Week-1The Business Environment
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Transcript of Week-1The Business Environment
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5/6/12
The Business
Environment
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What is businessenvironment
Understanding the environmentwithin which the business has tooperate is very important
for running a business unitsuccessfully.
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THE NATURE ANDPURPOSE OF BUSINESS
Categories of business- For Profit Business
- Not for profit
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For Profit Business
A for-profit organization existsprimarily to generate a profit,that is, to take in more money
than it spends. The owners candecide to keep all the profitthemselves, or they can spend
some or all of it on the businessitself. Or, they may decide toshare some of it with employeesthrough the use of various typesof compensation plans, e.g.,
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Not for profit
A nonprofit organization existsto provide a particular service tothe community. The word
"nonprofit" refers to a type ofbusiness -- one which isorganized under rules that forbid
the distribution of profits toowners. "Profit" in this context isa relatively technical accountingterm, related to but not identicalwith the notion of a surplus of
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Not for profit organizations
This may include:
Trade associationsThese exist to
provide services to their memberfirms, such as undertaking publicrelations and advertising for thetrade as a whole, publishing
trade magazines, providinginformation services andarranging exhibitions.
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Not for profit organizationsconti
Professional bodieswhich
provide qualifications andeducation, information services,employment advice, meetingsand conferences for their
members with the aim ofdeveloping and maintaining theirknowledge and skills in a
particular area of employment.
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Not for profit organizationsconti
Learned societieswhich exist to
further understanding, studiesand education in their specialistfield. An example is the RoyalHorticultural Society.
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Not for profit organizationsconti
Clubs which provide a variety of
activities catering for thespecific interests of theirmembers, such as sportsfacilities (for example, rugby,
football or tennis), dinner clubsfor members to meet newpeople, young farmers clubs for
those working in agriculture, etc.
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Think point
What is the key purpose of thebusinesses in your country and of theorganisations that you have worked
for? Make a list of five "for profit" and five
"not-for-profit"businesses that you
have regular dealings with. Each of these categories has a
distinct set of characteristics which
define their nature and
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Some examples
Adopted Vietnamese International (AVI)- An Online Cooperative of People
Adopted From Vietnam
Alliance for Youth Achievement -Children of Peace International hasestablished four orphanages
throughout Vietnam. Aid to Southeast Asia - A people-to-
people, international aid project
contributing to world peace and
F P fi B i
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For Profit Business-The major objectives of business
usually include: Survival Profit maximization
Profit maximization- May bedefined in two ways:
Normal profit
opportunity cost-
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Survival
This is the prime objective of abusiness since, unless a business cangenerate sufficient sales to cover its
running costs, its start up capital willsoon be exhausted and it will fail.Once a firm has reached this stage,
which often takes a year or longer, itmay then change
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Profit maximisation
Making profit is normally essential fora business to survive in the longterm.
At the most basic level, the profitgenerated must be sufficient to makeit worthwhile to continue to operate
of business.
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Profit maximisation
Normal profit-
Normal profit which is theminimum return that owners mustmake on the capital sum theyinvest to prevent them fromclosing that business and moving
their capital to an alternativesource, which returns moreincome from that same capital
sum. This
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Opportuinity cost
". This concept describes thesituation in which as an individualinvestor uses his/her money to
support a particular firm, s/he losesthe opportunity of investing itanother way where a
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Activity 1
What is the opportunity cost of youstudying for this qualification?
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Supernormal profit
This is the excess of profit abovenormal profit. If firms earnsupernormal profit they will definitely
prefer to stay in business.
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profit
Market share-Gaining a share ofthe market for a particular product isessential for a business to survive.
In the short term, most new entrantsto a market aim to gain market sharethrough market penetration.
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Satisficing
Settling for less than the optimalsolution in order to reach asatisfactory solution as quickly and
cheaply as possible. . Herbert Simon, whose primary
object of research was problem
solving, coined the term 'to satisfice',which denotes the situation wherepeople seek solutions or accept
choices or judgments that are 'good'
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The reason for Satisficingcould be:
Time pressure
The influence of powerfulstakeholders
Lack of knowledge about futureexternal or internal factors.
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Activity
Choose two for-profit and two not-for-profit companies in your country.
(a)Find out the purpose of theirbusinesses what their mainobjectives are.
(b)Examine those business objectivesand compare the rationale behindany differences
(c)Try to find out how their mainbusiness ob ectives have chan ed
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THE BUSINESS AS ALEGAL ENTITY
Non-corporate organisations arethose which do not have aseparate legal identity from theirowners. The main forms of non-corporate organisations are sole
traders and partnerships. Corporate organisationsare
those where the legal status of
the organisation is separate
e ma n ca egor es o
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e ma n ca egor es ocorporate organisations
are: private limited companies
public limited companies (plc).
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limited and unlimitedliability
Unlimited liability means thatthe individual owner or ownersof an organisation haveunlimited liability for all debts oractions taken by the business.
If, say, the organisation fails, theowner(s) would be liable for thefull extent of any debts of the
organisation and would have to
on corpora e
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on-corpora eOrganisations
Sole trader
Partnerships
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There are two main types ofpartnership
- Ordinary
- limited partnerships.
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Ordinary partnerships
There are two types of suchpartnerships
(a)Partnership without a legalcontract
where the partners informally set up
a business with no legal contract. Itis often applies to married couples ormembers of a family who open a
business together.
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Limited partnerships
The Partnership Act 1907 states thata limited partnership shall consist ofno more than twenty limited partnersand include one or more persons whoare termed general partners.
General partners have unlimitedliability whereas limited partnershave limited liability. From 20
December 2002, the restriction on
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Activity 3
Take a walk around your local areaand see what proportion ofbusinesses are sole traders or
partnerships, and in what businessspecialisations.
Find out how easy is it to become a
sole trader or to establish apartnership in your country.
Are there any restrictions on setting
up such a business?
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Limited Companies
A Limited Liability Company,quite simply is a company
whose liability is limited. Alimited company is a type ofcompany which when set-up
allows an entrepreneur tokeep their own assets andfinances separate from thebusiness itself. This means
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Limited companies
The owners of a limited company arethe shareholders those who haveinvested their money in the firm by
buying (ordinary) shares in thecompany.
If the company fails, the owners are
generally not responsible for settlingits debts. The shareholders' liabilityis limited to the amount of equity
they own and would lose only the
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Forming a limitedcompany
Articles of Association this is thedocument which sets out the rules bywhich shareholders and the companywill be administered, for examplevoting rights, powers of directors.
Memorandum of Association thisdocument sets out the companyname status address of the
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Forming a limitedcompany
Statement of Capitalthis givesdetails of the types of share(ordinary, preference, etc.), theamount paid up and unpaid on eachshare, the number of shares issued,
the nominal value of shares issued,voters rights and the shareholder'sdetails.
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private limited companies
Private Limited Companies aresimilar to public companies but canbe run with just one member and
cannot trade shares to the public toraise capital.
pu c m e compan es
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pu c m e compan es(plc).
Public Limited Companies alsoknown as PLCs, Public LimitedCompanies are businesses which
have been established with at least 2shareholders with at least 50,000worth of shares issued.
van ages o a so e
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van ages o a so etrader
Control - Sole traders maintain full control oftheir business. Running it how they pleasewithout the interference of others.
Profit retention Sole traders retain all theprofits of their business.
Private data Information about soletraders is kept private, unlike that of limited
companies which is necessarily made publicafter registration with Companies House.
Specialist Often a small business, soletraders can offer a more personal service with
local roots and ties. This can be more
sa van ages o a so e
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sa van ages o a so etrader
Liability They are subject tounlimited liability. This means if thebusiness gets into debt, the business
owner is liable. In the worst case, thismay mean a person risks their home,personal savings and any other
assets they have both in and outsideof the business.
Finance sole traders often find it
difficult to raise finance to fund their
van ages o
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van ages oPartnership
Capital Due to
the nature of thebusiness, thepartners will
fund the sa van ages o
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sa van ages oPartnership
Disagreements One of the mostobvious disadvantages of partnershipis the danger of disagreements
between the partners. Obviouslypeople are likely to have differentideas on how the business should be
run, who should be doing what andwhat the best interests of thebusiness are. This can lead todisagreements and disputes which
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