Lecture Slides I - Introduction to Business (2).pdf

Business Environment 2 Buisness Scholars Production & Dis...

Business Environment 2 Buisness Scholars Production & Distribution Marketing Maximization of Customer Satisfaction Business? Economists Creation of Utilities In Practice Creation of Customers 3 What is Business? ❑Business is a financial or economic activity, which is related with continuous and regular production and distribution of goods and services for satisfying human wants. ❑An institution or organization or economic system which or where goods and services are exchanged for money is called business. ❑According to different economists definition of business also differs. 18-09-2024 4 Definitions by Different Authors According to Stephenson "The regular production or purchase and sale of goods undertaken with an objective of earning profit and acquiring wealth through the satisfaction of human wants.” According to Brown and Petrello “Business is an institution which produces goods and services demanded by people”. 18-09-2024 5 Definitions by different Authors (Contd…) According to Griffin and Ebert (1996): ✓“Business is an organization that provides goods or services in order to earn profit”. Profit is the main feature of business activity. According to Lewis Henry ✓ "Human activity directed towards producing or acquiring wealth through buying and selling of goods." 6 Features of Business Source: What is a Business? definition, characteristics and classification - Business Jargons 7 Features of Business ❖Exchange of goods and services: All business activities are directly or indirectly concerned with the exchange of goods or services for money or money's worth. ❖Deals in numerous transactions: In business, the exchange of goods and services is a regular feature. A businessman regularly deals in a number of transactions and not just one or two transactions. ❖Profit is the main objective: The business is carried on with the intention of earning a profit. The profit is a reward for the services of a businessman. 18-09-2024 8 Features of Business ❖Risks and Uncertainties: Business is subject to risks and uncertainties. Some risks, such as risks of loss due to fire and theft can be insured. There are also uncertainties, such as loss due to change in demand or fall in price cannot be insured and must be borne by the businessman. ❖Buyer and Seller: Every business transaction has minimum two parties that is a buyer and a seller. Business is a contract or an agreement between buyer and seller. ❖To satisfy human wants: The businessman also desires to satisfy human wants through conduct of business. By producing and supplying various commodities, businessmen try to promote consumer's satisfaction. 9 Business Sectors 10 Business Sectors (Based on Level) PRIMARY SECONDARY TERTIARY SECTOR SECTOR SECTOR (Based on Ownership) 11 12 Bhutan’s Sectoral Contribution to Economy 14 15 Private Ownership Independent Profit Motive Management Characteristics of Private Sector Private No gov. Financing participation 16 State Ownership Wide Autonomy coverage Characteristics of Public Sector Government Public Control Accountability 23 24 25 30 31 32 33 Sole Proprietorship ❑The sole proprietor or sole trader is an individual who invests, owns, manages and controls the business. ❑The individual invests his own and/or borrowed capital, manages the business, bears all the risks alone, enjoys all the profits and suffers from all the losses. ❑Thus the sole proprietor is the sole owner, manager, controller, strategist, policy maker, risk-bearer, financier all rolled into one. 34 Sole Proprietorship - Features ❖One Man Ownership: ✓In proprietorship, only one man is the owner of the enterprise. ❖No Separate Business Entity: ✓No distinction is made between the business concern and the proprietor. Both are one and the same. ❖ No Separation between Ownership and Management: ✓In proprietorship, management rests with the proprietor himself/herself. The proprietor is a manager also. 18-09-2024 35 Sole Proprietorship - Features ❖Unlimited Liability: ✓Unlimited liability means that in case the enterprise incurs losses, the private property of the proprietor can also be utilized for meeting the business obligations to outside parties. ❖Profits or Losses to the Proprietor: ✓Being the sole owner of the enterprise, the proprietor enjoys all the profits earned and bears the full brunt of all losses incurred by the enterprise. ❖Less Formalities: ✓A proprietorship business can be started without completing much legal formalities. There are some businesses that too can be started simply after obtaining necessary manufacturing license and permits. 18-09-2024 36 37 Partnership ❑A partnership is a single business where two or more people share ownership. ❑In a partnership each person contributes to all aspects of the business, sharing the profits and losses of the business as well. ❑A partnership is usually formed to combine capital, labor and varied specialized skills and knowledge. 18-09-2024 38 Partnership - Features ❖Agreement: The partnership arises out of an agreement between two or more persons. ❖Profit sharing: There should be an agreement among the partners to share the profits of the business. ❖Membership: There must be at least two persons to form a partnership. The maximum number is 20. But in case of banking business the maximum is 10 members. ❖Unlimited liability: The liability of every partner is unlimited. 18-09-2024 39 Partnership - Features ❖Principal-agent relationship: Every partner is an agent of the firm. He can act on behalf of the firm. He is responsible for his own acts and also for the acts done on behalf of the other partners. ❖Collective management: The firm and the partners are one. When a contract is made in the name of the firm all the partners are responsible for it individually and collectively. ❖Non-transferability of shares: A partner cannot transfer his share of interest to others without the consent of the other partners. 18-09-2024 40 Joint Stock Company ❑A joint stock company is the one which has multiple owners, owned by the people who have subscribed shares in that company. 18-09-2024 41 Joint Stock Company - Features ❑ Legal Formation/Incorporated Association: A company is called an incorporated association because it comes into existence only after registration (Companies Act of Kingdom of Bhutan) ❑ Artificial legal person- A company is a creation of law and is called an artificial person. It exists only in the contemplation of law, and therefore, has no physical form. However, law grants it the right to act as a natural being — through a board of directors elected by the shareholders. ❑Minimum Number of Members- In Bhutan, the requirement of a minimum number of persons shall not be applicable in case of Government Companies. Forming a public company at least 7 persons and for forming a private company at least 2 persons are required. 18-09-2024 42 Joint stock company - features Distinct legal entity- A company is regarded as an entity separate from its members because a shareholder of a company (i)in his/her individual capacity cannot bind the company in any way. (ii) Can enter into contract with the company and can be an employee of the company. 18-09-2024 43 Joint stock company - features ❑ Perpetual Succession/Existence- A company has unending life quite independent of the life of its members. The death, insolvency, or exit of any shareholder has no effect on the life of a company. ❑ Common Seal: Requires that a company must have a common seal with its name engraved on it. Any document bearing the common seal of the company, and signed by two directors, legally binds the company. 18-09-2024 44 Business Environment “Business environment means the aggregate of conditions, events and influences that surround and affect it” -Keith Devis BE – collection of all individuals, entities and other factors which may or may not be under the control of the organization but can affect its performance, profitability, growth and even survival. 45 Business Environment Natural Physical Societal Environment Environment Natural Physical Environment Political Natural Physical Environment Economic Climate Sociocultural Societal Technology Wildfire Environment Legal Task Environment Task Internal Environment Environment Government Customers Structure Internal Competitors Culture Trade association Company's Environment Labour unions resources Creditors Communities Business Environment: Meaning, Types, Why It Matters - Penpoin 46 Business Environment ❑Business Environment can be defined as the combination of internal and external factors that influence a company's operating situation. ❑The factors include customers, competitors, suppliers, government, and the social, political, legal and technological factors etc. ❑While some of these factors or forces may have direct influence over the business firm, others may operate indirectly. ❑Thus, “The sum total of all individuals, institutions and other forces that are outside the control of a business enterprise but the business still depends upon them as they affect the overall performance and sustainability of the business.”. 18-09-2024 47 Business Environment ❖Business Environment has been defined by Bayard O. Wheeler as “the total of all things external to firms and industries which affect their organization and operation”. ❖According to Arthur M. Weimer: Business environment encompasses the ‘climate’ or set of conditions, economic, social, political or institutional in which business operations are conducted. 18-09-2024 48 Business Environment ❖According to Glueck and Jauch: “The environment includes factors outside the firm which can lead to opportunities for or threats to the firm. Although there are many factors, the most important of the factors are socio-economic, technological, supplier, competitors, and government.” 18-09-2024 49 Understanding of Business Environment A business firm is an open system. It gets resources from the environment and supplies its goods and services to the environment. There are different levels of environmental forces. Some are close and internal forces whereas others are external forces. External forces may be related to national level, regional level or international level. These environmental forces provide opportunities or threats to the business community. Every business organization tries to grasp the available opportunities and face the threats that emerge from the business environment. 18-09-2024 50 Understanding of Business Environment ❑Business organizations cannot change the external environment but they just react. ❑They change their internal business components (internal environment) to grasp the external opportunities and face the external environmental threats. It is, therefore, very important to analyze business environment to survive and to get success for a business in its industry. ❑It is, therefore, a vital role of managers to analyze business environment so that they could pursue effective business strategy. 18-09-2024 52 Features of Business Environment ❖Complex: It is very difficult to understand the impact of Business Environment on the companies. ❖Dynamic: It keeps on changing. ❖Uncertainty: It is very difficult to predict the changes of business environment ❖Relativity : The impact of business environment may differ from company to company or country to country. 18-09-2024 53 Features of Business Environment ❖Multi-faceted: A change may be favorable to someone and unfavorable to others ❖Internal and External factors : The environment of business comprises of internal and external factors. ❖Environment is inseparable part of business: Business cannot work without environment ❖Business lacks control over environment: Business environment is a constantly changing process. 18-09-2024 55 Importance of Business Environment ❑Determining Opportunities and Threats: The interaction between the business and its environment would identify opportunities for and threats to the business ❑Giving Direction for Growth: leads to opening up new frontiers of growth for the business firms. ❑Continuous Learning : The managers are motivated to continuously update their knowledge, understanding and skills to meet the predicted changes in area of business. 18-09-2024 56 Importance of Business Environment ❑Meeting Competition : It helps the firms to analyze the competitors’ strategies and formulate their own strategies accordingly. ❑Identifying Firm’s Strength and Weakness: Business environment helps to identify the individual strengths and weaknesses in view of the technological and global developments. 18-09-2024 57 18-09-2024 58 Environmental Scanning ✓The process of careful monitoring of an organization's internal and external environments for detecting signs of opportunities and threats that may influence its current and future plans. ✓The process involves gathering, analysing, and providing information for tactical or strategic purposes. Strategic: long term planning. Tactical : short term planning. 18-09-2024 60 Environmental Scanning: Techniques SWOT Analysis ✓A strategic planning technique to identify the factors for business competition or project planning. ✓The primary objective is to be fully aware of of all the factors involved in a decision. This method was created in the 1960s by Edmund P. Learned, C. Roland Christensen, Kenneth Andrews and William D. Book in their book "Business Policy, Text and Cases" (R.D. Irwin, 1969). 61 http://argowiki.com/images/2/26/SWOT_analysis_example.png 18-09-2024 62 Benefits of SWOT ✓It is a source of information for strategic planning. ✓Builds organizations strengths ✓Helps to deplete firms weaknesses. ✓Maximize organizations response to opportunities. ✓Overcome organizations threats. ✓Helps in identifying core competencies of the firm. ✓Helps in setting of objectives for strategic planning. ✓It gives a clear picture of the past, present and future aspects of the organization. 18-09-2024 63 PESTLE Analysis 65 Benefits of PESTLE analysis: a. It helps to spot business or personal opportunities, and it gives advanced warning of significant threats. b. It reveals the direction of change within the business environment. This helps to shape the business accordingly. c. It helps avoid starting the projects that are likely to fail, for reasons beyond the control of firms. d. It helps to develop an objective view of the new environment while entering a new country, region or market. 18-09-2024 66 Porters Fives Forces Model ✓Porter's Five Forces Framework is a tool for analyzing competition of a business. Developed in 1979 by Michael E Porter of Harvard Business School as a simple framework for assessing and evaluating the competitive strength and position of a business organization. 67 ✓Competition in the Industry: The first of the five forces refers to the number of competitors and their ability to undercut a company. The larger the number of competitors, along with the number of equivalent products and services they offer, the lesser the power of a company. Suppliers and buyers seek out a company's competition if they are able to offer a better deal or lower prices. Conversely, when competitive rivalry is low, a company has greater power to charge higher prices and set the terms of deals to achieve higher sales and profits. 18-09-2024 68 ✓Potential of New Entrants into an Industry: A company's power is also affected by the force of new entrants into its market. The less time and money it costs for a competitor to enter a company's market and be an effective competitor, the more an established company's position could be significantly weakened. An industry with strong barriers to entry is ideal for existing companies within that industry since the company would be able to charge higher prices and negotiate better terms. 18-09-2024 69 ✓Power of Suppliers: The next factor in the five forces model addresses how easily suppliers can drive up the cost of inputs. It is affected by the number of suppliers of key inputs of a good or service, how unique these inputs are, and how much it would cost a company to switch to another supplier. The fewer suppliers to an industry, the more a company would depend on a supplier. As a result, the supplier has more power and can drive up input costs and push for other advantages in trade. On the other hand, when there are many suppliers or low switching costs between rival suppliers, a company can keep its input costs lower and enhance its profits. 18-09-2024 70 ✓Power of customers: The ability that customers have to drive prices lower or their level of power is one of the five forces. It is affected by how many buyers or customers a company has, how significant each customer is, and how much it would cost a company to find new customers or markets for its output. A smaller and more powerful client base means that each customer has more power to negotiate for lower prices and better deals. A company that has many, smaller, independent customers will have an easier time charging higher prices to increase profitability. 18-09-2024 71 ✓Threat of substitutes: The last of the five forces focuses on substitutes. Substitute goods or services that can be used in place of a company's products or services pose a threat. Companies that produce goods or services for which there are no close substitutes will have more power to increase prices and lock in favorable terms. When close substitutes are available, customers will have the option to forgo buying a company's product, and a company's power can be weakened. 18-09-2024 72 Attractive Industry- High Profits Unattractive Industry- Low profits High Barriers to enter Low barriers to enter Weak suppliers bargaining power Strong suppliers bargaining power Weak buyers bargaining power Strong buyers bargaining power Few substitute products or services Many substitute products or services Low competition Intense competition 18-09-2024