ECO 101 Business Economics Seminar 1 PDF

ECO 101 Business Economics Monday 26 January 2024 | 9 00– 12 30 Lecturer: Dr. Rajiv Nathoo Email: [email protected] Reflect on current local & global challenges? What do economists do? Problem Analysis using Economic Models...

ECO 101 Business Economics Monday 26 January 2024 | 9 00– 12 30 Lecturer: Dr. Rajiv Nathoo Email: [email protected] Reflect on current local & global challenges? What do economists do? Problem Analysis using Economic Models Policy Implications Why Study Business Economics? Business economics concerns the examination of firms, in particular:  the environment in which they operate;  the decisions they make;  the effects of these decisions – on themselves, on their customers, on their employees, on their business rivals, and on the public at large. An understanding of the above issues will help in devising policy recommendations that can make the business successful. The Business Environment Local National Public pressure Competitors groups THE ORGANISATION Policies, procedures, resources, people. Internal environment. Government Suppliers Customers EXTERNAL ENVIRONMENT The world 7 THE INTERNAL ENVIRONMENT The internal environment of a business includes its structure, culture, leadership, human resources, operations, finances, marketing, research and development, and governance. It encompasses the internal factors that directly influence the organization's operations and performance.  THE EXTERNAL ENVIRONMENT The external environment in which the business operate can be divided into two levels: 1. The microenvironment is a collection of all the forces that are close to the firm. These forces are very particular for the said business only. Its elements include suppliers, competitors, marketing intermediaries, and customers. 2. The macroenvironment constitutes those outside forces that are not under the control of the firm but influences the functioning and performance of every business organisation, in general. It comprises of the demographic, socio-cultural, legal, political, technological, and global environment.  WHAT IS A BUSINESS?  A business is defined as an organisation engaged in commercial, industrial, or professional activities. Businesses can be for-profit entities or non-profit organisations.  There are various forms of a business, such as a limited liability company (LLC), a sole proprietorship, a corporation, and a partnership.  Businesses can range from small operations operating in one industry to large operations operating in many industries around the world. Sole Proprietorship A sole trading business is owned and controlled by one person, but it may employ more than one person to help him. It is very small in size and is very common in the services sector of the economy. Examples of sole trading businesses include small retailers, plumbers, electricians, beauticians, grocers, butchers and many others. Sole Proprietorship Unlimited liability for business debts - creditor can look beyond business assets to proprietor’s personal assets Limited to owners life span Equity raised is limited to proprietors personal wealth Business is unable to exploit new opportunities because of insufficient capital Transfer of ownership difficult – sale of entire business to new owner Partnership A partnership is an association of two or more partners who contribute capital together for the purpose of setting up a business. Doctors, dentists, accountants, consultants and solicitors are typical examples of professionals who may go into partnership together. Partnership General Partnership all partners share in gains & losses Unlimited Liability for all partnership debts Limited Partnership One general partner will run the business & they will have unlimited liability One limited partner will not actively participate Limited partner debts is limited to amount they contribute to partnership Company Limited Liability Companies and Corporations  For our purposes, the words “company” and “corporation” can be assumed to be interchangeable and to have equivalent meaning.  The most important distinction of a company/corporation, in comparison to sole proprietorships and partnerships, is the legal notion of limited liability. Company  A corporation is a legally defined, artificial being (a judicial person or legal entity), separate and distinct from its owners.  It has many of the legal powers that people have.  It can enter into contracts, acquire assets, and incur obligations.  It is solely responsible for its own obligations.  The owners of a corporation (or its employees, customers, etc.) are not liable for any obligations the corporation enters into – limited liability.  The corporation is not liable for any personal obligations of its owners. Company Formation of a Corporation  Corporations must be legally formed.  Setting up a corporation is considerably more costly than setting up a sole proprietorship and partnership.  Most firms hire lawyers to create a corporate charter that includes formal articles of incorporation and a set of bylaws.  The corporate charter specifies the initial rules that govern how the corporation is run. Company Ownership of a Corporation  There is no limit on the number of owners a corporation can have.  The entire ownership stake of a corporation is divided into shares, also known as stocks.  The collection of all the outstanding shares of a corporation is known as the equity of the corporation. Company Ownership of a Corporation  An owner of a share of stock in the corporation is known as a shareholder, stockholder, or equity holder.  Shareholders are entitled to dividend payments and usually receive a share of the dividend payments that is proportional to the amount of stock they own.  A unique feature of a corporation is that there is no limitation on the number of shareholders. Company Corporations/companies may be privately or publicly owned. Private companies:  Usually only a few shareholders heavily involved with managing and/or monitoring the firm.  Shares can only be traded privately. Public companies:  Shares listed and traded publicly on a stock exchange.  Possibly millions of individual shareholders.  Separation of ownership and control. AGENCY PROBLEM Public companies – separation of ownership and control: Shareholders (principal) versus managers (agent) represents a principal/agent relationship. An agency relationship exists whenever a principal hires an agent to act on his behalf. Agency problems – managers’ interests are not necessarily aligned with shareholders’ interests. There are costs of the agency relationship to the company such as (agency costs): Direct costs of salaries, bonuses, etc. Indirect costs that arise due to sub-optimal decisions (projects that increase a manager’s status, image, power etc. rather than maximise the wealth of the owner) Enron is perhaps the biggest corporate scandal in modern memory. The company's chairman Kenneth Lay, the CFO, and CEO Jeffrey Skilling were selling shares based on false accounting reports which made it seem as though the stock was more valuable. Many stockholders lost millions as the value of Enron shares plummeted. http://www.youtube.com/watch?v=stwcqdk7C_w AGENCY PROBLEM How to align the interests of managers with those of the shareholders? Board of Directors elected by shareholders to monitor managers as per the Corporate Governance guidelines; Design incentive schemes (e.g., tie the compensation of top managers to corporation’s profits or share price); Multinational Corporations A multinational corporation (MNC) is a firm that has been incorporated in one country and has production and sales operations in other countries. There are about 60,000 MNCs in the world. Many MNCs obtain raw materials from one nation, financial capital from another, produce goods with labor and capital equipment in a third country, and sell their output in various other national markets. Why do companies become multinational?  Strategic motives drive the decision to invest abroad and become an MNE: 1. ____________ Market seekers: produce in foreign markets either to satisfy local demand there/to export to markets other than their home markets. Raw 2. ____________ material ____________ seekers: extract raw materials (e.g. oil, diamonds) wherever they can be found, either for export or for further processing and sale in the host country. Production____________ 3. ____________ efficiency seekers: produce in countries where one or more of the factors of production are under-priced relative to their productivity e.g. cheap labour in Bangladesh. Knowledge seekers: operate in foreign countries to gain access to technology and 4. ____________ managerial expertise Political____________ 5. ____________ safety seekers: acquire new operations in countries that are considered unlikely to expropriate or interfere with private enterprise. Franchise A franchise business is usually a well-established and famous enterprise. They are found in different parts of the world and are known worldwide. A franchise is a type of enterprise that bought a license from a franchisor to sell its products and services. A franchisee is the enterprise that buys the license from a franchisor. The franchisor sells a license of operation before the latter can start to operate. Selecting the right business organisation for my enterprise Hospitality Businesses Hospitality businesses encompass a diverse range of establishments providing services to guests. This includes hotels, restaurants, bars, and related services aimed at ensuring customer comfort, satisfaction, and entertainment.  Hotels and Resorts  Restaurants and Cafes  Vacation Rentals (e.g., Airbnb)  Event Venues  Catering Services  Cruise Lines  Travel Agencies  Casinos and Gaming Resorts  Bars and Pubs  Tour Operators  Spa and Wellness Centers Note: This is not an exhaustive list.