This is a solution of Understanding Business Organizations Assignment given in unit 1 Business Environment, in which we discuss global and local environment of business and understanding of business strategy.
Business organizations are shaped by the market forces and regulators. The business environment at both local and global level play vital role in shaping the activities of business. Various factors like taxation policy, interest rates, and competition laws also play their part in affecting the way businesses are carried out. Companies operating at larger scale in the global market have to obey the exclusive rules and regulations of the jurisdictions. Market forces and organizational processes are dependent upon each other.
LO1: Understand the Nature of the National Environment in Which the Business Operates
AC1.1: Explain how economic systems attempt to allocate resources effectively
There are broadly three types of economic systems, namely free market economics, command economics, and mixed economics. The inherent forces of the economic systems work in such way that ensures effective allocation of resources. Producers and consumers exchange in a mutually beneficial ways under the free market economic system. The system enables its components to take care of the problems and it also relies on the market to allocate the resources. Independent market forces are encouraged in the free market system to foster the choices of stakeholders involved in the market. The consumers’ preferences decide what to produce in the market, and the producers are obliged to obey the consumer preference but with a self-interest. The producers determine how to produce in order to generate profits out of their course of activities. Later the flow of producer to particular type of consumers is also determined by the market forces, depending upon the purchasing power of the buyer. However in the command economic system, effective allocation of assets is determined by the controlling authorities. Controlling and deciding authorities like government and its affiliated departments (or sometime agencies) follow need based mechanism coupled with apt decision processes. The agencies determine what to produce, how to produce and for whom to produce. They follow planning mechanism in order to decide the income and usage of resources. In some cases, command economics may fare better than the free economic system. In emergency scenarios like market or social crisis, war, or natural calamity, the controlling economic system seems to have more control over the appropriate asset allocation. The mixed economic system is the hybrid of free economic and controlled economic systems. Free market forces acting under controlling planning authorities perform in efficient asset allocation. Consumer preferences partly influenced by the government agencies decide what to produce. How to produce is determined by the producer’s self-interest controlled under the government policies. Government preferences coupled with the consumers’ purchasing power decides for whom the producer will produce in what quantity. In practice most of the economies are mixed economy, operating under different types of governments who act in favour of the self-interest of both the consumers and producers (Whitley, 1994; Lane, 1992).
AC1.2: Assess the impact of fiscal and monetary policy on business organizations and their activities
The controlling authority of economic system in almost all countries is the government. It governs the economic system by formulating policies and through central planning system. The government uses two key policies in influencing the operating style of the economic system: fiscal policy and monetary policy. Through the fiscal policy government can modify its expenses and income from the economy in order to achieve its planned objective. Tax rates and government spending in public sectors decide the macro-economic picture of the economy. Fiscal policy can be discretionary or automatic, depending upon the need of the situation and style of governance. Growth stage of the economy and situation of the employment in the market affect the government fiscal policy. Fiscal policies can result in the availability of capital with the consumer and producers. Tax rates decide the action plans of businesses and it has further effect on hiring policies and investment strategies. If tax rates are higher, the businesses face problem in paying huge amount of various taxes and also in repaying interests generated from capital (and long-term liabilities). Higher tax rates result in lesser disposable income available with a buyer, which affects the consumer expenditure. Lesser consumer expenditure gives rise to supply demand problem in the market, which is not good for either forces.
Monetary policy on the other hand is the government’s plan of action in order to control the money supply in the country. Supply of money in the market decides a number of market based decisions. The government can control the money supply by adjusting the interest rates in the market which affects the availability and value of capital in the market. With the change in base interest rate, all other rates of interest get adjusted and the market dynamics gets affected. Effectively it also has an impact on the foreign exchange rate of currency, which has impact on the trade. Higher base rate results in larger interest amount payment. It can have negative impact on corporations in terms of decrease in revenue and profit generated. It negatively impacts capital investment and discourages them from taking further loan to boost investment plans; job creations get affected because of corporate actions. Higher interest rates also result in imbalanced foreign exchange rate, which affects the trade quantity. Businesses also face the burden of higher import expenses, as well as lesser profit realization from export (Kollmann, 2002; Fatás & Mihov, 2001).
AC1.3: Evaluate the impact of competition policy and other regulatory mechanisms on the activities of a selected organization (with reference to Tesco plc)
The organization selected is Tesco plc. It is a UK-based supermarket chain with presence across various geographies across the globe. The retail chain is famous for its strong brand image in the field of grocery and general merchandising. With increase in its geographical presence, Tesco is also facing the task of obliging rules and regulations of different jurisdictions. However the regulations in the home jurisdictions are impacting the business of the retailer to some extent.
In the UK, the government has been practicing imposing competition policy from 1948. The primary goal of competition policy is to create a sound and healthy competition market place which promotes fair competitions among the corporations. The UK regulations also make sure to keep the efficiency of the local market as well as the European market on broad scale. The laws are helpful in empowering the consumers with extensive choices, efficiency in operation, advancement in technology, and fair pricing race between businesses. Tesco cannot indulge itself in fixing prices by setting up cartels or any such unfair agreement with its peers. However the company has faced few troubles in adhering to new proposals by the British government. The proposal which stops expansion of new stores in certain markets is hampering growth in new localities. Historical examples of fine imposed by the competition authorities on certain British companies show that Tesco must abide by the rules in order to avoid hefty penalties.
Apart from the competition regulations, the company has to adhere to a number of other legal obligations. Regulations associated with the employee treatment and employee relation is also important. Minimum wage policy (National Minimum Wage Act 1998), maximum work hour policy, workplace safety regulations (Health And Safety & Work Act 1974), and employment contract terms decide the way Tesco must treat its employees. Sales and Good Act needs the company to adhere to certain contract terms while buying raw materials from suppliers and also while selling through its retail stores. Hiring policy of Tesco is adhered to the anti-discrimination laws present in the UK market. The company also follows race relations act, disability act, and employment equality regulations in practice (Kollmann, 2002; Fatás & Mihov, 2001).
LO2: Understand the behaviour of organizations in their market environment
AC2.1: Explain how market structures determine the pricing and output decisions of businesses
In micro-economics context, determining the price and the related decision regarding the quantity of output is very crucial. Market is a place where the buyers and the producer interact with each other to exchange goods and services. Market structure often decided the type of interaction the buyers will have with the sellers while exchanging the goods and services. However the sellers cannot decide on its own regarding the price structure and output amount, which only suits them in realising better profits. Market structures can be done on the basis of two criteria: how many producers are present in the market, and what kind of product is being sold in the market. If a number of firms are selling the same product then the price elasticity and the output size will usually be decided through the supply and demand mechanism. In case of heterogeneous products being sold in the market, the producer takes decision whether any of the product can be substituted and how much of each type of products are supposed to be produced. The competition comes in to picture when the number of producers present in the market is more than one. In that situation, again the pricing and output related decisions are adjusted according to the activities of the competitors trying to outplay each other over the similar products and similar pricing strategies. In perfect competition scenario, the number of producers and buyers are too huge to have individual impact on the price. Entry and exit in to the market is easy for the seller, hence it has to abide by the market pricing in order to survive in the perfectly competitive environment. However in the other structure of the market, producers hold the control over amount to be produced and hence they can also decide the price at which commodities to be sold to the consumers (Scherer & Ross, 1990).
AC2.2: Illustrate the way in which market forces shape organisational responses using a range of examples
Market forces are always crucial in deciding the pricing of the products and other related organisational actions. Depending upon the structure of the market, market forces interact in such a way that they will have better profitability or advantage over the other. In case of perfect competition, the number of sellers and buyers are high. Their impact over deciding the prices is not significant; hence often economist call this kind of property as price taking property rather than price making. The products which are sold in the market are homogenous, and the producers cannot bargain over the type of commodities to be sold. Because of the similarity among the products and services, the seller is forced to abide by the prevailing market trend of pricing. The interacting forces or the agents have clear idea about the trend of the market, and hence they act together according to the conditions. Market prices are crucial in this system, and if the seller is failing to stick to the market prices then it cannot attract potential buyers for the homogenous products it sells. In case of monopoly, there is usually only one seller and producer present in the market. The exclusive right to sell product in the market is governed by few forces such as government licensing, pioneering in a particular sector, exclusive access to mineral resources, and patent holding. The degree of control is considerable in this kind of market, which is reflected in the non-elastic pricing of the products. In terms of quantity and nature, products being unique and without almost any substitute in the market, are decided by the seller. In monopolistic competition, the number of competitors is high in the market. The degree of control in the market is valid up to some extent. However the price elasticity is large in the case. The nature of products is decided on the basis of the number sellers selling the product in the market; the products are exclusive to the sellers (Kamien, 1982). By very structure, monopolistic competition has properties of both perfect competition and monopoly. In terms of pricing, the customer may have a little choice because of differentiated product based on the type of firm. It has resemblance with the perfect competition, because the number of firms is large and their individual actions do not affect the other. In oligopoly, there are a few firms selling homogenous products to unspecified number of buyers. Because of the limited number of sellers, their actions in the market have potential to affect each other. The products offered in the market can be homogeneous or differentiated. The producers try to prevent other new entrants in the market by innovating advertisements or innovations with product. Pricing decisions are sensitive in the market as it affects the entire selling community. In duopoly market, there are two sellers controlling the commodities. The basic assumption in this type of market is that if one of the duopolists will take any market related decision, then the other one will not react in negative way. The products sold by the two duopolists are similar, and the amount of production is decided by the two sellers in order to maximize their profitability. In most of the cases, costs related to the production of commodities are very minimal. This happens because of exclusive access to the production facilities (Helpman & Krugman, 1989; Kamien, 1982)
AC2.3: Judge how the business and cultural environments shape the behaviour of a selected organization (with reference to an Anglo American company)
The businesses operating in the modern economy are not autonomous. They have to operate within the cultural environment of the market under the exclusive business atmosphere of the market. The organizational behaviour in different markets and conditions are shaped by the inherent ideology of the societies, which differ from place to place (Young, 1999). For example, an American multinational may not always operate its business in the American style when it has offices in European countries. The cultural aspects of the European societies come into the picture while the company decides its strategic business actions. The British society and hence its customers are different in their basic approaches towards businesses (Cannon, 1978).
Google is an American corporation having its present in the United Kingdom. Google have been abiding to the business requirements in the UK for its smooth operation. Market access in the UK system is not similar to that in the USA. Because of the presence of influence of the EU, Google have to be very much careful while selecting its competitive actions against tech companies in the Europe. Competition laws in the region are guided by strong EU polices, and those are to ensure that all technology companies must thrive hard to reap their merit based benefit out of the same market. Google have learnt from the previous examples of business negotiation, when American firms and British multinationals tried to form deal which did not comply with the market regulation. Consumer privacy is very strict in the UK. Google has modified its approach of free data transfer within offices across the globe. Protection of personal data in the region has triggered the need of better communication mediums. The employment policy is also different in the UK than the USA. Hiring and firing policies are not accepted in the region, hence Google have been very selective in its approach towards selecting new employees. Demographics have also asked for modification in its advertising and campaigning strategies. The American way of promoting products are not freely accepted in the British society; Google follows a careful approach while dealing with its promotional activities.
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LO3: Be able to assess the significance of the global factors that shape national business activities
AC3.1: Discuss the significance of international trade to the UK business organizations (with reference to the UK based mining companies)
Doing business in a number of geographical locations attract the importance of international trade polices into the picture. In the modern economy it is very important to expand the business activities outside the home market. It allows better utilization of resources available in various locations, and provides opportunities to make best use of diverse workforce. The benefits of international trade are multifaceted and it provides better profitability to companies. The significance of international trade can be exhibited with the example of a British mining company (Spar, 2006).
Anglo American plc is a publicly listed metals and mining company based out of London, the United Kingdom. The company has its primary listing of stocks on the London Stock Exchange, and also secondary listing in the Johannesburg Stock Exchange. The company has five primary areas of operation: coal, iron ore, base metal, diamonds, and platinum. To manage the portfolio of production, Anglo American plc has to make its presence on various continents. It has operation facilities in South America, North America, Australia, Asia, Africa and Europe. The broad operation has helped the company in accessing a wider marketplace. It has also brought down the operation costs involved in mining, because of the available options of low cost facilities in some of its markets. It is not helpful for a mining company to concentrate all its business efforts in one location. Availability of resources and importance of markets also play a role in favour of doing international trade.
AC3.2: Analyze the impact of global factors on the UK business organizations (with reference to the UK based mining companies)
There are a number of global factors which play role in impacting the business of companies operating at global scale. Anglo American plc has to face political systems in the countries it operates. Any adverse change in the government structure or government policies in any of the continent will have a far reaching impact on the operation of mining business. Political factors which also include policy changes in the EU approach will also have its impact on the company (Yip, Rugman & Kudina, 2006). The company has its presence in a number of economies which shows dissimilarity in their basic composition. Demand and supply of minerals varies depending upon the type of market. Any change in the economic indicator including interest rates, tax rates, inflation rates, or wage rates will leave the business pondering about its future course of action. Pattern of people’s behaviour and attitude towards a mining company also varies from place to place. Mining activities always attract controversies rising from land acquisition, habitat treatment and other social factors. Anglo American plc makes sure to clear any of such complications in order to have a smoother operation. The company decides upon the available technologies in the target new mine fields while designing its business planning. Operating in the African minefields may not be as technologically advanced as doing the same in North American minefields. For successful mining operation, it is important for the company to make sure that all its operation units are adhering to regulations and exclusive mining laws. Legislations related to consumer, employee protection, environment protection and safety norms are dissimilar across the globe; the company has to be careful in terms of handling any change in regulations (Börzel, 2003).
AC3.3: Evaluate the impact of policies of the European Union on the UK business organizations
The regulation and directives of the European Union play crucial role in shaping the business scenario of the companies operating under the EU. Role of the EU in affecting the political regulation of the UK has been significant. The UK being one of the important members of the EU agrees to various legislations and policies by the EU. The taxation, process of business operation, and expenditure pattern are decided by the EU. Some of the regulations and treaties of the EU are not acceptable for the UK scenario, but the UK government has historically shown lenience in agreeing to the larger mandate from the EU. Import policies and trade agreements must have a positive nod from the EU authority. However in a few cases, the trade relationship with non-EU members are getting affected because of the EU mandates.
The Common Fisheries Policy is probably the most discussed EU policy which has created controversy in the UK. The CFP policy has the governing impact on the fishing industry in European Union. The policy was introduced in 1970, which have had a negative impact on the UK fishing industry. The next amendment of the policy was reportedly started in 2012, and it holds the key to the sustainability of the UK fishing industry. The present policy allows usage of fishing grounds and fishing fleets across the European Union region. Another problem from the policy is also awarding quota based fishing licenses to the fishers who may not even qualify. Usage of better boats and methodology were not considered while deciding the quota. Moreover access to free water has also triggered fishing companies to build bigger boats with larger fishing capacities. This has resulted in overcapacity fishing and poses threat to the overall environmental sustainability (Holden & Garrod, 1996).
The economic system has a number of structure and inherent forces which act in mutually beneficially ways. However there are a number of market structure which are autonomous and have control over the market, they also set their own terms to rule the market. The government plays a crucial role in controlling the market through several policies and regulations. Most of the regulations have impact on the business environment and organizational structure. Monetary and fiscal policies play important roles in shaping the strategies of organizations in the long run. Companies working at global level have to abide by global regulation. The companies based out of the UK have to abide by the EU policies, which may also have adverse impact on their profitability.