Chartered Institute of Personnel Management of Nigeria - Business Administration and Practices Intermediate 1 PDF
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Olusegun Mojeed, FCIPM, fnli and Oluwatoyin Naiwo, FCIPM
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This is a study pack on Business Administration and Practices for Intermediate 1, published by the Chartered Institute of Personnel Management of Nigeria (CIPM). The pack is suitable for researchers, people managers, and organizations responsible for human capital development.
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STUDY PACK ON BUSINESS ADMINISTRATION AND PRACTICES INTERMEDIATE 1 i BUSINESS ADMINISTRATION AND PRACTICES INTERMEDIATE 1 @CIPM 2023...
STUDY PACK ON BUSINESS ADMINISTRATION AND PRACTICES INTERMEDIATE 1 i BUSINESS ADMINISTRATION AND PRACTICES INTERMEDIATE 1 @CIPM 2023 FOURTH EDITION CHARTERED INSTITUTE OF PERSONNEL MANAGEMENT OF NIGERIA CIPM House, 1 CIPM Avenue, Off Obafemi Awolowo Way, Opposite Lagos State Secretariat, Alausa, Ikeja, Lagos. Tel: 07001237555 E-mail: [email protected], [email protected] Website: www.cipmnigeria.org Facebook/X/Instagram/Youtube: @cipmnigeria LinkedIn: Chartered Institute of Personnel Management of Nigeria 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, electronically, mechanical, photocopying or otherwise without the permission of CIPM NIGERIA. ii FOREWORD This fourth edition of the CIPM study pack is one of the learning resources recommended to persons preparing for certification through professional examinations. It is uniquely prepared to meet the knowledge standards of HR certification bodies and/or degree awarding institutions. The study pack is highly recommended to researchers, people managers and organisations responsible for human capital development in its entirety. Each chapter in the text has been logically arranged to sufficiently cover all the various sections of this subject as itemised in the CIPM examination syllabus. This is to enhance systematic learning and understanding of the users. The document, a product of in-depth study and research, is practical and original. We have ensured that topics and sub-topics are based on the syllabus and on contemporary HR best practices. Although concerted effort has been made to ensure that the text is up to date in matters relating to theories and practices of contemporary issues in HR, nevertheless, we advise and encourage students to complement the study text with other study materials recommended in the syllabus. This is to ensure total coverage of the elastic scope and dynamics of the HR profession. Thank you and do have a productive preparation as you navigate through the process of becoming a seasoned Human Resources Management professional. Olusegun Mojeed, FCIPM, fnli President & Chairman of the Governing Council iii ACKNOWLEDGEMENT On behalf of the President and Chairman of the Governing Council, Mr Olusegun Mojeed, FCIPM, fnli and the entire membership of the Chartered Institute of Personnel Management of Nigeria (CIPM), we acknowledge the intellectual prowess of Mr. Joseph Olaniyi Ishola in writing this well-researched text for the Business Administration and Practices. The meticulous work of our reviewer, Dr. Oyewole Sarunmi has not gone unnoticed and is hereby acknowledged for the thorough review of this publication. We also commend and appreciate the efforts of members of the Education Committee of the Institute, under the chairmanship of Mr. Henry Onukwuba, MCIPM for their unflinching support. Finally, my appreciation goes to my internal project team, led by the Director, Professional Standards and Development, Mr. Gbenga Samuel Odetunde ACIPM, the Team lead, Certification and Licensing, Mr. Samuel Eviewho, ACIPM and Team lead, Professional Examination, Mr. Yinka Oyedere, MCIPM for making this project a success. Oluwatoyin Naiwo, FCIPM Registrar/Chief Executive iv Contents FOREWORD............................................................................................................................... III ACKNOWLEDGEMENT.......................................................................................................... IV CHAPTER ONE........................................................................................................................... 1 1.1 Learning Objectives............................................................................................................ 1 1.2 Introduction......................................................................................................................... 1 1.3 Concepts Of Business......................................................................................................... 2 1.4 Definition Of Business........................................................................................................ 3 1.5 Reasons For Business......................................................................................................... 4 1.6 Business Actors................................................................................................................... 5 1.7 Characteristics Of Business................................................................................................ 5 1.8 Function Of Business.......................................................................................................... 6 1.9 Objectives Of Business....................................................................................................... 7 1.10 Categories Of Business..................................................................................................... 10 1.11 Functions & Role Of Law In Business And Society..........................................................11 1.12 Classification Of Businesses............................................................................................. 13 1.12.1 Classification Of Businesses – By Business Objectives.................................................. 14 1.12.2 Classification Of Businesses – By Area Of Operations................................................... 14 1.12.3 Classification Of Businesses – By Size Of The Business................................................ 16 1.12.4 Classification Of Businesses – By Types Of Products................................................... 19 1.12.5 Classification Of Businesses – By Sectors Of The Economy......................................... 21 1.12.6 Classification Of Businesses – By Mode Of Ownership............................................... 25 1.13 Different Types Of Industry........................................................................................... 27 1.13.1 Profit And Non-Profit Making...................................................................................... 28 1.13.2 Private Sector Or Public Sector.................................................................................... 30 1.13.3 Industrial/Sectoral......................................................................................................... 33 1.14 Failure Of Businesses....................................................................................................... 37 1.15 Planning Against Business Failure.................................................................................... 39 1.16 Business Ownership Forms............................................................................................... 40 1.17 Choice Of Selection Of Ownership Form......................................................................... 41 1.18 Business Stakeholder........................................................................................................ 42 v 1.19 Expectations Of Stakeholders........................................................................................... 48 1.20 Core Business Functions....................................................................................................... 49 1.21 Summary........................................................................................................................... 51 1.22 Illustrative And Practice Questions................................................................................... 52 1.23 References......................................................................................................................... 54 1.24 Recommendations For Further Reading........................................................................... 55 CHAPTER TWO........................................................................................................................ 56 EVOLUTION OF BUSINESS................................................................................................... 56 2.1 Learning Objectives.......................................................................................................... 56 2.2 Introduction....................................................................................................................... 56 2.3 The Development Of Commerce...................................................................................... 56 2.4 Evolution Of Industry....................................................................................................... 57 2.5 The Industrial Revolution................................................................................................. 58 2.5.1 Industrial Revolution Elements......................................................................................... 59 2.5.2 Industrial Revolution Stages............................................................................................. 60 2.6 Factors That Favour Industrial Revolution In England.................................................... 61 2.7 Consequences Of The Industrial Revolution.................................................................... 62 2.7.1 PROS AND CONS OF INDUSTRIALIZATION 63 2.7.2 Relation Between Imperialism And Industrialisation....................................................... 63 2.8 The Impact Of Industrial Revolution On Business Management..................................... 64 2.9 Summary........................................................................................................................... 65 2.10 Addendum Notes................................................................................................................ 65 2.11 Illustrative And Practice Questions................................................................................... 67 2.12 References......................................................................................................................... 69 2.13 Recommendations For Further Reading............................................................................ 69 CHAPTER THREE.................................................................................................................... 70 THE ENVIRONMENT OF BUSINESS................................................................................... 70 3.1 Learning Objectives.......................................................................................................... 70 3.2 Introduction....................................................................................................................... 70 3.3 Nature And Importance Of Business Environment.......................................................... 71 3.4 Characteristics Of Business Environment........................................................................ 71 vi 3.5 Internal Factors Of Business Environment....................................................................... 74 3.7 The Task (Micro) Factors Of Business Environment....................................................... 75 3.7 The General (Macro) Factors Of Business Environment................................................. 77 3.9 Relationship Between Business And The Environment................................................... 79 3.10 Managing The Organizational Environment..................................................................... 81 3.11 Analyzing The Business Environment.............................................................................. 84 3.12 Organizational Approaches To Environmental Challenges.............................................. 86 3.13 Summary........................................................................................................................... 87 3.14 Illustrative And Practice Questions................................................................................... 88 3.15 References......................................................................................................................... 90 Recommendations For Further Reading....................................................................................... 90 CHAPTER FOUR....................................................................................................................... 91 THE ORGANIC BUSINESS FUNCTIONS............................................................................. 91 4.1 Learning Objectives.......................................................................................................... 91 4.2 Introduction....................................................................................................................... 91 4.3 The Production Function................................................................................................... 92 4.3.1 Introduction....................................................................................................................... 92 4.3.2 Meaning Of Production..................................................................................................... 92 4.3.3 Production Management................................................................................................... 92 4.3.4 Functions And Scope Of Production Management........................................................... 92 4.3.5 Factors That Determine The Volume Of Production........................................................ 93 4.3.6 Factors Influencing The Choice Of The Production System............................................ 94 4.3.7 Factors Influencing Factory Location............................................................................... 95 4.3.8 Quality Control.................................................................................................................... 96 4.3.9 Types Of Production System............................................................................................ 97 4.3.10 Production Processes.................................................................................................. 101 4.3.11 Plant Layout................................................................................................................ 101 4.3.12 Problems Of Production Function In Nigeria............................................................. 102 4.3.13 Solution To Production Function Problems In Nigeria............................................... 102 4.4 The Marketing Function....................................................................................................... 103 4.4.1 Definiton Of Marketing.................................................................................................. 103 vii 4.4.2 Functions Of Marketing.................................................................................................. 104 4.4.3 Distinctions Between Marketing And Selling................................................................. 105 4.4.4 Importance Of Marketing To Society............................................................................. 106 4.4.5 Marketing Concept.......................................................................................................... 106 4.4.6 Marketing Mix................................................................................................................ 108 4.4.7 Marketing Research.........................................................................................................116 4.5 The Human Resourcefunction.........................................................................................117 4.5.1 Introduction......................................................................................................................117 4.5.2 Definition Of Human Resources Management................................................................117 4.5.3 The Role Of Personnel/Human Resources Department...................................................118 4.5.4 Human Resources Policy.................................................................................................119 4.5.5 The Scope Of Human Resources Management.............................................................. 120 4.6 The Finance Function..................................................................................................... 135 4.6.1 Introduction..................................................................................................................... 135 4.6.2 Definition Of Finance..................................................................................................... 136 4.6.3 The Main Components Of Finance Functions................................................................ 136 4.6.4 Functions Of Financial Manager.................................................................................... 136 4.6.5 The Three Core Decision Areas In Financial Management............................................ 137 4.6.6 Sources Of Business Financing...................................................................................... 138 4.6.7 Capitalisation.................................................................................................................. 140 4.6.8 Factors Affecting A Company’s Choice Of Finance....................................................... 141 4.7 Summary......................................................................................................................... 142 4.8 Illustrative And Practice Questions................................................................................. 142 4.9 References....................................................................................................................... 144 CHAPTER FIVE...................................................................................................................... 146 BUSINESS ANALYSIS AND EVALUATION TOOLS......................................................... 146 5.1 Learning Objectives.............................................................................................................. 146 5.2 Introduction..................................................................................................................... 146 5.3 Meaning And Nature Of Business Analysis & Evaluation Tools And Techniques......... 146 5.4 Objectives Of Business Analysis & Evaluation Tools And Techniques......................... 147 5.5 Uses Of Business Analysis & Evaluation Tools And Techniques................................... 148 viii 5.6 Forms Of Business Analysis & Evaluation Tools And Techniques................................ 148 5.7 Swot Analysis.................................................................................................................. 148 5.8 Pest Analysis................................................................................................................... 152 5.9 Financial Analysis........................................................................................................... 157 5.10 Most Analysis.................................................................................................................. 161 5.11. Catwoe Analysis.............................................................................................................. 161 5.12 Process Flow Diagram.................................................................................................... 162 5.13 Summary......................................................................................................................... 162 5.14 Illustrative And Practice Questions................................................................................. 163 5.15 REFERENCES 165 CHAPTER SIX......................................................................................................................... 167 THE LEGAL FORMS OF BUSINESS OWNERSHIP......................................................... 167 6.1 Learning Objectives........................................................................................................... 167 6.2 Introduction......................................................................................................................... 167 6.3 Classification Of Business Organizations According To Their Ownership........................ 167 6.4 Determinants Of The Choice Of Forms Of Business Ownership....................................... 167 6.5 Basic Forms Of Business Ownership................................................................................ 168 6.5.1 The Sole Proprietorship................................................................................................... 169 6.5.2 Partnership....................................................................................................................... 171 6.5.3 Limited Liability Company.............................................................................................. 174 6.5.4 Public Corporations......................................................................................................... 177 6.5.5 Franchises........................................................................................................................ 185 6.5.7 Summary........................................................................................................................... 186 6.5.8 References........................................................................................................................ 190 Chapter Seven............................................................................................................................. 191 Forms Of Business Combinations.............................................................................................. 191 7.1 Learning Objectives............................................................................................................. 191 7.2 Concept Of Business Combinations............................................................................... 191 7.3 Types Of Business Combinations................................................................................... 194 7.4 Definition Of Merger:..................................................................................................... 200 7.5 Acquisition...................................................................................................................... 203 ix 7.6 Integration....................................................................................................................... 205 7.7 Consolidation.................................................................................................................. 209 7.8 Absorption....................................................................................................................... 209 7.9 Takeover...........................................................................................................................211 7.10 Conglomerate 215 7.11 Summary Of The Chapter............................................................................................... 218 7.11 Illustrative And Practice Questions................................................................................ 220 7.13 References....................................................................................................................... 222 CHAPTER EIGHT................................................................................................................... 224 DOCUMENTS USED BY BUSINESS ORGANIZATIONS................................................. 224 8.1 Learning Objectives............................................................................................................ 224 8.2 Introduction......................................................................................................................... 224 8.3 Memorandum Of Association............................................................................................. 224 8.4 Articles Of Association...................................................................................................... 227 8.5 The Prospectus.................................................................................................................... 230 8.6 Certificate Of Incorporation............................................................................................... 237 8.7 Certificate Of Trading......................................................................................................... 241 8.8 Feasibility Report & Business Plan................................................................................... 241 8.9 Minutes Of Meeting............................................................................................................ 252 8.10 Schedule Of Non-Current Assets...................................................................................... 253 8.11 Schedule Of Directors....................................................................................................... 254 8. 12 Schedule Of Shareholders................................................................................................ 264 8.13 Vision................................................................................................................................ 267 8.14 Mission.............................................................................................................................. 268 8.15 Goals And Objectives....................................................................................................... 269 8.16 Strategies........................................................................................................................... 270 8.17 Policies.............................................................................................................................. 270 8.18 Summary......................................................................................................................... 271 8.19 Illustrative And Practice Questions................................................................................... 272 8.20 References:........................................................................................................................ 275 CHAPTER NINE...................................................................................................................... 276 x SCALE OPERATION AND ECONOMIES OF SCALE...................................................... 276 9.1 Learning Objectives........................................................................................................ 276 9.2 WHAT IS 'ECONOMIES OF SCALE' 276 9.3 BREAKING DOWN 'ECONOMIES OF SCALE' 278 9.4 Measurement Of Size Of Business................................................................................. 279 9.5 Determining The Size Of The Firm: Main Factors Responsible.................................... 281 9.6 Capitalism (Economy System)....................................................................................... 284 9.7 Socialism (Economic System)........................................................................................ 287 9.8 Mixed Economy.............................................................................................................. 295 9.9 Market Structures............................................................................................................ 303 9.10 Concept Of Perfect Competition..................................................................................... 304 9.11 Theory Of Monopoly...................................................................................................... 308 9.12 Theory Of Monopolistic Competition.............................................................................311 9.13 The Theory Of Oligopoly............................................................................................... 313 9.14 Summary Of The Chapter............................................................................................... 316 9.15 Illustrative And Practice Questions................................................................................... 318 9.16 References......................................................................................................................... 321 CHAPTER TEN........................................................................................................................ 322 GOVERNMENT AND BUSINESS IN NIGERIA................................................................. 322 10.1 Learning Objectives.......................................................................................................... 322 10.2 Introduction....................................................................................................................... 322 10.3 Objectives Of Government Regulation Of Business........................................................ 322 10.4 Reasons For Government Control Of Business............................................................... 323 10.5 Why Government Participates In Business....................................................................... 324 10.6 The Role Of Government In Business.............................................................................. 324 10.7 Specific Ways Government In Nigeria Have Aided Business Development...................... 326 10.8 Roles Of Some Government Agencies In The Regulation And Control Of Business...... 327 10.9 Bank Of Industry............................................................................................................... 339 10.10 The Nigerian Financial Intelligence Unit (Nfiu)............................................................ 340 10.11 Summary......................................................................................................................... 341 10.12 Review Questions........................................................................................................... 342 xi 10.13 References:...................................................................................................................... 345 CHAPTER ELEVEN................................................................................................................ 346 INTERNATIONAL BUSINESS ADMINISTRATION.......................................................... 346 11.1 Learning Objectives.......................................................................................................... 346 11.2 Introduction....................................................................................................................... 346 11.3 Meanings Of International Business................................................................................. 346 11.4 Relevant Forces Of International Business Administration Environment........................ 350 11.5 Challenges/Barriers To Effective International Business Administration........................ 374 11.6 Foreign Exchange Market............................................................................................... 375 11.7 Foreign Direct Investment.............................................................................................. 379 11.8 Tariffs.............................................................................................................................. 384 11.9 Exporting And Importing Regulations And Documentations......................................... 385 11.10 International Trade.......................................................................................................... 394 11.11 Classical Theories Of International Trade...................................................................... 407 11.12 Modern Theory Of International Trade........................................................................... 408 11.13 New Theories Of International Trade............................................................................. 410 11.14 Risks Management In International Business Trade....................................................... 416 11.15 Multi-National Corporations (Mncs) And Multi-National Entities (Mnes).................... 425 11.16 Summary......................................................................................................................... 452 11.17 Illustrative And Practice Questions................................................................................. 455 11.18 References......................................................................................................................... 458 CHAPTER TWELVE............................................................................................................... 462 BUSINESS SOCIAL RESPONSIBILITY.............................................................................. 462 12.1 Learning Objectives:....................................................................................................... 462 12.2 Introduction....................................................................................................................... 462 12.3 Meaning, Nature & Scope Of Business Social Responsibilities......................................... 463 12.4 Dimensions Of Corporate Social Responsibility.............................................................. 472 12.5 ARGUMENTS FOR AND AGAINST CORPORATE SOCIAL RESPONSIBILITY 474 12.6 Changing Concept Of Social Responsibility For Business.............................................. 484 12.7 THE STAKEHOLDER CONCEPT 490 12.8 The Best Practices And Standards In Corporate Social Responsibility.............................. 494 xii 12.9 SUMMARY 499 12.10 ILLUSTRATIVE AND PRACTICE QUESTIONS 499 12.11 REFERENCES 502 CHAPTER THIRTEEN........................................................................................................... 504 THE PROBLEMS OF BUSINESS ADMINISTRATION IN NIGERIA............................. 504 13.1. Learning Objectives........................................................................................................... 504 13.2. Introduction........................................................................................................................ 504 13.3 Challenges Of Businesses In Nigeria.............................................................................. 504 13.4 Requirements For Business Survival.................................................................................. 508 13.5. Causes Of Business Administration Failures..................................................................... 510 13.6 Indicators &Symptoms Of Business Failure................................................................... 513 13.7 Remedies/Survival Strategies......................................................................................... 514 13.8 Planning Against Business Failures................................................................................ 515 13.9 Summary............................................................................................................................. 522 13.10 Review Questions............................................................................................................. 523 13.11 References:........................................................................................................................ 526 CHAPTER FOURTEEN.......................................................................................................... 527 ETHICAL ISSUES IN BUSINESS ADMINISTRATION..................................................... 527 14.1 Learning Objectives:....................................................................................................... 527 14.2 Introduction..................................................................................................................... 527 14.3 Why Some Managers Behave Unethically..................................................................... 530 14.4 Five Basic Approaches To Ethical Decision-Making..................................................... 531 14.5 Mechanisms For Managing Ethics In Business Generally............................................. 535 14.6 Moral............................................................................................................................... 538 14.7 Integrity........................................................................................................................... 543 14.8 Ethical Behaviours.......................................................................................................... 552 14.9 The “Why” Behind Understanding Ethical Behavior..................................................... 553 14.10 Predicting Unethical Behavior: The Antecedents........................................................... 554 14.11 Corporate Governance, Procedures And Compliance.................................................... 555 14.12 Need For Effective Corporate Governance In Nigeria................................................... 563 14.13 Codes Of Best Practices On Corporate Governance In Nigeria....................................... 565 xiii 14.14 Compliance Requirements Of Corporate Governance..................................................... 566 14.15 Sanctions In Corporate Governance............................................................................... 569 14.16 Social Audit In Corporate Governance........................................................................... 571 14.17 Summary......................................................................................................................... 576 14.18 Illustrative And Practice Questions................................................................................. 578 14.19 References....................................................................................................................... 582 CHAPTER FIFTEEN............................................................................................................... 585 GLOBALIZATION.................................................................................................................. 585 15.1 Learning Objectives............................................................................................................ 585 15.2 Introduction..................................................................................................................... 585 15.3 Globalisation Defined:.................................................................................................... 585 15.4 Factors Responsible For Globalisation........................................................................... 588 15.5 Benefits/Consequences Of Globalization....................................................................... 589 15.6 Disadvantages/ Challenges Of Globalisation.................................................................. 590 15.7 Policy Response To The Effect Of Globalisation........................................................... 591 15.8 Effects Of Globalisation................................................................................................. 592 15.9 Implication Of Globalization On Business Managers And Organisations......................... 594 15.10 Implication Of Globalization On Economy And Business Stakeholders....................... 597 15.11 Global Warming............................................................................................................. 601 15. 12 Summary..................................................................................................................... 617 15.13 Illustrative And Practice Questions................................................................................. 619 15.14 References......................................................................................................................... 622 xiv CHAPTER ONE NATURE OF BUSINESS 1.1 LEARNING OBJECTIVES After studying this chapter, you should be able to: i. Explain the concept of business; ii. Identify the need for business; iii. Classify business activities and clarify the meaning of industry and commerce; iv. State various types of industry; v. Explain the activities relating to commerce; vi. Analyse the organic business functions; vii. Describe the characteristics of business; and viii. Discuss business, the society and the law. 1.2 INTRODUCTION The word business literarily means a state of being busy. A person may be busy playing computer games, watching television or be on social media chatting for pleasure. In such cases, no business activities are involved because the economic element is missing, hence a business is a state of doing something that will yield returns like money, prestige, post and any other thing that can give benefits and satisfaction. Business can be traced back to creation when God creates heaven, earth, and all things there in, God was and still busy later when Adam and Eve took over the operations of the earth, which keep them busy, and human have been busy doing some kind of activities till date. (Adesanya et.al 2012). Human life is built around work. People are engaged in some kind of work to earn their livelihood and to acquire wealth. Some activities are inspired by social, cultural, religious and or sentimental requirement of human beings. It is worthwhile to mention that business involves repeated activity and not a single or isolated activity. Moreover, business involves economic activities related to production, exchange, and distribution of goods and services and not their consumption for own use. Therefore, business means all those activities which involve production, exchange, and distribution of goods and services with a view to earning profit. Business includes a wide range of activities like manufacturing, trading, transportation, banking, insurance, warehousing and finance. 1 1.3 CONCEPTS OF BUSINESS A concept is an idea, plan or intention conceived in the mind therefore concepts of business can be viewed from two perspectives. Traditional Concept: The traditional concept explains that the purpose of business is to earn profit through the production and marketing of products. Products may be of different types. For example, physical goods, services, ideas, and information, etc. The main motto of business is to maximize profit only as per the traditional concepts. Modern Concept: Consumer satisfaction is the central point of the modern concept of business. Profit can be earned by maintaining social responsibility. It strives to include every aspect of human civilization. It views modern business as a socio-economic institution that is always responsible for society. The modern concept of business is, thus, a very broad one. Business is viewed as sub-system of the total social system. According to Davis and Blomstorm (n.d) “Our modern view of society is an ecological one. Ecology is concerned with the mutual relations of human populations or systems with their environment. It is necessary to take this broad view because the influence and involvement of business are extensive. Business cannot isolate itself from the rest of society. Today the whole society is a business’ environment. Moreover, human activities are very important as it’s the backbone of the business organization, hence business itself is a social system therefore human activities in business may be divided into two which are: Economic activities: These are the activities which are related to the production of wealth. Every person is engaged in some kind of work to earn his living. All these activities create utilities. The economic activities can further be classified into three, they are: (i) Profession: A profession is an occupation which involves the rendering of personal service of a specialized nature. The service is based on professional education, knowledge, teaching, and skills e.g., medical education, chartered accountant etc. 2 (ii) Employment: This is when a person undertakes to render personal service under an agreement of employment. The service is rendered for a salary or wage and/or other benefits attached to that job which may be in a government or a private organization. (iii) Business: When a person is engaged in an activity concerned with the production and exchange of goods and services with the objective of earning profits. Non-economic activities: Are those activities which are in the form of social service etc. These activities are not undertaken with economic objectives. In other words, the element of ‘profit’ is not found in these activities. 1.4 DEFINITION OF BUSINESS Defining the term business can be looked at from different dimensions. Business had been viewed differently by scholars, it is viewed as any establishment like manufacturing, production and service-oriented activity, others viewed it as any transaction involving buying and selling or as a task or duty that must be accomplished. Others view business as an organization or enterprising entity engaged in commercial, industrial, or professional activities, this entity can be for-profit or non-profit organizations that operates to fulfill a charitable mission or further a social cause. However, business has been used to cover all activities that are concerned with the production and distribution of goods and services to meet the dynamic and increasing need of the society with the intention to make anticipated profit or other benefits. Literarily, a simple definition of business is to say that business occurs when a person or organization profits by providing goods or services in exchange for money. Harney (N.D) defined business as “human activity directed towards producing or acquiring wealth through buying and selling of goods.” “Business is a form of activity pursued primarily with the object of earning profits for the benefit of those on whose behalf the activity is conducted”. (DickseyN.D). Business may be defined as the sum of all gainful human activities, which aim to creates, exchange and possess wealth in the form of physical output and useful services. 3 Otokiti (2005) view business from two dimensions, economic and functional. From economic angle, business means work, efforts activity and acts of people which connect with the production of wealth, distribution of resources and its creation. While the functional angle of business means, those human activities which involve production or purchase of goods with the objective of selling them at a profit or for a reward. He further states that business is regarded as a function of commerce, industry, and marketing service, economic, organic social and acquisition. Lawal and Bello (2010) refers to business (in a capitalist economy) as the totality of all activities involved in the production and distribution of goods and services for profit. Adesanya, et al (2012) opined that business is defined as the activities undertaking by an organization to satisfy human needs and wants with the aim of making profit. So far, it is clear that ‘business is the economic activity of individuals and organizations aimed to earn profit through the production and distribution of goods and services.’ The above definition indicates that business activities are undertaking by individual and institutions or organization. Thus, it has been observed that business involves activities performed by individuals and or organization for mutual benefits. Therefore, ‘business is defined as all the activities undertaking by individual and organizations to satisfy human want and needs through exchange with the motives of mutual benefits.’ Needs are basic necessity of life, and their absence may result in harm of ultimately death, like the absence of good, shelter, clothing security, love etc., while wants are desire that man aspire to reach in life which if it’s missing may not necessarily cause any harm like being rich or being a governor or president of a nation. In business, mutual benefits occurred when profit is enjoyed by the producer, while satisfaction is the ultimate goal of a customer. 1.5 REASONS FOR BUSINESS As earlier stated, that business attempts to satisfy human wants and need, through provision of essential goods and services and to make profit and satisfaction enjoyed by the customer, therefore business is essential for these reasons highlighted below: 4 1. To transform the resources into finished goods and services that will meet the need of mankind. 2. To provide the platform to develop the society. 3. It encourages people to develop their career which eventually leads to managerial efficiency and effectiveness. 4. To create the platform for logical and philosophical thinking that makes human to be creative and innovative. 5. To provide opportunities for self-employment. 6. It assists the consumers in taking a decision in the face of many alternatives. 1.6 BUSINESS ACTORS There are five major actors that play an active role in business activities: i. Entrepreneur – Person that search for a change especially in production process, respond to it and exploit it as an opportunity. ii. Manager – To administer the business operations profitably. iii. Employees – The workers who perform the actual physical and mental efforts necessary to produce and distribute the goods or render the services to the people. iv. Customer – These are the customers that consume or use the products who equally determine the success and failure of a business enterprise. v. Government – The regulatory body that make law and create an enabling environment for business to operate. 1.7 CHARACTERISTICS OF BUSINESS The following are the characteristics or features of business: 1. Entrepreneur: An entrepreneur is the person who recognizes the need for a product or service, visualizes a business, take initiatives to establish the business, combine various factor of production and puts them as a business entity. 2. Economic activities: Business includes only economic activities. All those activities relating to the production and distribution of goods and services are called economic activities. 3. Exchange: A business must involve the exchange of goods and services from one person to another with a profit motive. The goods to be exchanged must either be produced or procured from other sources. 5 4. Profit motive: The profit motive is an important element of business. Any activity undertaken without profit motive is not business. The object of starting a business is to earn profit though there may be losses. 5. Risk and uncertainty: The business involves a large element of risk and uncertainty. The factors on which business depends are never certain, so the business opportunities will also be uncertain. 6. Continuity of transaction: In business, only those transactions are included which have regularity and continuity. Hence isolated transaction will not be called business, even if the person earns profit form that deal. 7. Creation of Utility: The process of storing when they are not required and supplying them at a time when they are needed is called creation of utilities. So, the business creates many utilities in good so that the consumer may use them according to their preference and needs. 8. Organization structure: Every enterprise needs an organization for its successful working seamlessly. Various business activities are divided into departments, sections, and jobs for effective performance. 9. Financing: Business enterprises cannot move a stop without finance; hence the finance is required for providing fixed and working capital. 10. Consumer satisfaction: The ultimate aim of business is to supply goods to the consumers. The goods are produced for the consumers. If the consumer is satisfied, then he will purchase the same thing again. 11. Satisfying social needs: The business should aim at serving the society at large. The business is a socio-economic institution. 1.8 FUNCTION OF BUSINESS A business must perform a number of functions in order to achieve its objectives. Various business functions are inter-dependent and the efficient performance of all of them is necessary to operate the enterprise efficiently and effectively. 1. Production function: Production function involves transformation of raw materials goods and services and making them useful. 6 2. Marketing function: Marketing is a process involving activities ranging from getting from producers and sending them to ultimate consumers or users. It involves all efforts to create customers for the products and provide maximum satisfaction to them. 3. Personnel function: Personnel function is concerned with people at work and with their relationship within an enterprise. It aims to bring together people and develop them into an effective organization. 4. Finance function: Finance function is the most important of all business functions. The funds will have to be raised from various sources. The receiving of money is not enough, its utilization is more important. 5. Purchase function: Traditionally, purchase was considered to be a part of production function. However, big organisations have a separate department for undertaking purchase activities. 6. Public relations function: This is a situation when the business becomes more of consumer- oriented hence the public relations department is concerned with creating a favourable impression and image of the business organization on the society. 7. Legal function: Some business houses have a separate legal department in order to advise business on legal issues. The legal department ensures that the business unit complied with various rules and regulations framed by the local, state, and central governments from time to time. 8. Research and Development function: Research and Development (R & D) is an important activity in the modern competitive business world. The R & D department consists of experts from various areas, whose primary job is to experiment with new methods and processes. 9. Advertising and sales promotion function: Although advertising and sales promotion are part of marketing functions, but they assumed a great importance in the wake of increasing competition. 1.9 OBJECTIVES OF BUSINESS Objectives are those ends that any business organization intends to achieve, and these objectives are highlighted below. Lawal (1993) and Adesanya et al (2012) agreed with Drucker (1968) that there are eight key areas a business organization needs to set objectives, these are: 7 1. Profitability- Ability to earn some income over expenditure. 2. Productivity: A measure of enterprise ability to produce more goods and services with less input i.e. less costs. 3. Market share, dominance in the marketplace. 4. Innovation: Company ability to innovate new things, e.g., new technology. 5. Social Responsibility: Business organizations should recognize their responsibilities to their customers and the society at large. 6. Managers performance and development: Company make policy to develop and manage talents via training and development program for present and future needs. 7. Employees relations: Companies must seek good employee relations to improve engagement and overall performance. 8. Growth: Physical and financial resources of the company should be developed to enable the company to grow. Business objectives can also be classified as: i. Organic objectives: This is basically for the business to survive, grow, gain prestige and win recognition from the society. ii. Economic Objectives: To earn as much profit as possible iii. Social Objectives: Business must fulfill its obligations to society, by way of supply of quality goods, avoidance of profiteering and anti-social practices, and providing employment. iv. Human Objectives: Which are: (a) Fair deal to employees. (b) Development of human resources. (c) Joint participation in decision making. (d) Job satisfaction. v. National Objectives: These are: (a) Ensuring social justice. (b) Development of small enterprises. (c) Production according to national priorities. (d) Self-sufficiency and export development. (e) Development of skill of personnel. 8 Mahesh Kumar (N.D) classified business objective into three which are: 1. Organizational Objectives: The organizational objectives of management refer to the main objectives required to fulfill the economic goals of any business organization. These objectives are survival, profit, and growth. (a) Survival: The basic objective of every business is to survive for a long period in the market. (b) Profit: Profit earning is essential for meeting the expenses and for successful continuity of the business. (c) Growth: The future growth and development of the business which can be measured in terms of increased sales, increase in number of products, segments etc. The growth potential of the organization must be fully exploited by the management. 2. Social Objectives: Every organization is part of the society. Thus, it has certain social obligations to fulfill which are: (i) Pollution free methods of production. (ii) Increasing employment opportunities especially for the economically weaker sections of the society and backward classes. (iii) Providing basic facilities to the employees like schools and crèches for their children, medical facilities etc. (iv) To supply quality goods and services at reasonable and affordable prices. (v) To provide financial support to society by donating for noble causes. (vi) To organize educational, health and vocational training programme. 3. Personal Objectives: Employee with different values, experiences and objectives become part of the organization to satisfy their different needs which are: (i) Financial needs like salaries, incentives, and other monetary benefits. (ii) Social needs like recognition and value in the organization. (iii) Higher level needs which include personal goals with the organizational goals. NOTE: Objectives should be clear and concise. Goals do not have to be specific right for you to act on but should give you a future target or list of things you want to work on. Objectives need to be SMART, that is Specific, Measurable, Action-oriented, Realistic and Timebound – to accomplish the goals set of the business. 9 Specific objectives should be as detailed as possible. For the objectives to be measurable, it should be stated in terms of monetary value or quantities. Objectives are clear targets of performance which can be used to evaluate the operation. Action oriented objectives state which actions need to be taken and who will take them. Objectives should be realistic but challenging, with set deadlines in order to be timely. 1.10 CATEGORIES OF BUSINESS The following are the categories of business: 1. Genetic-business: Genetic business is related to the re-producing and multiplying of certain species of animals and plants with the object of earning profits from their sale. No doubt nature, climate and environment play an important part in these industries, but human skill is also important. Examples of the genetic industry are nurseries, cattle breeding etc. 2. Extractive business: The extractive industry is engaged in raising some form of wealth from the soil, climate, air, water, or form beneath the surface of the earth. Extractive industries supply basic raw materials that are mostly the products of the soil and are usually transformed into many useful products by manufacturing industries e.g., mining, crude oils etc. The products of extractive industry are generally used as raw materials by manufacturing industry which may be classified as follows: a. Analytical business: In this industry, a product is analyzed, and many products are received as final products. For example, in the processing of crude oil, we will get kerosene, petrol, asphalt, waxes, gas, jet fuel and diesel etc. b. Processing industry: In this industry a product passes through various processes to become a final product. The raw materials can be converted into finished products. Examples for the processing industry are sugar industry, cotton industry, etc. 3. Construction Business: This industry is engaged in the creation of infrastructure for smooth development of the economy. It is concerned with the construction, creation, or fabrication of products. Engineering, architectural skills and constructing firms play an important part in construction industry e.g., construction of buildings, dams, roads, etc. 4. Manufacturing business: This business is engaged in the conversion of raw materials into semi-finished or finished goods. This industry creates form by making them suitable for human use. These industries supply machines, tools, and other equipment to other industries too. 10 5. Synthetic business: In this industry, many raw materials are brought together into manufacturing process to make a final product. Examples of synthetic industry are soaps making, paints, cements, rocks, coal, etc. 6. Commerce: This is the sum of total of all those processes, which are engaged in the removal of hindrance of persons (trade), place (transport and insurance) and time (warehousing) in the exchange (banking) of commodities. They refer to all those activities which are necessary to bring goods and services from the place of their origin to the place of their consumption. It is concerned to be a part of business. It is that activity of business which is concerned with the exchange of goods and services. 7. Online business: Online business or e-business is any kind of business or commercial transaction that includes sharing information across the internet. Commerce constitutes the exchange of products and services between business, groups and individuals and can be seen as one of the essential activities of any business. 8. Franchise Business: A franchise is a right granted to an individual or group to market a company’s goods or services within a certain territory or location. The franchisor (the company owner) sells the rights to the franchisee (the company licensed to operate the brand or product), and then typically receives a fee for ongoing support, therefore having a vested interest in the success of each franchise. In other words, it is an agreement or license between two parties which gives a person or group of people the right to market a product or service using the trademark of another business. 1.11 Functions & Role of Law in Business and Society Law plays a significant role in the operation of business in society. Laws provide rules of conduct and ethical standards that regulate social behavior. Without these rules and standards, society would not be able to efficiently run, and the business world would virtually end (Bushman, 2007). What is Law? Law has been defined in many ways. A body or rules of action or conduct prescribed by a controlling authority, and having legal binding force (Melvin, p. 4, 2011), is one or the most generally accepted definitions. Essentially law provides a way of resolving disputes and dealing with individuals who break the rules and regulations set forth from the government. 11 Role of Law in Business Since the body of American law is so diverse, business law is broken down into three categories: i. Criminal and Civil Law: These laws are of criminal or civil nature. Criminal law is for the protection of society of an individual breaking the law. Most violators are subject to fines and possibly imprisonment. Civil laws are designed for individuals to be compensated for losses because of another’s action. ii. Substantive and Procedural Law: Substantive law provides individuals with social rights and duties, while procedural law gives structure for pursuing substantive rights. iii. Public and Private Law: Public law is the defining framework between an individual and the government. Private law is where individual contract with each other where no specific statutes or regulations are involved. These categories of law are very important to business and society by having guidelines set up for individuals to abide by. These laws were also set up for the protection of society (Melvin, P. 18, 2011). Law in the world of Business When starting a business, an individual must attain legal counsel to get the correct paperwork in order for your company to operate correctly and to avoid potential legal liabilities in the future. There are very important legal matters that need to be addressed in agreements and contracts whether you are opening a new business or purchasing an existing. Depending on what type of business the individual is interested in, there can be several extra forms and legal obligations to the business that need to be handled before the business can start operating. Not all registrations need to be handled by legal counsel; some can be taken care of by an accountant and possibly an insurance company depending on the type of business. After the business is operating, there are many laws the business has to follow on a daily basis. There are federal laws of filing income tax as well as business tax returns to pay the necessary taxes on the business. Most states have income tax and other taxes such as sales tax and use tax also for most businesses. If a business chooses to ignore these laws and regulations, the taxing authorities will come in and enforce these laws by assessing hefty 12 penalties and interest for these tax laws not being followed, and possibly even levying bank accounts and canceling permits and licenses to operate. They also pull returns in for audit to make sure individuals and businesses are showing accurate information on their income tax returns. At times there are issues that are not agreeable between the taxpayer and the Internal Revenue. When this problem arises, there are tax courts where you go before the judge to plead your case and why you feel your information is correct. As a public accountant, a person must stay on top of all the law changes that occur. There are laws and acts coming into effect or expiring that can have a major impact on the clients. Being licensed, an accountant is required to have continuing education on a yearly basis to help keep in check with the changes. There are also many ethical standards and code of conduct an individual must maintain as an accountant. One of the main issues with law and accounting today is the reminder that an accountant has an accounting license not a law license and should in no way perform any legal acts for any individuals. With the evolution of the internet and the paperless world, it is becoming more difficult to get actual signatures on forms. The government has changed the laws on having signatures on documents and instead having pin codes, etc. This in turn makes it useful for the accountant of having a signed document from the client which status they are showing accurate information on their returns. We have release forms in your office that clients must sign to give consent to send in their payments, forms, and documents electronically. 1.12 Classification of Businesses Business can be classified according to: i. Business Objectives. ii. Areas of Operations. iii. Size of the business. iv. Types of Products. v. Sectors of the Economy. vi. By Mode of Ownership. 13 1.12.1 Classification of Businesses – By Business Objectives The majority of business organizations can be classified into four main areas according to their reasons for existence: Profit-making organizations For-Profit (Commercial) Organizations: Unincorporated Businesses and For-Profit Commercial Organizations: Incorporated Businesses aim to make profits in order to survive, grow and make the shareholders rich, for example Tesco or Carrlefour in UK, Dangote, Unilever, MTN etc. in Nigeria. Not-for-profit organizations Types of Business Organizations: In Private Sector: Non-Profit Social Organizations make profit, but maximizing profit is not the main reason for their existence. They have a social goal in mind such as providing educational services for underprivileged children, protecting the natural environment, educating the society about a social cause such as negative effects of smoking cigarettes have on the human body or providing employment to the local community. Charitable organizations They generally aim to raise money from the use for a particular cause, mainly supporting the poor. Charities do not make any profit, but they rely on generous donations which they later give away to the needy. Very often they raise money by selling goods donated by famous people such as singers or soccer players. Public service organizations State-owned public sector organizations aim to provide a service for people and maintain the proper functioning of the country, for example the Department of Defense. 1.12.2 Classification of Businesses – By Area of Operations More and more of the world’s largest businesses now operate internationally, meaning that they do business (produce and sell) in more than one country. On the other hand, there are also many small businesses and micro businesses that operate only in a very small part of the country, or even only in one city. Now, let’s take a look at the classification of businesses by the area where businesses operate: 14 Local businesses Local businesses operate in a small and well-defined part of the country, usually in the area where their owners live. They do not have expansion as a business objective, neither do they make any attempt to expand across the whole country or find more customers. They are fine and comfortable operating locally. For example, small construction companies offering house renovations, carpenters, single-branch convenience stores, hairdressing businesses and beauty salons, small language schools, etc. Their main business objective is to make sufficient profit for the owner to sustain his/her family. National businesses National businesses have many branches in one country and operate across most territory of their native countries. However, they make no attempts to establish business operations in other countries. They are fine doing business only in their own country. The main business objectives for national businesses include maintaining sales revenue and market share. For example, large car-retailing firms, retail shops with many branches selling goods in just one country, logistics and security companies, national banks such as First Bank of Nigeria etc. International (multinational) businesses International businesses, also called multinational companies, operate in more than one country. They are more than just importers and exporters. They have their headquarters in one country, but offices, factories, and assembly plants in other countries to produce goods and provide services anywhere in the world. Most head offices though are located in Western European countries, USA, the UK, Singapore or Tokyo while production functions and main operations are based in less- developed countries due to cost-saving initiatives (e.g., outsourcing manufacturing to South-East Asian countries). The growth of such huge businesses can be explained in a way that these firms have benefited greatly from the freedoms offered by globalization. The biggest multinationals such as Coca Cola or McDonald’s generate annual sales revenues and have wealth that exceeds the size of many countries’ entire economies. 15 1.12.3 Classification of Businesses – By Size of the Business There are millions of businesses around the world and all of them vary in size, hence it is useful to classify businesses according to their size to have a better understanding of external business environment. Measuring the size of businesses is helpful to managers as we can make comparisons between various business organizations, and also assess their business growth (or lack of growth) over time. This information of business size is also of interest to other stakeholders such as workers, investors and the government. The official definition for micro businesses, small businesses and large businesses is easily discoverable from the trade and industry department in your own country. Let’s take a look at the classification in Nigeria presently: Micro businesses It is quite common to make a distinction for a very small business known as micro- enterprise, in addition to measuring businesses only as small companies and big companies. It is because most of the business organizations that exist in the world are micro businesses and very small businesses such as sole traders with either one or no additional workers. Micro businesses employee very few people (if any) and generate low sales revenue compared to other firms in the economy. All the business organizations that employ 10 or less people, generate less than N25,000,000 in sales revenue and have assets based (excluding land and building) less than N5,000,000 are classified as a micro business. Small businesses Small firms offer many benefits for the dynamism of an economy such as induction of new ideas or creation of new products. Governments around the world very often support small companies in many ways offering various assistances to entrepreneurs. All of the world’s largest companies like Google, Amazon or Apple had started off as very small firms and had been operating as small firms for many years before starting to grow. All the business organizations that employ 10 and not more than 49 people, generate between N25,000,000 16 and N100,000,000 in sales revenue and have assets based (excluding land and building) less than N50,000,000 are classified as a small business. Medium businesses They hire between 50 and 249 workers, record between more than N100,000,000 in sales revenue and has assets based between N50,000,000 and less than N500,000,000. Large businesses Big businesses are usually huge multi-national corporations employing hundreds of thousands of people around the world such as Julius Berger Plc, Guaranty Trust Bank etc. According to the Central Bank of Nigeria (CBN) classification of business size, a large business hires over 250 employees, generates over N500,000,000 in sales and owns an assets based of N500,000,000. What classification of businesses according to size looks like in other major countries and regions? According to McAdam et al. (2004), there is no universal definition of SMEs, and this poses a challenge for studying SMEs. Commonly, the definitions of SMEs fall into two criteria. A quantitative criterion includes size, capital, annual turnover, invested capital, revenue, total assets, market share and so on (Hossain and Kauranen, 2016). Amongst these, the number of employees is the most common since it is available, easy to control and not affected by inflation (Filion, 1990; cited in Buculescu, 2013). Other qualitative categories such as turnover and balance sheet are also criticized as being suitable explanatory factors because they do not consider the type of the economic sector, and other business aspects (Buculescu, 2013). Furthermore, each country has its definition. In Nigeria, PMI 2012 stated the definition from SMEDAN thus: TABLE 1: Overview of MSMEs – Definition by SMEDAN CATEGORY EMPLOYEES ASSETS {N’mexl land, Bldg Micro 0- 10 0-5 Small 10 - 50 5-50 Medium 50 - 150 5-500 17 While Kocherbaeva et al. 2019, provides classification criteria of enterprises according to size, per the recommendation of the EU Commission as of May 2003 (2003/361/EC) for legal and administrative purposes below: TABLE 2: Classification of Small and Medium, & Large Enterprises according to Size (Eurostat 2004) ENTERPRISE NO. OF ANNUAL ANNUAL INDEPENDENCE EMPLOYEES TURNOVER BALANCE IN MLN. SHEET EUR TOTAL IN MLN. EUR Micro 1-9 firms rely on export agents. 426 ii. expansion of export sales. iii. further expansion þ foreign sales branch or assembly operations (to save transport cost). 2. Foreign Production Stage There is a limit to foreign sales (tariffs, NTBs) DFI versus Licensing Once the firm chooses foreign production as a method of delivering goods to foreign markets, it must decide whether to establish a foreign production subsidiary or license the technology to a foreign firm. If it is Licensing, this is usually first experience (because it is easy). For example, Kentucky Fried Chicken in the U.K. i. it does not require any capital expenditure. ii. it is not risky. iii. payment = a fixed % of sales. The Problem here is that the mother firm cannot exercise any managerial control over the licensee (it is independent). The licensee may transfer industrial secrets to another independent firm, thereby creating a rival. If it is through Direct Investment, it requires the decision of top management because it is a critical step. However: i. it is risky (lack of information) (US -> Canada). ii. plants are established in several countries. iii. licensing is switched from independent producers to its subsidiaries. iv. export continues. 3. Multinational Stage The company becomes a multinational enterprise when it begins to plan, organize, and coordinate production, marketing, R&D, financing, and staffing. For each of these operations, the firm must find the best location. Here, the Rule of Thumb is that a company whose foreign sales are 25% or more of total sales is a MNC. This ratio is high for small countries, but low for large countries, e.g., Nestle (98%: Dutch), Phillips (94%: Swiss). Examples: Manufacturing MNCs, 24 of top fifty firms are located in the U.S., 9 in Japan, 6 in Germany. Petroleum companies: 6/10 located in the U.S. Food/Restaurant Chains. 10/10 in the U.S. 427 4. Characteristics of a Multinational Corporation Some of the characteristics common to various types of multinational corporations include: i. A worldwide business presence. ii. Typically, large, and powerful organizations. iii. Business conducted in various languages. iv. A complicated business model and structure. v. Direct investments in foreign countries. vi. Jobs created in foreign countries, potentially with higher wages than found locally. vii. Seeks improved efficiencies, lower production costs, larger market share. viii. Has substantial expenses associated with navigating rules and regulations of foreign countries. ix. Pays taxes in countries in which it operates. x. Reports financial information according to International Financial Reporting Standards (IFRS). xi. Sometimes accused of negative economic and/or environmental impacts in foreign markets. xii. Sometimes accused of negative economic impacts in home country due to outsourcing jobs. 3. Motivations for MNCs and MNEs to operate in foreign markets. Multinational enterprises (MNEs) have a long history and have long had an influence on the development of the economies in which they operate. Their impact is on the ‘home country’ (where they originate), on ‘host countries’ (where they extend their business operations), and on ‘third countries’ (to which the contribution spread). Why would a business want to become a multinational company? Usually, the primary goal of a business is to increase profits and growth. If it can grow a global customer base and increase its market share abroad, it may believe that opening offices in foreign countries is worth the expense and effort. Companies may also see a benefit in certain tax structures or regulatory regimes found abroad. 428 As earlier reiterated, Multinational companies are large sized business companies operated in two or more than two countries. These companies have distinct features or characteristics compared to other forms of business organizations. A. Notable Characteristics of Multinational Companies Are as Follows: 1. Large size Multinational companies are large-sized business organizations. They have huge resources in terms of capital, technology, people and information. They are highly efficient and complex. 2. Multi-country operations This is another characteristic of multinational company. Multinational companies operate in several countries. They can have production, marketing and service type of operations. They cover large geographical areas. They have assets and activities in two or more countries. 3. Various objectives Multinational companies pursue various objectives like: i. Access to new market opportunities to expand market size. ii. Access to cheap raw materials to reduce costs and increase competitive capacity. iii. Access to cheap source of labor to reduce costs of labor and energy. 4. Various environments Multinational companies operate in various environments. The political, legal, economic, social, cultural and technological forces differ from country to country. 5. Centralized ownership and control The ownership and control of multinational company is centralized in the home country. They provide share ownership to local people in host countries. 6. Multiple currencies Multinational companies deal in currencies of several countries. The risk is high because of changing values of currencies in host countries. 7. High efficiency High efficiency is another important feature of multinational companies. Multinational companies are highly efficient due to: i. Mass production leading to economic of scale. ii. Use of advanced technology to increase speed of production. 429 iii. Professional management and marketing skills to use resources effectively. 4. Types of MNCs and MNEs. A multinational business has assets in more than one country, generating at least 25% of its revenue from operations outside the home country. There are different models of multinational corporations. Multinational corporations typically have a central office in the home country, coordinating and managing other branches and assets. Given below, are four business types and the financial benefits of each. a) Multinational Decentralized Corporation: Every branch office has a decentralized management structure with no central chain of command for decision making. A decentralized multinational corporation maintains a prominent presence in its home country. With decentralization, the corporation’s organizational structure doesn’t have management or administrative centers. Instead, each office or asset hosts a unique management structure. Decentralization allows for rapid expansion. Each new unit can operate as a separate entity within a local market. Branch managers also have the freedom to respond to opportunities or emergencies without constrictions from a tedious chain of command. b) Global Centralized Corporation: A centralized firm manages and controls the international units from the headquarter in the home country. The organizational structure of a centralized global corporation has a chief administrative and management office or head office. The corporation may outsource production to developing economies to lower costs, for example. These businesses may also develop production infrastructure in these countries to optimize affordable resources and acquire cost advantages. A centralized international organization facilitates proximity to its international target markets. The main advantage of affiliates and subsidiaries in target markets is distribution cost reduction. It also makes potential consumers and their information more accessible. c) International Company: In this, the global branches adhere to the parent company’s technology or R&D. All the research work for new product development and 430 improvisations occurs in the headquarter. Effective R&D allows for the creation of new products or the addition of features to existing successes. Building on existing R&D gives these global companies a competitive edge in local markets, too. Other benefits include an increase in market participation and better cost management. d) Transnational Enterprise: It is a blend of all the above three forms of MNCs. The parent company guides but not controls the functioning of its global branches. Transnational enterprises generally have a decentralized organizational structure. These corporations do business in several countries without one location as a corporate home. Transnational enterprise structures engage in value creation in various countries while maintaining high levels of responsiveness. It is a flexible and efficient approach that is gaining popularity. 5. Impact of MNCS and MNES On Host Countries (Positive and Negative Effects) Potential benefits of MNCs on host countries could either be negative or positive. a. The potential benefits of MNCs on host countries include: i. Provision of significant employment and training to the labour force in the host country. ii. Transfer of skills and expertise, helping to develop the quality of the host labour force. iii. MNCs add to the host country GDP through their spending, for example with local suppliers and through capital investment. iv. Competition from MNCs acts as an incentive to domestic firms in the host country to improve their competitiveness, perhaps by raising quality and/or efficiency. v. MNCs extend consumer and business choice in the host country. vi. Profitable MNCs are a source of significant tax revenues for the host economy (for example on profits earned as well as payroll and sales-related taxes). b. The potential drawbacks of MNCs on host countries include: i. Domestic businesses may not be able to compete with MNCs and some will fail. ii. MNCs may not feel that they need to meet the host country expectations for acting ethically and/or in a socially-responsible way. 431 iii. MNCs may be accused of imposing their culture on the host country, perhaps at the expense of the richness of local culture. Might MNCs reduce cultural diversity around the world as they continue to expand, particularly into less developed or developing countries? iv. Profits earned by MNCs may be remitted back to the MNC's base country rather than reinvested in the host economy. v. MNCs may make use of transfer pricing and other tax avoidance measures to significantly reduce the profits on which they pay tax to the government in the host country. c. MNEs Impact on the Global Economy Multinational Enterprises are spreading and expanding across the world. From the British East India Trading Company from 17th century, till recent days, MNEs seem to be imprinted in current globalized world life. The rapid growth of MNEs is correlated with booming Information and Communication Technologies since 70’s, reaching 82 000 counted entities by 2008 (UNCTAD, 2010). MNEs has become an attractive way to run a business as depending on division it allows the company to access lower cost production, better technology, less intrusive taxation system or just access to large consumer market. MNEs optimize globally, and it allows them to win on local markets. MNEs merge horizontal and vertical strategy by efficient production geo-location combined with serving local markets with sophisticated services. Huge part of many MNEs activity is production undertaken in foreign affiliates. According to OECD data, production share in global production output grew almost 3-fold in the past 20 years, achieving close to 14% of global production share. Adding domestic companies, the current estimation says that MNEs are responsible for almost one-third of global production. External contractors are also often used, increasing the impact of MNEs even further. Foreign affiliates significantly differ from domestic companies. They are often export-oriented, having also lower value-added to output ratio than domestic firms (partly because they are often elements of a global supply chain for the MNE). 432 Foreign affiliates are efficient, they hire fewer people per amount of goods produced. Typical western MNAs hire 2 people in their domestic office for 1 person employed in a foreign affiliate on average. According to data from 2014 provided by OECD, MNEs are responsible for more than half of global exports and 49% of global imports. At the same time, their share in global employment is significantly lower – only about 23%. It comes from higher productivity but also the sectors of production where SMEs work best (for example with heavy use of automated processes). 6. Strategies for MNCs and MNEs to succeed in foreign markets. Multinational corporations choose from among four basic international strategies: (1) international (2) multi-domestic, (3) global, and (4) transnational. Each strategy involves a different approach to trying to be sensitive to (1) costs and efficiencies on one hand and trying to be responsive to (2) variation in customer preferences and market conditions across nations. Responding or not responding to these two pressures of cost and local cultural conditions determines which of the four types of international strategies will be pursued. International Strategy: Firms pursuing an international strategy are neither concerned about costs nor adapting to the local cultural conditions. They attempt to sell their products internationally with little to no change. When Harley Davidson sells motorcycles abroad, they do not need to lower their prices or adapt the bike to local motorcycle standards. People in other countries buy a Harley particularly because it is different from the local motorcycles. Buyers want the American look and the sound and power 433 of a Harley and will pay for that differentiation. Belgium chocolate exporters do not lower their price when exporting to the American market to compete with Hershey’s, nor do they adapt their product to American tastes. They use an international strategy. Starbucks and Rolex watches are other examples of firms pursuing the international strategy. Multi-Domestic Strategy: A firm using a multi-domestic strategy does not focus on cost or efficiency but emphasizes responsiveness to local requirements within each of its markets. Rather than trying to force all of its American-made shows on viewers around the globe, Netflix customizes the programming that is shown on its channels within dozens of countries, including New Zealand, Portugal, Pakistan, and India. Similarly, food company H. J. Heinz adapts its products to match local preferences. Because some Indians will not eat garlic and onion, for example, Heinz offers them a version of its signature ketchup that does not include these two ingredients. Outback Steakhouse uses the multi-domestic strategy in the multiple countries where it operates, adapting to local eating preferences but not lowering prices significantly. Global Strategy: A firm using a global strategy sacrifices responsiveness to local requirements within each of its markets in favor of emphasizing lower costs and better efficiency. This strategy is the complete opposite of a multi-domestic strategy. Some minor modifications to products and services may be made in various markets, but a global strategy stresses the need to gain low costs and economies of scale by offering essentially the same products or services in each market. Microsoft, for example, offers the same software programs around the world but adjusts the programs to match local languages. Similarly, consumer goods maker Procter & Gamble attempts to gain efficienc
