BUSINESS AND MANAGEMENT

1. BUSINESS AND MANAGEMENT MODULE 1 BUSINESS ORGANIZATIONS & ENVIRONMENT

2. Economic Opportunities & Threats • Refers to large scale economic factors affecting the economy as a whole • Government policies • Attitudes and actions in foreign countries • Business and consumer confidence

3. Macroeconomic Objectives • Governments tend to have four objectives: • Control inflation • Economic growth • Reduce unemployment • Acceptable international trade balance

4. Controlled Rate of Inflation • A continual rise in the general prices of the economy • Most countries regard a low or sustainable inflation rate as a necessity for achieving the other economic objectives • There are two main causes of inflation

5. Demand Pull Inflation • Caused by excessive aggregate demand in the economy • Any factor that causes a rise in consumption, investment, government spending or trade will lead to an increase in aggregate demand • If consumer confidence is high, this encourages people to spend money, and firms to spend money on production

6. Cost Push Inflation • Caused by higher production costs leading to a rise in prices (assuming firms want to maintain their profit margins) • Union wage increases • Material costs • Affects of climate on crops

7. Controlling Inflation • By limiting demand-pull and cost-push factors • Domestic government might raise taxes to control the amount of consumption in the economy • It could subsidize local businesses to reduce costs of production • Could pursue “supply-side policies” that improve the productive capacity of the economy (investment in health care/education etc) • Exercise 10 – Zimbabwe’s Inflation Problems

8. Unemployment • Measures the proportion of a country’s workforce not in employment • Influenced by aggregate demand – as production is high, unemployment will be low • Economic costs of unemployment affect both the government and society

9. Unemployment Solutions • Demand-side policies • Directly target increasing the level of aggregate demand • Reducing taxes or increasing government spending • Reducing interest rates • Supply-side policies • Increase the level of aggregate supply • Tend to be more permanent policies

10. Types of Unemployment • Frictional – time lapse between leaving one and finding another • Seasonal – caused by seasonal change • Technological – losing a job to automation • Regional – analysis of different areas (urban vs rural) • Structural – a particular industry suffers • Cyclical – recessionary unemployment; affecting everyone

11. Economic Growth • Refers to an increase in a country’s economic activity over time • Measured by the change in total output known as the GDP • Changes in the economic pattern are typically known as cycles • There are several key phases

12. The Business Cycle GDP ($) Trend line Peak Recession Economic Activity Recovery Slump Time

13. Trading Cycle • Peak – economic activity is at its highest level • Consumer spending and investment is high; low unemployment; good cash flow • Recession – dip in level of economic activity for two successive quarters • Declining aggregate demand; falling exports and lower investment • Slump – bottom of a recession (last decline stage) • High unemployment and low levels of consumer spending; poor cash flow and high bankruptcy rates • Recovery – level of GDP starts to rise again • Consumption, spending and investment begin to rise

14. Mini Case Study Case Study – ASOS Source: Jones, Hall, Raffo, Business Studies 3rd Edition, Unit 3, page 37

15. Coping with a Recession • Cost reduction • Efforts to cut utility bills; cheaper warehousing; staff reductions • Price reduction • Influence consumer spending • Non-pricing strategies • Repackaging, special offers, after-sales care • Branding • Consumers maintain loyalty to a brand even during recessionary times; price elasticity • Outsourcing • Lower production costs overseas can help maintain a businesses profit level

16. Barriers to Economic Growth • Lack of infrastructure • Basic electricity, roads, hospitals etc • Lack of technical knowledge • Rapid population growth • High net birth results in too many mouths to feed, which may hinder economic development • High foreign debt repayments • Countries are obliged to meet interest and debt repayments first leaving little for domestic growth

17. Balance of Payments • A record of a country’s money inflows and outflows (over a specific time) • Made up of a capital account and current account • Current • Export and import earnings and expenditures • Capital • Government services, foreign currency etc

18. Current Account • Visible trade balance • International trade in tangible goods (oil, steel cars etc) • Invisible trade balance • Intangible goods such as banking, distribution and insurance

19. Exchange Rates • Measures the value of one currency in terms of another foreign currency • A higher rate (appreciation of currency) means that export prices will be relatively higher, thereby reducing competitiveness • A lower rate (depreciation of currency) means that domestic firms that import raw materials will suffer from having to pay higher prices • Governments try to protect the balance of payments by adjusting exchange rates (through interest rate changes) • Exercise – Exchange rates

20. Protecting Against Currency Fluctuations • Large fluctuations in exchange rates can create difficulties for businesses • Cannot accurately forecast import requirements (costs) • International deals may be postponed until currency fluctuations are minimized • Protectionism • Government policy used to safeguard domestic business • Involves tariffs or quotas for example

21. Examples of Protectionism • Tariffs • Form of tax placed on imported products; gives domestic goods a slight advantage • Quotas • Quantitative limits that prevent too many foreign products entering a country • Subsidies • Payments made by government to a domestic business as a form of aid • Embargos • Physical bans on international trade with certain countries • Standards • Imposition on strict standards (health and safety) on certain imported products