. The board of directors controls management and staff, and is accountable to the shareholders; it has responsibilities towards both groups – owners and employees alike. (i) Executive directors participate in the daily operations of the organisation. (ii) Non-executive directors are invited to join in an advisory capacity, usually to bring their particular skills or experience to the discussions of the board to exercise some overall guidance. (c) Operational management usually consists of career managers who are recruited to operate the business, and are accountable to the board. 8 CA Sri Lanka  BL4 | Chapter 1: An Introduction to Business Organisations 2.3.3 Types of limited company In Sri Lanka, privately-owned limited companies come in two types: private limited companies (eg X Limited) and public limited companies. They differ as follows. (a) Number of shareholders. Most private companies are owned by only a small number of shareholders. The maximum numbers of shareholders that a private company can have is 50, excluding past and present employees. (Companies Act s27 b (ii) – former employees of the company who became shareholders of the company while being employees of such company and who have continued to be shareholders after ceasing the employment of the company.) Public companies are, generally, owned by a wider proportion of the investing public. (b) Transferability of shares. Shares in public companies can be offered to the general public. In practice this means that they can be traded on a stock exchange. Shares in private companies, on the other hand, are rarely transferable without the consent of the other shareholders. (c) Directors as shareholders. A private company must have one director, a public company must have a minimum of two directors. The directors of a private limited company are more likely to hold a substantial portion of the company's shares than the directors of a public company. (Companies Act s201 – a company shall have at least one director, except a public company which should have at least two directors.) (d) Source of capital (i) A private limited company's share capital will normally be provided from the founder or promoter or business associates of the founder or employer. (ii) A public limited company's share capital, in addition, can be raised from the public directly, or through institutional investors, using recognised markets. Many companies start in a small way, often as family businesses which operate as private companies, and which then grow to the point where they become public companies and can invite investors to subscribe for shares. The new capital thus made available enables the firm to expand its activities and achieve the advantages of large-scale operation. CA Sri Lanka 9 BL4 | Chapter 1: An Introduction to Business Organisations 2.3.4 Advantages and disadvantages of limited company status Advantages More money available for investment. Reduces risk for investors, thanks to limited liability. Separate legal personality. A company can own property, make contracts, etc. Ownership is legally separate from control. Investors need not get involved in operations. No restrictions on size. Some companies have millions of shareholders. Flexibility. Capital and enterprise can be brought together. Disadvantages Legal compliance costs. Because of limited liability, the financial statements of most limited companies have to be audited, and then published for shareholders. Shareholders have little practical power, other than to sell their shares, although they can vote to sack the directors. 2.4 The public sector The public sector comprises all organisations owned and run by the government and local government. Here are some examples: Statutory bodies Government companies Schools Public sector organisations have a variety of objectives. The Sri Lanka Department of Pensions administers part of the social security system relating to pensions, benefits and retirement information. Sri Lanka Post aims to make revenues from mail services, although it does have a social function too. 2.4.1 Key characteristics of the public sector (a) Accountability, ultimately, to the legislature. (b) Funding. The public sector can obtain funds in three main ways: (i) Raising taxes (ii) Making charges (eg for prescriptions) (iii) Borrowing 10 CA Sri Lanka  BL4 | Chapter 1: An Introduction to Business Organisations (c) Demand for services. There is a relationship between the price charged for something and the 'demand'. In the public sector demand for many services is practically limitless. (d) Limited resources. Despite the potentially huge demand for public services, constraints on government expenditure mean that resources are limited and that demand cannot always be met. 2.4.2 Benefits of public sector (a) Fairness. The public sector can ensure that everyone has access to services such as health and education. (b) Filling the gaps left by the private sector, by providing public goods such as street lighting. (c) Public interest. Governments once believed the public interest was best served if the state ran certain services. (d) Economies of scale. Costs can be spread if everything is centralised. (e) Cheaper finance. Taxes or borrowing backed by government guarantees might be cheaper than borrowing at commercial rates. (f) Efficiency. The public sector is sometimes more efficient than the private sector. The UK's National Health Service, despite its well-publicised problems, has lower administration costs and serves more of the population than the private sector does in the US. 2.4.3 Problems with public sector organisations (a) Responsibility. Inefficiency may be ignored as taxpayers bear losses. (b) Interference. Politicians may not be familiar with the operation of a business and yet political pressures and indecision may influence adversely the decision-making process. Pressures to get elected may lead to the deferral of necessary but unpopular decisions. (c) Cost. There can be conflict between economy of operation and adequacy of service. The public will demand as perfect a service as possible – but may not wish to bear the cost involved. 2.5 Non-governmental organisations Non-governmental organisations (NGOs) are bodies which are not directly linked with national government. The description 'NGO' generally applies to groups whose primary aim is not a commercial one, but within this the term is applied to a diverse range of activities, aimed at promoting social, political or environmental change. However NGOs are not necessarily charities and, although they may have political aims, they are not political parties. CA Sri Lanka 11 BL4 | Chapter 1: An Introduction to Business Organisations NGOs need to engage in fund raising and mobilisation of resources (donations, volunteer labour, materials). This process may require quite complex levels of organisation. The following are some organisational features of NGOs. Staffing by volunteers as well as full-time, paid, employees Finance from grants or contracts Skills in advertising and media relations Some kind of national 'headquarters' Planning and budgeting expertise It can be seen, therefore, that NGOs may need to possess an efficient level of organisation structure, much in the same way as a traditional commercial undertaking. 2.6 Co-operative societies and mutual associations Co-operatives are businesses owned by their workers or customers, who share the profits. Here are some of the features they have in common. Open membership Democratic control (one member, one vote) Distribution of any surplus in proportion to purchases Promotion of education Although limited companies also have some measure of democratic control, this is on the basis of one share, one vote – so a shareholder could dominate a company if he or she holds a majority of shares. This would not happen in a co-operative. Mutual associations are similar to co-operatives in that they are 'owned' by their members rather than outside investors. 12 CA Sri Lanka  BL4 | Chapter 1: An Introduction to Business Organisations CHAPTER ROUNDUP  Organisations can achieve results which individuals cannot achieve by themselves.  A business is an organisation that is oriented towards making a profit.  An important difference between business organisations is between those which are profit orientated ('commercial') and those which are not-for-profit orientated ('non-profit') organisations. CA Sri Lanka 13 BL4 | Chapter 1: An Introduction to Business Organisations PROGRESS TEST 1 Which of the following defines an organisation? A A social arrangement which pursues collective goals, which controls its own performance and which has a boundary separating it from its environment B A social arrangement which exists to make a profit, controls its own performance and which operates within certain boundaries 2 A private sector organisation is one owned or run by: A Central government B Local government C Government agencies D None of the above 3 Businesses owned by their workers or customers who share the profits are called: A Limited companies B Private limited companies C Co-operatives D Partnerships 14 CA Sri Lanka  BL4 | Chapter 1: An Introduction to Business Organisations ANSWERS TO PROGRESS TEST 1 The answer is A. This is the definition of an organisation. Not all organisations exist to make a profit. 2 The answer is D. A public sector organisation is owned or run by central or local government. 3 The answer is C. Co-operatives are owned by their workers or customers. CA Sri Lanka 15 BL4 | Chapter 1: An Introduction to Business Organisations 16 CA Sri Lanka  INTRODUCTION CHAPTER We start this chapter by considering in Section 1 in broad terms how the organisation interacts with its environments. Section 2 further discusses the different types of environment that are important. One key distinction is between the micro environment and the macro environment. We consider this distinction and start focusing on the micro environment in Section 3. The aim of environmental analysis (Section 4) is to review the environment for opportunities and threats, and to secure environmental fit. An organisation has many interchanges with its environment. It draws inputs from it and outputs goods and services to it. The environment is a major source of uncertainty. An organisation is affected by general environmental trends, usefully summarised in the PEST model, which is introduced in Section 5 and then drawn out into its component elements in Sections 6 to 9 which cover legal aspects, social and cultural trends and the impact of technology on organisations. In section 10 we move on to looking at the impact of globalisation and the impact of worldwide forces on businesses. We conclude this chapter by considering the impact of competitors (Section 11) and the competitive forces that act on industries (Section 12). Knowledge Component A Business and Organisational Environment 1.1 Introduction to 1.1.2 Identify the organisational and business environment and describe organisational the nature and types of organisational environments environment 1.1.3 Recognise the components of internal environments and identify the importance of each component in the management process 1.1.4 Explain the dimensions of task environment and identify how those components are influenced on the businesses 17 BL4 | Chapter 2: The Business Environment Knowledge Component 1.1.5 Explain the dimensions of general environment and identify how those components are influenced on the businesses 1.1.7 Discuss the new dynamics of organisational and business environment 1.1.8 Review possible actions of organisations to be adopted to the dynamic environment 1.2 Role of stakeholders in 1.2.1 Identify the key stakeholders in organisations organisation 1.2.2 Discuss the impact of different stakeholders to the organisation 1.3 Industry analysis 1.3.1 Recognise the competitiveness of industries 18 CA Sri Lanka  BL4 | Chapter 2: The Business Environment LEARNING OUTCOME CHAPTER CONTENTS 1 The organisational environment 1.1.2, 1.1.3, 1.2.1, 1.2.2 2 Classification of organisational environments 1.1.2, 1.1.4 3 The micro environment