Business Environment Notes for MBA DU
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Department of Marketing University of Dhaka Evening MBA Program Course # MKT – 510 (Business Environment) Course Teacher: Prof. ABM Shahidul Islam, Ph.D.
Course Outline 1. Introduction: Business Organizations – The External Environment; The Internal Environment 2. Contexts: The Political Environment; The Macroeconomic Environment; People, Technology and Natural Resources; The Legal Environment; Cultural and Social Environment 3. Government and Business 4. Corporate Responsibility of Business and the Environment Text Books: 1. The Business Environment, 2nd Edition by Lan Worthington and Chris Britton, Pitman Publishing, London 2. Business and Society, Third Edition by Keith Davis & Robert L. Blomstrom, McGraw-Hill Book Company
Lecture # 1 Introduction: Business Organizations – The External Environment. Business organizations differ in many ways, but they also have a common feature: the transformation of inputs into output. This transformation process takes place against a background of external influences which affect the firm and its activities. This external environment is complex, volatile and interactive, but it cannot be ignored in any meaningful analysis of business activity. Business Defined: It can be described as being concerned with buying and selling or with trade and commerce, or the concern of profit-making organizations. Environment is the totality of forces and entities interacting with and affecting any agent. A model of business activity: Though there are differences among businesses, but all business organizations are ultimately involved in the same basic activity, namely, the transformation of inputs or resources into outputs, i.e. goods or services. This process is illustrated below: Inputs
Outputs
Land, Premises Materials Labor Technology Finance
Goods Services Ideas Consumption Information etc
BUSINESS ORGANIZATIONS
Managerial Skills etc.
Figure: 1. The Business Organization as a transformation System. In essence, all organizations acquire resources – including labor, premises, technology, finance, materials – and transform these resources into the goods or services required by their customers. In short, inputs help to create output and output creates inputs. The output of an organization may represent an input for another. The Firm in its Environment: Organizations are entities made up of interrelated parts which are intertwined with the outside world – the external environment. This environment comprises a wide range of influences – economic, demographic, social, political, legal, technological, etc – which affect business activity in a variety of ways and which can impinge not only on the transformation process itself, but also on the process of resource
acquisition and on the creation and consumption of output. This idea of the firm is illustrated in figure 2 below: Environmental Influences Political, Social, Legal, Cultural, Technological etc.
Inputs
Business Organizations
Outputs
Consumption
Figure 2: The Firm in its Environment.
In examining the business environment, a useful distinction can be made between those external factors which tend to have a more immediate effect on the day to day operations of a firm and those which tend to have a more general influence. The immediate or operational environment for most firms include suppliers, competitors, labor markets, financial institutions and customers, and may also include trading organizations, trade unions and possibly parent company. In contrast, the general or contextual environment comprises those macro environmental factors such as economic, political, socio cultural, technological and legal influences on business which affect a wide variety of businesses and which can emanate not only from local and national sources but also from international and supranational developments. Following figure makes this distinction. General or Contextual
Intermediate or Operational Environment Supplies Competitors Labor Market Financial Institutions etc.
Environment Economic Political, Legal Social etc.
Business Organizations Figure 3: Two Levels of Environment
This type of analysis can also be extended to the different functional areas of an organization’s activities such as marketing or personnel or production or finance as illustrated in figure 4. Such analysis can be seen to be useful in at least two ways. First, it emphasizes the influence of external factors on specific activities within the firm and in doing so underlines the importance of the interface between the internal and external environment. Second, by drawing attention to this interface, it highlights the fact that, while business organizations are often able to exercise some degree of control over their internal activities and processes, it is often very difficult, if not impossible, to control the external environment in which they operate. Environmental Influences General Immediate
Marketing Intermediaries
Marketing System
Marketing Intermediaries
Market (s)
Figure 4: Environmental Influences on a Firm’s Marketing System The General or Contextual Environment Here we shall overview the business environment by highlighting some of the key environmental influences on business activity. 1. The Political environment: A number of aspects of political environment clearly impinge on business activity. The nature of political system and its institutions and processes, government involvement in the working of the economy and its attempts to influence market structure and behavior are of great concern of the businesses. Government activities, both directly and indirectly, influence business activity and government can be seen as the biggest business enterprise at national or local level. Given the trend towards the globalization of markets and existence of international trading organizations and blocks, international politico-economic influences on business activity represent one key feature of the business environment. Another is the influence of public, as well as political, opinion in areas such as environmental policy and corporate responsibility. 2. The Economic Environment: Government plays a major role in the economy at both national and local level and its activities help to influence both the demand and supply side. A number of other economic aspects related to
business activity such as various structural aspects of both firms and markets and comparison of economic theory and practice are worthy of consideration. 3. The Legal Environment: Businesses operate within a framework of law which has a significant impacts on various aspects of their existence. Laws usually govern the status of the organization, its relationship with its customers and suppliers and certain internal procedures and activities. They may also influence market structures and behavior. 4. The Socio-cultural Environment: Both demand and supply are influenced by social and cultural factors. Cultural factors may affect the type of products being produced or sold, the markets they are sold in, the price at which they are sold and a range of other variables. People are a key organizational resource and fundamental part of the market for goods and services. Accordingly, sociocultural influences and developments have an important effect on business operations, as do demographic changes. 5. The Technological Environment: Technology is both input and an output of business organizations as well as being an environmental influence on them. Investment in technology and innovation is frequently seen as a key to the success of an enterprise and has been used to explain differences in the relative competitiveness of different countries. It has also been resp0nsible for significant developments in the internal organization of businesses in the markets for economic resources.
The Immediate or Operational Environment 1. Resources and resource Markets: An organization’s need for r4esouces makes it dependent to a large degree on the suppliers of those resources. Some aspects of operation of resource markets or indeed the activities of an individual supplier can have a fundamental impact on an organization’s success and upon the way in which it structures it internal procedures and processes. By the same token, the success of suppliers is often intimately connected with the decisions and/or fortunes of their customers. While some organizations my seek to gain an advantage in price, quality or delivery by purchasing resources from overseas, such a decision may engender (create) a degree of uncertainty, particularly where exchange rates are free rather than fixed. Equally, organizations may face uncertainty and change in the domestic markets for resources as a result of factors as varied as technological change, government intervention or public opinion. 2. Customers: Customers are vital to all organizations and the ability both to identify and meet customer needs is seen as one of the keys to organizational survival and prosperity. This idea of consumer sovereignty is a central tenet (principle of belief) of the market economy and is part of an ideology whose influence has become all pervasive in recent years. Understanding the many factors affecting both individual and market demand, and the ways in which firms organize themselves to satisfy that demand is a vital component of a business environment that is increasingly market-led. 3. Competitors: Competition – both direct and indirect – is an important part of the context in which many firms operate and is a factor equally applicable to the input
as well as the output side of business. The effects of competition, whether from domestic organizations or from overseas firms is significant at the macro as well as the micro level and its influence can be seen in the changing structures of many advanced industrial economies. How firms respond to these competitive challenges and the attitudes of governments to anti-competitive practices is a legitimate area of concern for student of business.
Analyzing the Business Environment For analyzing business environment grouping of the environmental influences into four broad areas can be made. Consideration is given to the political, economic and legal contexts within which businesses function. In addition to examining the influence of political and economic systems, institutions and processes on the conduct of business will be made. Focus will be made on the macroeconomic environment and on influences affecting key organizational resources, particularly labor, technology and raw materials. Attention will be focused on three central structural aspects: legal structure, size structure and industrial structure. Impact of different legal definitions on firm’s operations need to be studied. Possible variations in organizational goals based on legal and other influences should also be known. Role of government in assisting small business development and growth should be known. Analysis of government involvement in business and in particular its influence on supply as well as the demand side of the economy at both national and local level should be studied. Investigation of rationale for government intervention in markets and a review of government actions in three areas, namely, privatization and deregulation, competition policy and the operation of the labor market. Consideration should be given to corporate responsibility towards natural environment as a part of businesses’ moral dimension. The idea of CSR and the different forces which impact on an organization in this area. Organizations should monitor changes in the business environment.
CENTRAL THEME 1.Interaction with the Environment: Changes in the environment can cause changes in inputs, in the transformation process and in outputs and in these in turn may engender further changes in the organization’s environment. The internal and external environments should be seen as interrelated and interdependent, not as separate entities. 2. Interaction between environmental variables: In addition to the interaction between the internal and external environments, the various external influences affecting business organizations are also frequently interrelated. Changes in interest rates may affect consumer confidence and this can have an important bearing on business activity. Failure to respond to the
3.
4.
5.
6. 7.
challenges or opportunities presented by such changes could signal demise of the organization or at best a significant decline in its potential performance. The Complexity of the Environment: For students of business and managers alike, the requirement is to recognize the complexity of the external environment and to pay greater attention to those influences which appear the most pertinent and pressing for the organization in question. Environmental Volatility and Change: The organization’s external environment is further complicated by the tendency towards environmental change. The volatility may be particularly prevalent in some areas (e.g. technology) or in some markets or in some types of industry or organization and this makes decision making more difficult. Environmental Uniqueness: Each organization has to some degree a unique environment in which it operates and which will affect it in a unique way. Thus while it is possible to make generalizations about the impact of the external environment on the firm, it is necessary to recognize the existence of this uniqueness and where appropriate to take into account exceptions to the general rule. Different Spatial Levels of Analysis: External influences operate at different spatial levels – local, regional, national, supranational, international. Two-way Flow of Influence: It is important to recognize that the flow of influence between the organization and its environment operates in both directions.
LECTURE # 2
The Political Environment Politics is a universal activity which affects the business world in a variety of ways. Understanding political systems, institutions and processes provides a greater insight into business decisions and into the complexities of the business environment. Introduction: Business activity takes place both within and across state boundaries and frequently involves governments, whether directly or indirectly. Consequently the political and economic arrangements within the state in which a business is located and/or with which it is trading can have a fundamental impact on its operations – even to the extent of determining whether it is willing or, in some cases, able to trade at all. As a prelude to a detailed analysis of the political environment, it is necessary to make a number of general observations regarding political change and uncertainty and its impact on business activity. First, the nature of a country’s political system – including its governmental institutions – tends to reflect certain underlying social values and philosophies which help to determine how decisions are made, including decisions about the allocation of resources. Thus, while government may come and go, the values on which their decisions are based tend to be more enduring and as a result disputes normally center around ‘means’ (e.g. sources of revenue), rather than ‘ends’ (e.g. controlling inflation). In short, the political environment of business is a dynamic environment, containing both elements of continuity and change, and students and practitioners of business alike need to be constantly aware of developments in this area, if they are to gain a greater insight into the background of business decision making. Second, changes in the political environment also emanate from a country’s institutional arrangements. The tendency in democratic states, to have regular elections, competing political parties offering alternatives policies, and a system of pressure groups, all help to generate a degree of discontinuity, which renders predictions about the future more uncertain. For a business, such uncertainty can create not only opportunities but also a degree of risk which will often be an important influence on its decisions. Third, it is important to emphasise that political influences are not restricted to national boundaries – a point emphasized by the increasing importance of international and supranational groupings such as the G7 nations, EU, GATT etc. These external politicoeconomic influences form part of the environment in which a country’s governmental institutions take decisions and their impact on domestic policy and on business activity can often be fundamental. Fourth, the precise impact of political factors on a business tends to vary to some degree according to the type of organization involved. Multinational corporations – will be more concerned with questions such as the stability of overseas political regimes than the small
local firm operating in a localized market, where the primary concern will be with local market conditions. Finally, it needs to be recognized that businesses are not merely reactive to changes in the political environment but they can also help to shape the political context in which they operate and can influence government decisions-makers, often in a way which is beneficial to their own perceived needs. POLITICAL SYSTEMS The nature of Political Activity: It is the process involved in arriving at a solution to a problem, where a conflict of opinion occurs, that are the very essence of the political activity. Politics, in short, is concerned with those processes which help to determine how conflicts are contained, modified, postponed or settled, and as such can be seen as a universal social activity. Individuals often talk of ‘office politics’ or the ‘politics of the board room’ or the ‘mediating role’ played by a parent in the event of a family dispute. For most individuals, however, the term ‘politics’ tends to be associated with activities at state level, where the resolution of conflict often involves large numbers of people and may even involve individuals in other states. Given the scale and complexity of the modern state, the problems requiring solutions can often be acute and chronic. Solving those problems tends to be seen, as the function of government. How governments exercise their power and the ideological foundations on which this is based, helps to indicate the nature of the political system and its likely approaches to the resolution of conflicts. Authoritarian Political Systems: Political systems can be seen to range across two extremes, on the one hand, “authoritarian’ and on the other ‘democratic’. In an authoritarian political system the disposition is to settle conflicts through the enforcement of rules, regulations and orders by an established authority. This authority may be an individual (e.g. a monarch or the other powerful individual) or a group of individuals (e.g. a political party or military junta) who may have assumed political power in a variety of ways (e.g. by birth, election or coup). Monopolising the process altogether and permitting no opposition to occur. Here society is often described as being ‘totalitarian’. Democratic Political System In a democratic political system, the assumption is that as far as possible conflicts should be resolved by rational discussions between the various parties concerned, with the final solution being accepted voluntarily by all participants. Given the complexity of modern states, conflict resolution is achieved indirectly through a system of political representation and responsibility. Under such a system, the wishes and views of
individuals are said to be represented in an established authority (e.g. government) that has normally be chosen by the people and which is accountable (responsible) to them at regular intervals through a variety of mechanisms, including regular and free elections shown in the following figure. Make laws/decisions On behalf of
The people (electorate)
The government
Choose members of Figure: Representative democracy Democratic Institutions and Processes The democratic approach to government implies the existence of a complex array of institutions and processes through which the wishes of the people are articulated and carried out. Foremost among these would normally be: 1. A system of competing political parties 2. A system of regular and free elections based on universal adult suffrage 3. An independent judiciary 4. Mechanisms for articulation of sectional interest (e.g. pressure groups) 5. A powerful and elaborate system of political communications, independent of government control. 6. Habitual processes of consultation, bargaining, explanation, education, compromise, and so on. 7. Freedom of opinion, expression, organization, movement and so on. 8. Respect for minority views
Political Institutions in Democratic States In a democratic political system, then, one would expect to find institutional arrangements. Typically such arrangements would include: 1. An electoral system which provided for the popular election of part, if not all, of the government. 2. Competing political parties seeking to win power in government by providing candidates for election by people. 3. A representative legislative assembly, responsible for making laws and for exercising some control over the executive branch of government. 4. An executive, usually with one person at the head, responsible for the formulation and implementation of government policies and laws. 5. An independent judicial system to interpret the law and to adjudicate in the event of dispute. 6. Groups and individuals organized to bring pressure to bear on government or parties or the people in pursuit of particular ideas or interest. An illustration of how some of these elements can combine to provide democratic approach to government is shown by the simplified model of the UK political system in the following figure. Electorate
Electoral System
Political parties
Pressure Groups
Parliament (the legislature)
Government
Key: Flow of representation Flow of responsibility Pressure group influence Other democratic countries have similar institutional arrangements, usually dictated by history, custom and constitutional developments. What these examples clearly illustrate is how representation basically flows from people to government, while responsibility flows from government to people. Democracy tends to incorporate a system of ‘checks and balances’ which prevents an elected government from exercising complete authority over every aspect of daily life.
A Democratic Political System in Action: UK Government The three main elements of UK government are: 1. The Legislature
2. The Executive, and 3. The Judiciary 1. The Legislative branch of government: Legislature – representative of the people and responsible for making laws – is an important component of a democratic system of government. MPs are directly elected by their constituents and one of the MP’s main roles is to represent the constituency for the period between general elections. Individuals can discuss their problems and views with their representatives, MPs also speak on constituency matters in Parliament, frequently raise questions which require answers from government ministers, and generally scrutinizing government proposals for any potential effects they may have on the constituency. Parliament also provides opportunities for the people’s representatives to scrutinize and, where necessary, to criticize and challenge the decisions of government. Primary role is to scrutinize the work of government departments and other state agencies. Such committees – chaired by both government and opposition back benchers – are able to question ministers and civil servants, call for departmental papers, cross-examine experts from outside government, and generally investigate the work of the executive. The role of opposition parties remains a vital component of democracy and helps to provide a curb on unlimited government action. 2. The Executive branch of government: Putting laws and policies into effect is formally the work of the executive. This role is carried out by a wide variety of institutions and agencies that are part of the machinery of government. These include the Cabinet, government departments, local authorities, nationalized industries, health authorities and a large number of other quasi autonomous national government agencies. The core of the executive is Cabinet, headed by the Prime Minister. Prime Minister is the leader of the government party, head of the government and head of the cabinet. Prime Minister’s powers include among others are: a. choose members of the cabinet b. choose other non-cabinet ministers c. promote, demote or dismiss ministers d. appoint individuals to chair cabinet committees e. appoint top civil servants f. confer certain appointments and titles; and g. determine the date of the general election within the five year term office The cabinet is responsible for directing and coordinating the work of the whole executive machine. Its functions include:
a. Making decisions on the nature and direction of government policy; including public expenditure, economic policy, defense, foreign relations, industrial policy and so on. b. Overseeing and co-ordinating the administration of government. c. Arbitrating in the event of disputes between ministers or departments. d. Discussing, deciding and generally directing the government’s legislative programme, including laws relating to business. A large part of this work, of course, is carried out using a system of committees and subcommittees, which are comprised of individuals chosen by the prime minister and which are supported by a powerful secretariat headed by the cabinet secretary. Much of the day to day work of central government is carried out in vast and complex administrative structure called government departments. Most government departments are headed by cabinet ministers and include other ministers outside the cabinet who have been appointed by the prime minister. Together these ministers constitute the political executive answerable to the parliament through the various mechanisms referred to a above. Ministers are assisted in their work by permanent officials, known as civil servants or as bureaucrats, many of whom have spent a large part of their working lives in the government machine. Whereas ministers are politicians, civil servants are administrators vested formally with the task of carrying out the policies of the incumbent government, irrespective of their own political views and preferences.
4. The Judicial branch of Government: The third arm of government, the judiciary – comprising the judges and the courts – is formally separate from the independent of parliament and the government. The role of the judiciary is to put into effect the laws enacted by parliament and to keep the government within the limits of its powers as laid down in the statutes and in common law, as interpreted by the judiciary.
The role of Political Parties and Pressure Groups: Democratic government is founded on a party system, although the nature of the system and the influence of political parties in government varies from country to country. In democratic politics, parties compete for political power in an election based representative system. To do this they must attract members, choose political candidates, produce leaders, establish a structure and develop a program of policies which they hope will appeal to voters in sufficient numbers to allow the party to form part, and preferably the whole, of the elected government. Unlike political parties, pressure groups do not normally seek political office. They are, in effect, groupings of like minded people who have voluntarily joined together to try to influence government thinking and policies and to represent the interests of their members. Such groups tend to be divided into two main kinds”
1. Interest groups or protective groups, which protect the interest of a particular section of the community, such as trade unions or professional association. 2. Cause groups or issue groups, which promote a particular cause such as nuclear disarmament. Pressure groups provide governments with detailed information on specific areas of everyday activity without which rational decision making would be difficult. They also fulfil a number of other important functions in a democratic system, including: a. Helping to defend minority interests. b. Providing for continuity in communications and consultation between the governors and the governed between elections. c. Assisting in the implementation of government policies and legislation. Examples of such groups include federations, chambers of commerce and trade unions. It is common is democratic systems for certain groups to be consulted at some stage during the policy process. Pressure groups can use a variety of methods to attract support for their cause or to protect the interests of their members. These range from direct consultation, negotiation and bargaining with decision makers, to marches, strikes, disruption and other forms of demonstrative action designed to attract media attention in the hope of gaining public support. Because of the complexity of the political system, groups often find it both necessary and advantageous to operate at a variety of levels in the hope of building a coalition of support shown in the following figure. Government decisions Endorses Electorate
Parties
Parliament
Government
Pressure groups Patterns of attempted influence Figure: Pressure group and the democratic system
Supranational Government Decisions and law affecting business activity are increasingly being made at supranational as well as national and subnational levels. Nowhere is this more evident than in western Europe, where the influence of the EU is profound. As a significant part of the political environment of the major world economies, the EU deserves special
consideration, particularly since its decisions often have global as well as the regional consequences – affecting not only firms within the member states, but also businesses and governments trading with these states both directly and indirectly.
A Model of Policy Process Here we shall discuss the process of government decision making in democratic systems. (Figure below shows this) Government like firms, are organizations which transform inputs into output and they do so in an environment largely the same as that which confronts other types of enterprise. Like other organizations, government is a user of resources, especially land, labor, capital, finance and expertise, but in addition all governments face political demands and supports when considering their policy options. Political demands – including those directly or indirectly impinging on business activity – becomes translated into action through a variety of mechanisms, including electoral system, party activity, pressure group influence etc. The supports of the political systems are those customs, conventions, rules, assumptions and sentiments which provide a basis for the existence of the political community and its constituent parts and thus give legitimacy to the actions and existence of the incumbent government. The outputs of the political system vary considerably and range from public goods and services to rules and regulations and transfer payments (i.e. where the government acts as a reallocator of resources as in the case of the provision of state benefits) Environmental Influences Inputs: Demands Supports Resources
output: Government
Policy statements Rules and regulations Public goods and services Transfer payments
Figure: Government and its Environment
Make laws/decisions On behalf of
Outcomes
The people (electorate)
The government
Choose members of Figure: Representative democracy Electorate
Electoral System
Political parties
Pressure Groups
Parliament (the legislature)
Government
Key: Flow of representation Flow of responsibility Pressure group influence
Government decisions Endorses Electorate
Parties
Parliament
Government
Pressure groups Patterns of attempted influence Figure: Pressure group and the democratic system
Environmental Influences Inputs: Demands Supports Resources
output: Policy statements Rules and regulations Public goods and services Transfer payments
Government
Outcomes
Figure: Government and its Environment
Lecture # 3 The Macroeconomic Environment Business organizations operate in an economic environment which shapes and is shaped by their activities. In market-based economies this environment comprises variables which are dynamic, interactive and mobile, and which, in part, are affected by government in pursuit of various roles in the economy. As a vital component in the
macroeconomy, govt exercises a significant degree of influence over the flow of income and hence over the level and pattern of output by the public and private sectors. Other key influences include a country’s financial institutions and the international economic organizations and groupings to which it belongs or subscribes.
Introduction: An understanding of the overall economic context within which businesses operate and its core values and principles is central to any meaningful analysis of the business environment. Three further points are worth highlighting. First, business activity is not only shaped by the economic context in which it takes place, but helps to shape that context; consequently the success or otherwise of govt economic policy depends to some degree on the reactions of both the firms and markets (e.g. stock market) which are affected by govt decisions. Second, economic influences operate at a variety of spatial levels and govts can find that circumstances largely or totally beyond their control can affect businesses either favorably or adversely. Third, the economic influence of industry and commerce can be considerable and this ensures that business organizations – both individually and collectively – usually constitute one of the chief pressure groups in democratic states.
ECONOMIC SYSTEMS The concept of economic scarcity: Like politics, the term economic tends to be used in a variety of ways and contexts to describe certain aspects of human behavior, ranging from activities such as producing, distributing and consuming, to the idea of frugality in the use of a resource. Economists argue that whereas needs and wants are finite and accordingly no society at any time has the capacity to provide for all its actual or potential requirements. The inability of govts to provide instant health care, the best roads, education, defence, railways, and so on, at a time and place and of a quality convenient to the user. This being the case, choices have to be made by both individuals and society concerning priorities in the use of resources, and every choice inevitably involves a sacrifice. Economists describe this sacrifice as the opportunity cost or real cost of the decision that is taken. From a societal point of view the existence of economic scarcity poses three problems concerning the use of resources: 1. What to use the available resources for? That is, what goods and services should be produced with the resources? 2. How best to use those resources? For example, in what combinations, using what techniques and what methods? 3. How best to distribute the goods and services produced with them? That is, who gets what, how much and on what basis?
In practice, these problems tend to be solved in a variety of ways, including barter, price signals and the market, queuing and rationing. Other main approach to resource allocation tends to predominate and this allows analytical decisions to be made between different types of economic system.
The Centrally Planned Economy In this type of economic system most of the key decisions on production are taken by a central planning authority, normally the state and its agencies. Under this arrangement, the state typically: a. owns and/or control the main economic resources; b. establishes priorities in the use of those resources; c. sets output targets for businesses which are largely under state ownership and/or control; d. directs resources in an effort to achieve these predetermined targets; and e. seeks to co-ordinate production in such a way as to ensure consistency between output and input demands. The fact that an economy is centrally planned does not necessarily imply that all economic decisions are taken at central level; in many cases decision making may be devolved to subordinate agencies; including local committees and enterprises.
The Free Market Economy The free market (or capitalist) economy stands in direct contrast to the centrally planned system. The key features of this type of economic system are as follows: a. resources are in private ownership and individuals owning them are free to use them as they wish. b. Firms, also in private ownership, are equally able to make decisions on production, free from state interference. c. No blueprint (or master plan) exists to direct production and consumption. d. Decisions on resource allocation are the result of a decentralized system of markets and prices, in which the decisions of millions of consumers and hundreds of thousands of firms are automatically co-ordinated. e. The consumer is sovereign, i.e. dictates the pattern of supply and hence the pattern of resource allocation. In short, the three problems of what to produce, how to produce and how to distribute are solved by market forces. The diagram below illustrates the basic operation of a market economy. In essence individuals are owners of resources (e.g. labor) and consumers of products; firms are users of resources and producers of products. What products are produced – and hence how resources are used – depends on consumers, who indicate their demands by purchasing (i.e. paying the price) or not purchasing, and this acts as signal to producers to acquire the resources necessary (i.e. pay the price) to meet the preferences of consumers. If consumer-demands change, this will cause an automatic reallocation of resources, as firms respond to new market conditions.
Consumers (individuals)
Supply
Demand
Income
Expenditure
Market for resources (with prices)
Market for products (with prices)
Expenditure
Income
Demand
Supply
Producers (firms)
Figure: The Market Economy The distribution of output is also determined by market forces, in this case operating in the markets for productive services. Individuals supplying a resource (e.g. labor) receive an income (i.e. price) from the firms using that resource and this allows them to purchase goods and services in the markets for products, which in turn provides an income for firms that can be spent on the purchase of further resources. Politico-economic Synthesis The economic problem of resource allocation, clearly has a political dimension, given its focus on the ownership, control and use of wealth-producing assets within society. This allows link to be made between a country’s chosen economic system and its political regime. Political system can be characterized as ranging from democratic to authoritarian, depending on the degree of public involvement in decision making process. Similarly economic systems can be seen to range from free market to planned, according to the
level of state intervention in the process of resource allocation. This two dimensional model thus provides for four major combinations of politico-economic systems, ranging from democratic-free-market on the one hand to authoritarian-planned on the other.
The Macroeconomy Levels of Analysis: Economics is concerned with the study of how society deals with the problem of scarcity and the resultant problems of what to produce, how to produce and how to distribute. Within the broad framework the economist typically distinguishes between two types of analysis” 1. Microeconomic analysis, which is concerned with the study of economic decision taking by both individuals and firms. 2. Macroeconomic analysis, which is concerned with the interactions in the economy as a whole. 1. The microeconomic approach shows how individual consumers in the market might be affected by a price change. This analysis could be extended to an investigation of how the total market might respond to a movement in the price, or how a firm’s decisions on supply are affected by changes in wage rates or production techniques or some other factor. 2. Macroeconomics recognizes the interdependent nature of markets and studies the interaction in the economy as a whole, dealing with such questions as the overall level of employment, rate of inflation, the percentage growth of output in the economy and many other economy-wide aggregates.
The Flows of Economic Activity: Economic activity can be portrayed as a flow of economic resources into firms, which are used to produce output for consumption, and a corresponding flow of payments from firms to the providers of resources, who use them primarily to purchase the goods and services produced. These flows of resources, production, income and expenditure accordingly represent the fundamental activities of an economy at work. Figure below illustrates the flow of resources and of goods and services in the economy. Private domestic Consumption Government
Consumption Flows of Resources (e.g. labor)
Firms
Flows of goods and services
Consumption Foreign Consumption
Capital Formation Figure: Real flows in the economy In effect, firms use economic resources to produce goods and services, which are consumed either by private individuals (private domestic consumption) or government (government consumption) or by overseas purchasers (foreign consumption) or by other firms (capital formation). This consumption gives rise to a flow of expenditures that represents an income for firms, which they use to purchase further resources in order to produce further output for consumption. Changes in Economic Activity: The level of spending by consumers on goods and services produced by indigenous firms is influenced by a variety of factors. For a start, most households pay tax on income earned which has the effect of reducing the level of income available for consumption. Added to this, some consumers prefer to save (i.e. not spend) a portion of their income or to spend it on imported products, both of which mean that the income of domestic firms is less than it would have been had the income been spent with them. Circumstances such as these represent what economists call a leakage. Fluctuations in the level of economic activity are the result of changes in a number of variables, many of which are outside the control of firms or governments. Some of these changes are autonomous (i.e. spontaneous), as in the case of an increased demand for imports, while others may be deliberate or overt, as when the govt decides to increase its own spending or to reduce taxation in order to stimulate demand. Equally, from time to time an economy may be subject to external shocks, such as the onset of recession among its principal trading partners or a significant price rise in a key commodity (e.g. the oil price rise), which can have an important effect on internal income flows. Taken together, these and other changes help to explain why demand for goods and services constantly fluctuates and why changes occur not only in an economy’s capacity to produce output, but also in its structure and performance over time.
Government and the Macroeconomy: Objectives The link between business activity and spending is clear to see. This spending comes from consumers, firms, governments and external sources and collectively can be said to
represent total demand in the economy for goods and services. Governments have a crucial role to play in shaping demand, not only in their own sector but also on the market side of the economy. Govt policies on spending and taxation or on interest rates clearly have both direct and indirect influences on the behavior of individuals and firms, which can affect both the demand and supply side of the economy in a variety of ways. 1. Controlling Inflation: Inflation is usually defined as an upward and persistent movement in the general level of prices over a given period of time; it can also be characterized as a fall in the value of money. For governments of all political complexions reducing such movements to a minimum is seen as a primary economic objective. Rising price levels can have serious consequences for the economy in general and for businesses in particular, and that is why govt has concern about inflation. From an international competitive point of view, such an occurance, if allowed to continue unchecked, could be disastrous for both firms and the economy. 2. Economic Growth: Growth is an objective shared by govts and organizations alike. For govts, the aim is usually to achieve steady and sustained levels of noninflationary growth, preferably led by exports. Exactly what constitutes desirable levels of growth is difficult to say, except in very broad terms. If given a choice, govts would basically prefer: a. steady levels of real growth, rather than annual increases in output which vary widely over the business cycle; b. growth rates higher than those of one’s chief competitors; and c. growth based on investment in technology and on increased export sales, rather than on excessive govt spending or current consumption. Where growth prospects for the economy look good, business confidence tends to increase, and this is often reflected in increased levels of investment and stock holding and ultimately in levels of employment. 3. Reducing Unemployment: Basic aim of govt should be to reduce unemployment to a level which is both politically and socially acceptable. The broader social and economic consequences of high levels of unemployment are well documented: it is waste of resources, it puts pressure on the public services and on the Exchequer. Its implication for businesses: high level of unemployment implies a pool of labor available for firms seeking workers, generally at wage levels lower than when a shortage of labor occurs. It can also give rise to a fall in overall demand for goods. 4. A Favorable Balance of Payments: A country’s balance of payments is essentially the net balance of credits (earnings) and debits (payments) arising from its international trade over a given period of time. Where credit exceeds debits a balance of payments surplus exists; the opposite is described as a deficit. Understandably govts tend to prefer either equilibrium in the balance of payments or surpluses. 5. Controlling public borrowing: Most govts face annual budget deficits rather than budget surpluses and hence have a public sector requirement. Large scale and persistent deficits are generally seen as a sign of an economy facing current
and future difficulties which require urgent govt action. Controlling public borrowing is best tackled by restraining the rate of growth of public spending rather than by increasing revenue through changes in taxation, since the latter could depress demand. 6. A Stable exchange rate: A country’s currency has two values: an internal value and an external value. Internally, its value is expressed in terms of the goods and services it can buy and hence it is affected by changes in domestic prices. Externally, its value is expressed as an exchange rate which governs how much of another country’s currency it can purchase. Fluctuations in external value of a currency will influence the price of imports and exports and hence can affect the trading prospects for business, as well as country’s balance of payments and its rate of inflation. Govts prefer exchange rates to remain relatively stable.
Government and the Macroeconomy: Policies Government intervention usually takes three forms viz. fiscal policy, monetary policy and direct controls. 1. Fiscal Policy: each year govt raises and spend huge amounts of money. Fiscal policy involves the use of changes in govt spending and taxation to influence the level and composition of aggregate demand in the economy and, given the amounts involved, clearly has important implications for business. Reduction in taxation and/or increases in govt spending will inject additional income into the economy and will, via the multiplier effect, increase the demand for goods and services, with favorable consequences for business. Reduction in govt spending and/or increases in taxation will have the opposite effect, depressing business prospects and probably discouraging investment and causing a rise in unemployment. Fiscal changes can be used to achieve specific objectives, some of which will be of direct or indirect benefits to the business community. Reduction in taxes on company profits and/or increase in tax allowances for investment in capital equipment encourage business to increase investment spending. In considering the use of fiscal policy to achieve their objectives, govts tend to faced with a large number of practical problems that generally limit their room for maneuver. Boosting the economy through increases in spending or reductions in taxation could cause inflationary pressures, as well as encouraging an inflow of imports and increasing the public sector deficit, none of which will be welcomed by entrepreneurs. Govt decision makers are politicians who need to consider the political as well as economic implications of their chosen courses of action. 2. Monetary Policy: Monetary policy seeks to influence monetary variables such as the money supply or rates of interest in order to regulate the economy. Changes in interest rates have implications for business activity. Lower interest rates not only encourage firms to invest, but also encourage consumption as disposable incomes
rise. Rising interest rates tends to have opposite effect – causing a fall in consumption and deferring investment because of the additional cost of borrowing. Govt is able to manipulate monetary variables in a variety of ways, including taking action in the money markets to change interest rates and controlling its own spending to influence money growth. 3. Direct controls: Fiscal and monetary policies currently represent the chief policy instruments used in modern market economies. Govts, however, also use a number of other weapons from time to time in their attempts to achieve their macroeconomic objectives. Examples of such policies include: a. Incomes policies, which seek to control inflationary pressures by influencing the rate at which wages and salaries rise. b. Import controls, which attempt to improve a country’s balance of payments situation, by reducing either the supply of, or the demand for, imported goods and services. c. Regional and urban policies, which are aimed at alleviating urban and regional problems, particularly differences in income, output, employment, and local and regional decline.
The Role of Financial Institutions Interactions in the macroeconomy between govts, businesses and consumers take place within an institutional environment that includes a large number of financial intermediaries. These range from banks and building societies, insurance companies, investment trusts and issuing houses, all of which provide a number of services of both direct and indirect benefit to businesses. The Role of Central Bank: central bank exercises overall supervision over the banking sector, and its activities have a significant influence in the financial markets including the foreign exchange market. International Economic Institutions and Organizations: A number of international economic institutions and organizations affect the trading environment such as EU, IMF, OECD, GATT, WTO etc.. Their roles also be known to businesses.
Evening MBA Program Department of Marketing, University of Dhaka Course # MKT – 510 (Business Environment) First Mid-Term Examination Time: 50 minutes Date: 15.01.2008 Full Marks: 15 (N.B.: Questions Carry equal marks. Answer any one of the following questions.) Q.1.a. Why it is said that businesses are involved in the transformation process? b. Show how a business organization is influenced by the environmental influences in the transformation process of inputs into outputs. c. Give an overview of the ‘contextual’ environment of business.
Q.2.a. Discuss briefly the two main political systems. b. Name the democratic institutions, processes, and political institutions that prevail in democratic states. c. Given an idea about the legislative branch of government under democratic political system.
Evening MBA Program Department of Marketing, University of Dhaka Course # MKT – 510 (Business Environment) First Mid-Term Examination Time: 50 minutes Date: 15.01.2008 Full Marks: 15 (N.B.: Questions Carry equal marks. Answer any one of the following questions.) Q.1.a. Why it is said that businesses are involved in the transformation process? b. Show how a business organization is influenced by the environmental influences in the transformation process of inputs into outputs. c. Give an overview of the ‘contextual’ environment of business. Q.2.a. Discuss briefly the two main political systems. b. Name the democratic institutions, processes, and political institutions that prevail in democratic states. c. Given an idea about the legislative branch of government under democratic political system.
Lecture # 4 People, Technology and Natural Resources The aim of this topic is : 1. to be aware of the importance of people, technology and natural resources to business. 2. to understand what determines the quantity and quality of labor in the economy 3. to recognize the effect of technological change on business 4. to understand the main issues affecting natural resources Introduction:
The main aim of business is to produce goods and services that people want. This production cannot take place without people, technology and natural resources. In economics these three are called the factors of production and are categorized under the headings of labor, capital and land. People: are important in the economy as both producers and consumers of goods and services. People are most important input into the production process. Therefore the quantity and quality of people available in an economy will have a considerable impact upon economy’s ability to produce. The quantity of people available for work depends upon a variety of factors: a. the size of the total population; b. the age structure of the population; c. the working population; d. the length of working week; and e. the wage level. As well as the quantity of labor, productivity is also affected by its quality. Quality depends on: a. education and training; b. working conditions; c. welfare services (e.g. national insurance schemes, NHS etc.) d. motivation; and e. the quality of other factors of production. The population of Bangladesh: About 150 million. Population size and growth of population depends on many things such as: birth rate, the death rate and net migration rate. a. The birth rate: The birth rate is the number of live births per thousand of the population in a given year. There has been a trend towards smaller families as people become better off and as health improves and death rate falls. The reasons are: i. Availability of contraception ii. Both men and women are marrying later and either choosing not to have children or to have them later in life. iii. There has also been a change in the attitude towards women and work; a higher proportion of women work. b. The death rate: This is the number of deaths per thousand of a population in a given year. Over the last 100 years there has been a dramatic fall in the death rate. The death rate has fallen because of the following factors: i. increased medical knowledge; ii. more health care; iii. better food, housing and clothing; iv. better educated population; v. better working conditions;
vi. vii.
better sanitation conditions; and a decline in infant mortality.
c. Migration: people leave (or emigrate from) a country and others enter (or immigrate into) a country. The balance between these will be the level of net migration. If more are entering than leaving there will be net immigration and population size will be increasing. If more are leaving than entering there will be net emigration and population size will be falling. The age distribution of the population: The most important factors which have influenced the age structure of the population are the decline in the death rate, which has resulted in a greater number of old people in the population, and changes in the birth rate. There have been quite marked changes in birth rates, which have affected the age structure of the population. Average age is increasing. This has a number of implications for the economy: a. there will be a changes in the patterns of demand for goods and services b. as retired people increase, the burden on those in work will be increased to pay for the support services like health care and pensions c. there will be an impact upon mobility of labor force as older people are less mobile than younger people. The sex distribution of the population: The sex distribution of population has important implications for the make up of the working population because of the differing activity rates of the sexes. The workforce: The workforce is the number of people who are eligible and available to work and offer themselves up as such. The size of the workforce will be determined by the age at which people can enter employment. The importance of the workforce is twofold: it produces the goods and services needed in the economy; and through the payment of taxes it supports the dependent population (i.e., very old and very young). The present trend has been for increased participation rates for women over time as families have become smaller and because of these changing role of women in society as a whole. The length of the working week: The average length of time for which people work is also a significant determinant of the quantity of labor that is available in an economy. Generally, the shorter the working week, the less labor that is available. Over the last 100 years, a gradual reduction in the length of working week. Wages:
It is clear that wages will affect how much people are willing to work and therefore the overall supply of labor in the economy. The demand for labor will come from the firm which wishes to produce goods and services that can be sold in the market. The demand for labor is a derived demand as the demand is derived from the demand that exists for what it produces. The supply of labor comes from people. It is equally likely that the total supply curve has the normal upward slope, indicating that as the wage rate increases the supply of labor increases. It is argued that as the wage rate increases past a certain level people would prefer to substitute leisure for wages. In a free market, the wage rate and the amount of labor being used will be determined by the forces of demand and supply. Trade unions and wages: One of the main aims of union has been to counteract, and protect their members from, the power of the employer. As far as wages are concerned, this has been achieved through collective bargaining. It is argued that the activities of trade unions through collective bargaining have served to increase the wage rate above its equilibrium level and thus cause unemployment. The above are some of the factors that determine the number of people who are available in an economy for producing goods and services. But it is not just the quantity of labor but also its quality that is important. The quality of workforce is determined by many factors already mentioned, but most important by the level of education and training of the workforce.
TECHNOLOGY Is defined as the ‘sum of knowledge of the means and methods of producing goods and services. It is increasingly science based, encompassing things like chemistry, physics and electronics, and refers to the organization of production as well as the actual techniques of production itself. Technological change leads to the introduction of new products, changes in the methods and organization of production, changes in the quality of resources and products, new ways of distributing the product, and new ways of storing and disseminating information. Technology has a very big impact upon the world of business in all of these areas and has an important effect on the level and type of investment that takes place in an economy and therefore the rate of economic growth. Technological change: There have been massive changes in technology in the past couple of years. Few of these and their impact upon business and economy are as follows: a. Information technology: Developments in IT have had the effect of transforming existing business activities as well as creating entirely new ones. There are also advances in the computing area such as the development of new languages and AI. Advances in IT have many impacts upon business. They are creating new products and making old products more profitable to produce through things like computer-aided-design. The effects they are having on the different functions carried out by businesses can be seen:
Administration: The administration of businesses has been revolutionized by the introduction of IT. Communication: This has been eased by the introduction of fax machines and email, video conferencing and has contributed to change in working practices by making it possible for people to work anywhere. Production: The use of CAD will shorten the design and planning phase of the product and shorten the life cycle of the product. Storage and distribution: The computerization of stock control has had implications for the storage requirements of firms. It has made implementation of the just-in-time stock control possible. Electronic Funds Transfer at point of sale (EFTPOS): This system has also had a revolutionary effect in the area of retailing. The internet: The potential for internet is enormous. b. Other Technological Developments: New materials: such as technical ceramics and many more. Biotechnology: It will have impact on many fields such as robots which can imitate the activity of human brain. Energy: The kind of developments that can take place in this field are the use of superconductors to transport electricity and research which might make solar energy a viable source of energy. b. Technology and Investment: The second input into the production process after people is capital. Capital is usually divided into working capital and fixed capital. Capital is a stock of goods used in the production process, a stock which is continually being used and therefore needing to be replaced. This stock provides a flow of services for the production process. The increase in the stock of capital over time is called investment. Investment will serve to increase the productive potential of the firm and the economy. Investment usually refers to the purchase of new assets, as the purchase of second-hand assets merely represents a change in ownership and therefore does not represent a change in productive potential. Investment is important for the firm as it is a mechanism for growth; it is an integral part of the innovative process and can have disastrous results for a firm if an investment gets wrong. Generally the higher the level of investment in a country the higher will be the level of economic growth. The level of investment is affected by the state of the economy. There is an important relationship between investment and technological change which runs in both directions. Investment can form the basis for improvements in technology while improved
technology which brings about new ways of producing goods will lead to a greater investment. c. Innovation and Technology: There are two types of innovation that can occur as a result of technological change: product innovation and process innovation. Product innovation is the development of new products, like microprocessors, which will have far reaching effects on business. New products impact upon the industrial structure of a country, as new industries grow and old industries disappear. This in turn will lead to changes in the occupational structure of the workforce. Process innovation refers to changes that take place in the production process, like the introduction of assembly-line production in the manufacture of cars. Not all innovation is technological in nature; for example, changes in fashion in clothing d. Research and Development: Most, but not all, technological changes have occurred through the process of research and development. Research can be theoretical or applied, and development refers to the using of research in the production process. Most research and development carried out by private companies is directed towards applied research and development. It is designed to develop new products and production processes which will render production more profitable. The spending on research and development can be protected by firms applying for patents whereby other firms have to pay to see the information and wait a specified period of time before the idea can be used. e. Limits to Technological Change: Technological change has many effects on the economy and the environment and if uncontrolled can lead to problems, like high levels of unemployment or exhaustion of natural resources. For these and other reasons the scale of technological change needs to be controlled. Natural Resources In economics, natural resources are put under the heading of land as a factor of production. It would include all natural resources like the soil, minerals, oil, forests, fish, water, the sun, and so on. Although the area of land in a country is fixed, land as a factor of production is not completely fixed in supply as more land can be made available through land reclamation schemes and better irrigation. The productivity of agricultural land can be increased by the use of fertilizers. Our natural resources are in finite supply. Natural resources are renewable and nonrenewable. Protection of the Environment: Increased knowledge of the effects of depletion of natural resources has led to increased environmental awareness amongst the population. There has been an increased interest in conservation and recycling and the search for alternative forms of energy. This change in public opinion has already had a major impact on the way in which business operates and is likely to have been bigger effects. One proposal is that there should be a packaging levy designed to reduce the amount of packaging used and encourage the use of environmentally friendly material in packaging.
Synopsis This chapter looked at the three main inputs into the production process: people, technology and natural resources. People are important in two ways: they are the producers of goods and services, and also the consumers of goods and services. The quantity of human resources available in an economy depends upon things like total population size, participation rates, length of working week and wages. The quality depends upon such things as the level of health care, education and training. Last 50 years there has been the massive changes in technology that have had an enormous impact upon business, resulting in new products and markets and new methods of production and distribution. As far as natural resources are concerned, the traditional view was that they were fixed in supply and therefore did not receive much consideration. However, with increased environmental awareness there is growing concern that this is not the case and that many of our natural resources are non-renewable and therefore need to be conserved.
LECTURE # 5 The Legal Environment Businesses, like individuals, exist and carry on their activities within a framework of law which derives from custom and practice, the judicial decisions of the courts and from statutes enacted by governments. This legal environment not only constrains and regulates a firm’s operations, but also provides an enabling mechanism through which it is able to pursue its objectives, particularly the achievement of profits through entrepreneurial activity.
Introduction: It is almost universally accepted that for a society to exist and function in an ordered way a set of rules is required to regulate human behavior. This framework of rules and the institutions through which they are formulated and enforced represent what is normally understood as the “law”, which invariably evolves over time in response to changing social, economic and political circumstances. Classification of law Laws relating to both individuals and organizations can be classified in a number of ways: International and national, public and private, criminal and civil. Public and private law: Public law is the law which concerns the state, whether in international agreements or disputes or in the relationship between the state and the individual. Thus public law consists of international treaties and conventions, constitutional law, administrative law and criminal law. Private law is law governing the relationships between individuals and comprises laws in respect of contract, tort, property, trusts and the family. Criminal Law: relates to a legal wrong (criminal offence) – a breach of a public duty, punishable by the state on behalf of a society. Tort: is a civil wrong other than a breach or contract or a breach of trust and is a duty fixed by law on all persons (e.g. road users have a duty in law not to act negligently). The law of tort, therefore, is concerned with those situations where the conduct of one party threatens or causes harm to the interests of another party and the aim of the law is to compensate for this harm. The most common torts are negligence, nuisance, defamation and trespass. Trusts: a trust is generally defined as an “equitable obligation imposing on one or more persons a duty of dealing with property, over which they have control, for the benefit of other persons who may enforce the obligation. Minors may not hold legal estates, so their interests must be protected by a trust, administered by an individual or an institution.
SOURCES OF LAW Laws invariably derive from a number of sources including (a) custom, (b) judicial precedent, (c) legislation, and (d) international and supranational bodies (e.g. E.U.). (a) Custom: Early societies developed particular forms of behavior (or ‘customs’) which came to be accepted as social norms to be followed by the members of the community to which they applied. Many of these customary rules ultimately become incorporated into a body of legal principles known as the common law. Occasionally, however, they are recognized by the courts as being of local significance and may be enforced accordingly as exceptions to the general law (e.g. concerning land usage). (b) Judicial precedent: Much of law is derived from judicial precedent (previous decisions of the courts). In essence, judicial precedent is based on the rule that the previous decisions of a higher court must be followed by the lower courts – hence the significance of the court structure. (c) Legislation: A substantial proportion of current law – including laws governing the operations of business organizations – derives from legislation or statute, enacted in Parliament. Apart from a limited number of bills proposed by backbench MPs private members’ bills) , the vast majority of legislation emanates from government and takes the form of Acts of Parliament. Acts of Parliament are those bills which have formally been enacted by Parliament and they represent the ‘supreme law of the land’. In addition to creating new laws, statutes may also be used to change or repeal existing laws. In some instances they may be designed to draw together all existing law or to codify it or to grant authority to individuals or institutions to make regulations for specific purposes. THE LEGAL SYSTEM: THE COURTS A country’s legal system can be said to have two main functions: (a) to provide an enabling mechanism within which individuals and organizations
can exist and operate (e.g. companies are constituted by law) and (b) to provide a means of resolving conflicts and of dealing with those who infringe the accepted standards of behavior. Court is the central element of a country’s legal system, with responsibility for interpreting the law and administering justice in democratic societies. It is worth remembering, however, that political and governmental activity take place within a framework of law. A businessman needs idea about the legal system of the country concerned. In Bangladesh there are magistrates’ court, judge court and supreme court consisting of high court division and appellate division. BUSINESS ORGANIZATIONS AND THE LAW Business organizations have been described as transformers of inputs into output in the sense that they acquire and use resources to produce goods or services for consumption. Following table illustrates all aspects of this transformation process are influenced by the law. Table showing Law and the Business Organization Business activity
Examples of Legal Influences
Establishing the organization
Company laws, partnerships, business names Planning laws, property laws, contract agency Employment laws, health & safety laws, contract, Agency
Acquiring resources Business operations
Selling output for consumption
Consumer laws, contract, agency
It is important to emphasize from the outset that the law not only constrains business activity (e.g. by establishing minimum standards of health and safety at work which are enforceable by law), but it also assists it (e.g. by providing a means by which a business unit can have an independent existence from its members), and in doing so helps an enterprise to achieve its commercial and other objectives. In short, the legal environment within which businesses operate is an enabling as well as a regulatory environment and one which provides a considerable degree of certainty and stability to the conduct of business both within and between democratic states.
Contract Law: The essentials All businesses enter into contracts, whether with suppliers or employees or financiers or customers, and these contracts will be important – and possibly crucial – to the firm’s operations. Such contracts are essentially agreements (oral or written) between two or more persons which are legally enforceable, providing they comprise a number of essential elements. These elements are: offer, acceptance, consideration, intention to create legal relations and capacity. (1) Offer: An offer is a declaration by the offeror that they intend to be legally bound by the terms stated in the offer if it is accepted by the offeree (e.g. to supply component parts at a particular price within a specified time period). This declaration may be made orally or in writing or by conduct between the parties and must be clear and unambiguous. (2) Acceptance: Just as an offer must be firm and certain, the acceptance of an offer by the person(s) to whom it was made must be unequivocal and must not contain any alterations or additions. Accordingly any attempt to alter the terms of an offer is regarded as a counteroffer and thus a rejection of the original offer, leaving the original offeror free to accept or decline as he or she chooses. While acceptance of an offer normally occurs either in writing or verbally, it may also be implied by conduct. (3) Consideration: Together, offer and acceptance constitute the basis of an agreement or meeting of minds, provided the parties are clear as to what they are agreeing about (i.e. a consensus ad idem exists). Central to this agreement will be consideration which has been defined as some right, interest, profit or benefit accruing to one party or some forbearance, detriment, loss or responsibility given, suffered or undertaken by other. (4) Intention to create legal relations: Not every agreement is intended to create a legally binding relationship. In commercial agreements, however, it is generally accepted that both parties intend to make a legally binding contract and therefore it is unnecessary to include terms to this effect.
(5) Capacity: A contract may be valid, voidable or void and one of the factors which determines this is the contractual capacity o9f the respective parties to the agreement. Normally speaking, an adult may make a contract with another adult which, if entered into freely and without any defects, and which is not contrary to public policy, is binding upon them both (i.e. valid). However, the law provides protection for certain categories of persons deemed not to have full contractual capacity (e.g. minors, drunks and mentally disordered); hence the practice by firms of excluding people under the age of 18 from offers of goods to be supplied on credit. In the case of business, legal capacity depends on the firm’s legal status. Unincorporated bodies (e.g. sole traders, partnerships) do not have distinct legal personality and hence the party to the agreement is liable for their part of the bargain. Limited companies, by contrast, have a separate legal identity from their members and hence contractual capacity rests with the company, within the limits laid down in the objects clause of its M.A. (6) Other Factors: To be enforceable at law a contract must be legal (i.e. not forbidden by law or contrary to public policy). Similarly, the agreement must have been reached voluntarily and result in a genuine meeting of minds. Consequently, contracts involving mistakes of fact, misrepresentation of the facts, or undue influence or duress may be void or voidable, depending on the circumstances. Agency As business activity has become more specialized and complex, firms have increasingly turned to outside individuals to carry out specialist functions such as freight forwarding, overseas representation, insurance broking and commercial letting. These individuals (known as agents) are authorized by individual or organization hiring them (known as the principal) to act on their behalf, thus creating an agency relationship. As in other areas of commercial activity, special rules of law have evolved to regulate the behavior of the parties involved in such relationship. In essence, the function of an agent is to act on behalf of a principal so as to effect a contract between the principal and a third party. Having established a contractual relationship between the principal and the third party, the agent
generally leaves the picture and usually has no rights and duties under the contract thus made. With regard to an agent’s specific obligations under an agency agreement, these are normally expressly stated under the terms of the agreement, although some may also be implied. The common law of agency prescribes, however, that agents: (i) Obey the lawful instruction of the principal, otherwise they may be in breach of contract. (ii) Exercise due care and skill, in order to produce a deal which is to the principal’s best advantage. (iii) Act personally, rather than delegate, unless expressly or implicitly authorized to do so. (iv) Act in good faith, thus avoiding conflicts of interests or undisclosed profits and bribes. (v) Keep proper accounts, which separate the principal’s funds from those which belong personally to the agent. Moreover, in so far as an agent is acting under the principal’s authority, the principal is bound to the third party only by acts which are within the agent’s authority to make. Law and the Consumer Existing laws to protect consumers are both civil and criminal and the relevant rights, duties and liabilities have been created or imposed by common law (especially contract and tort) or by statute. Number of acts are in practice in different countries which business people should be aware of. Some of the acts are: Sale of Goods Act, Control of Essential commodities act etc. Codes of Practice Alongside the protection provided by the law, consumers may be afforded a further measure of security when the organization they are dealing with belongs to a trade association which is operating under a code of practice (e.g. The Tour Operators Association of Bangladesh, Association of Travel Agents Of Bangladesh). In essence, codes of practice represent an attempt by trade associations to impose a measure of self-discipline on the behavior of their members by establishing the standards of service customers should expect to receive and by encouraging acceptable business practices. In addition, such codes of conduct invariably identify how customer complaints
should be handled any many offer low-cost or no- cost arbitration schemes to help settle disputes outside the more formal legal process. While codes of practice do not in themselves have the force of law, they are normally seen as a useful mechanism for regulating the relationship between business organizations and their customers. Synopsis All business activities, from the establishment of the organization through the sale of the product to the customer, are influenced by the law.
LECTURE# 6: Cultural and Social Environment Introduction: When companies develop strategies for their global markets, they need to be flexible and alert to local culture. Although there are many stories of mistakes, flubs, and failures, there are far more successes than failures. Successful business strategies reflect local customs, society, and culture.
In Britain, customers don’t like the idea of deliverymen knocking on their doors – they think it is rude. In Kuwait, pizza is more likely to be delivered to a waiting limousine than to someone’s front door. When designing a product, the style, uses, and other related business activities must be made socially and culturally acceptable (i.e. acceptable to the present society) In fact, culture is pervasive in all business activities – and a businessman’s efforts actually become a part of the fabric of culture. The manner in which people consume, the priority of needs and the wants they attempt to satisfy and the manner in which they satisfy them are functions of their culture that temper, mold, and dictate their style of living. Culture is the human-made part of human environment – the sum total of knowledge, beliefs, art, morals, laws, customs, and any other capabilities and habits acquired by humans as members of society. Culture and Its Elements: The student of business should approach an understanding of culture from the viewpoint of the anthropologist. 1. Material Culture: Technology; Economics 2. Social Institutions: Social Organization; Education; Political Structures 3. Human and Universe: Belief Systems 4. Aesthetics: Graphic and Plastic Arts; Folklore; Music, drama, and dance 5. Language All the elements are instrumental to some extent in the success or failure of a business effort because they constitute the environment within which a businessman operate. Material Culture: it is divided in to two parts, technology and economics. Technology includes the techniques used in the creation of material goods. In the U.S., Japan, Germany, or other countries with high level of technology, the general population has a broad level of technical
understanding that allows them to adapt and learn new technology easily than populations with lower levels of technology. Economics is the manner in which people employ their capabilities and the resulting benefits. Included in the subject of economics is the production of goods and services, their distribution, consumption, means of exchange, and the income derived from the creation of utilities. Material culture affects the level of demand, the quality and type of products demanded, and their functional features, as well as the means of production of these goods and their distribution. Social Institutions: They include social organization, education, and political structures that are concerned with the ways in which people relate to one another, organize their activities to live in harmony with one another, teach acceptable behavior to succeeding generations, and govern themselves. The position of men and women in the society, the family, social classes, group behavior, age groups, and how societies define decency and civility are interpreted differently within every culture. In cultures where social organizations result in close knit family units, for example, it is more effective to aim a promotion campaign at the family unit than at individual family members. Education, one of the most important social institutions, affects all aspects of the culture from economic development to consumer behavior. Humans and Universe: Within this category are religion (belief systems), superstitions, and their related power structures. The impact on religion on the value systems of a society and the effect of value systems on marketing must not be underestimated. Religion impacts people’s habits, their outlook on life, the products they buy, food they eat, clothing they wear, the way they buy them, even the newspapers they read.
Superstition plays a much larger role in a society’s belief system. Astrologers are routinely called on in Thailand to determine the best location for a structure. The Thais insist that all wood of a new house must come from the same forest, and houses should have odd number of rooms for good luck.
Aesthetics: Aesthetics are of particular interest to marketers because of their role in interpreting the symbolic meanings of various methods of artistic expression, color, and standards of beauty in each culture. Language: Marketers must have thorough understanding of language. Tambo means a roadside inn in Bolivia, Colombia, Ecuador, and Peru; in Argentina and Uruguay, it means dairy firm.
LECTURE# 7
Government and Business We are in an economy which more and more is being politically directed and ordered. ----- Louis T. Rader
Following topics will come under this chapter: 1. How much government? a. Big business and big government b. The concept of Functionalism c. The vital partnership d. The public-private corporation 2. The Role of Government: a. Setting Objectives b. Directing Resources 3. The Role of Business: a. Profit b. Product Decisions c. Assisting Government 4. Business in Politics: a. Need for business involvement b. What are proper political activities for business?
HOW MUCH GOVERNMENT? Best government is the least government. What kind and how much government intervention is appropriate? In light of today’s complex social demands the role and responsibilities of government and other major social institutions are again being reexamined.
1.a. Big business and big government: Originally the rationale for increasing government involvement in the social system was to limit and control the growth and power of big business. But business has continued to grow. So has the size and power of government. Some American businesses have incomes that exceed the gross national product of some developing countries. At the same time the federal budget is over $200 billion. The Chief Executive deals with twelve Cabinet departments, approximately fifty independent agencies, and some fifty interagency committees. Government is the biggest spender, the biggest employer, the biggest property owner, the biggest tenant, the biggest insurer, the biggest lender, the biggest borrower, the biggest customer. The govt. has grown, it has been subject to many of the same criticisms that have been directed toward big business – particularly the criticism that bigness breeds too much power. Government does exercise broad powers by which many businessmen consider to be violations of individual liberties. They condemn increasing authoritarian control by government with its restrictions and regulations. They contend that excessive government involvement in the private sector of our economy has a demoralizing effect which invites evasions of laws, destroys the innovative spirit, crushes the profit motive, and therefore dilutes the strength and vitality of the economy. Many among this group cry for a return to the good old days of laissez faire. Both business and government have grown tremendously, and they will continue to grow. But, utopian pleas to return to the ‘good old days’ will do little to develop strong business-government relationships. Those who make utopian pleas to often view government as a powerful enemy bent on destroying what is left of the free enterprise system. They want less government. These group urge more government power and more government involvement in social and economic problems. 1.b. The Concept of Functionalism: It holds that social functions should be performed by the institutions which can do them most efficiently. National defense, reclamation, and policing of activities appear to be functionally appropriate jobs for government. On the other hand, research and development, product planning, product decisions, actual production, and market innovation appear to be appropriate business functions.
In simple societies division and assignment of social functions usually appear to be uncomplicated matters, with functions relatively well defined and clearly delegated to one institution. But as societies advance economically and socially, they also become more complex, and the concept of functionalism becomes less easy to apply. New social values and philosophies are often in direct conflict with traditional, well-established values of managers in business and government, and these managers often find themselves in a kind of a social vertigo with no familiar horizons to guide them. However, within the new contingency models there is developing a reallocation of traditional functional responsibilities. Jobs which were once considered to be the domain of government are in certain instances being shifted to private business. Examples of responsibilities that have shifted from government to business are providing community services such as garbage disposal, financing highrisk minority businesses, training hard-core unemployed, and improving the quality of national waterways. Similarly, functions which were once considered to be solely business functions are now being shifted to, or al least shared by, government. Examples of functional responsibilities that have shifted from business to government are setting product standards such as automobile emission standards, enforcing product quality, and allocating productive resources. 1.c. The Vital Partnership: As our society becomes more complex and as social problems becomes more severe, there is an increasing business recognition of the need for joint action by business and government. Former U.S. Secretary of Commerce John T. Connor called this join action “THE VITAL PARTNERSHIP”. Business must become more involved in social problems. In the broadest sense the vital partnership should not be limited only to business and government. Like any other partnership, if it is to be successful, roles of partners in the vital partnership need to be clearly defined and agreed upon. While there is increasing agreement that a partnership between business and government is desirable, few seem entirely sure of what the role of each partner should be. 1.d. The Public-Private Corporation: An example of vital partnership at work is the public-private corporation. Public-private corporations are the result of attempts to identify a specific public purpose and fulfill those purposes by utilizing the resources and managerial capabilities of private
business. The major part of the operating budget comes from government sources and the balance from private sources such as foundations, corporate gifts, and individual donations. Thus the stockholders are largely the public and the board of directors is selected by the President. The major argument supporting establishment of public-private corporations is that it removes the activity from many restrictions imposed upon government managers and allows the expertise of private business to be applied to areas of public concern. 2. The Role of Government: As the social values and expectations change and as social and economic problems become broader and more complex, the roles and responsibilities of major social institutions are subject to continuing reexamination. 2.a. Setting Objectives: There is also growing agreement that the special areas of govt expertise are setting national objectives, providing political capacity to achieve objectives, providing funds, and accepting public acceptability. Other functions may be more effectively performed by other institutions. According to Peter Drucker, the proper role of govt is to formulate social objectives so that they can become opportunities, for other institutions to serve society. Except for a few instances, govt’s role is not ‘to do’, because it is generally an efficient performer. The reason why other institutions may accomplish many social functions better that govt is that a govt, by design, is a protective institution rather than a performing and creative institution. Active business executives also support the same idea. The chairman of the board of one company commented: ‘Govt must lead. But it cannot be the sole problem solver. Its role is to define problems, articuale desired results, organize, directly and indirectly, the whole potential of the society, in a coordinated effort to remake the society and save it from destroying itself.” 2.b. Directing resources: If one of the major roles of govt is to establish national objectives, how are productive resources to be channeled toward achievement of these objectives? One alternative is voluntary action on the part of both consumers and producers. Voluntarism is based on the premise that in order to achieve a new order of social want and expectations, all parties are willing to give up whatever is necessary to achieve the stated goals. Voluntarism has been only modestly successful so far, and there is little evidence that the record will improve.
A second and more realistic alternative for directing productive resources toward desired social goals is through govt actions, and this is the second major role of govt. Govt can direct productive resources through the use of several tools – taxing and spending, regulation, standards, incentive and administrative action. Standards for acceptable automobile emission levels are a good illustration of govt imposed standards leading toward national objectives. Govt should and sometimes does come to the aid of businessmen by providing research and development funds, authorizing issues of tax free bonds for pollution control purposes, and similar help. 3. The Role Of Business: Most business leaders actively support community action programs in their own communities as a means of exercising social responsibility. They view involvement in community problems as good corporate citizenship. They believe that business should be involved just as other members are involved and should cooperate with other institutions in finding solutions to problems of the local community. In cooperation with government, business has trained hardcore unemployed and supported nondiscriminative hiring. 3.a. Profit: Direct expenditure of money, by itself, on problems such as urban decay, pollution, transportation, hard-core unemployment, and poverty has done little to produce lasting solutions. Most businessmen and many govt leaders believe that these problems can be solved only by bringing to bear the research and development expertise of business along with its organizational and productive resources. These activities require a strong economic base and must be paid for from profits. 3.b. Product decisions: Closely related to producing profits is the business role of supplying society with goods and services which are consistent with changing social values. Business is being asked to provide products and services that not only satisfy consumer wants but that, at the same time, are consistent with new social values, such as ecological compatibility and consumer safety. Saying it another way, business is asked to make product decisions according to questions of not only will it sell, but is it good for the customer and society. 3.c. Assisting Government: A new role of business – a role of strengthening govt. An important role of business can be to help govt develop its
capabilities and functions. Perhaps the most urgent and essential social responsibility of business is to contribute to the building of a more adequate political structure and authority based on a clearer, more explicit, and more realistic ideology. 4. Business In Politics: Many reasons both for and against corporate involvement in politics have been advanced. Corporate political involvement enhances the quality of pluralism and provides an additional safeguard against the authoritarian potential of a mass society. 4.a. Need for business involvement: Most businessmen feel that there is an increasing need for business involvement and that business can and should influence govt wherever appropriate. Many govt leaders share the belief that business ought to participate in the political process to the fullest extent possible for the social benefit of all concerned. Most responsible businessmen view political involvement as part of corporate citizenship; i.e., because business is one of the major social institutions, it has an obligation to become involved in the political process which directs and controls forces for social well being. Others view political involvement as a necessary matter of self-interest. Still others think that business should be in politics to balance the power of other social institutions. For example, some fell that since labor is in politics as labor, business should also be in politics as business to balance the equation. Otherwise, labor’s political power may become dominant, thereby destroying pluralism. 4.b. What are Proper Political Activities for Business? Questions of business involvement in the political arena generally fall into three broad categories: FINANCIAL SUPPORT (making donations to political parties and campaign), PROVIDING INFORMATION (because of their knowledge and experience, business leaders are qualified to make judgments about business-related issues in the same way a medical doctor is qualified to make judgments about issues concerning medicine. Many businessmen feel that they can best make the business point of view known to legislators through direct correspondence.), and DIRECT INVOLVEMENT OF COMPANY PERSONNEL IN THE POLITICAL PROCESS OR LOBBYING. Lobbying refers to behavior after the election and is concerned with securing legislation favorable to a particular point of view. This is the normal
working of a pluralistic society in which society wants the viewpoints of business as well as other interest groups. Many business that cannot afford individual representatives turn to organizations such as trade associations to make their points of view known. The fundamental roles of lobbying are communication and expression of viewpoints, and getting the ears of legislators for desired purposes. Because of the special talents which business leaders have, they are often called upon to assume either political posts or leadership of a government project on a temporary basis. The important point is that, by political involvement, businessmen are often in an excellent position to influence government policy in the same way that leaders of other pluralistic groups are able to do. Both business and government need each other’s help. The strength and growth of national economy depend upon cooperation, and as society grows more complex, the need for cooperation and understanding will become more important and demanding.
Q.5. “We are in an economy which more and more is being politically directed and ordered” – Explain the statement in the light of the businesses’ interface with government.
Evening MBA Program
Department of Marketing, University of Dhaka Course # MKT – 510 (Business Environment)
2nd Mid-Term Examination Time: 50 minutes
Date: 12.02.2008
Full Marks: 15
(N.B.: Questions Carry equal marks. Answer any one of the following questions.) Q.1.a. “The main aim of business is to produce goods and services that people want. This cannot take place without people.” – Discuss the statement in the light of different dimensions of people. Q.2.a. Write short notes on “Technology” and “Natural Resources” as factors of production.
Evening MBA Program
Department of Marketing, University of Dhaka Course # MKT – 510 (Business Environment) 2nd Mid-Term Examination Time: 50 minutes
Date: 12.02.2008
Full Marks: 15
(N.B.: Questions Carry equal marks. Answer any one of the following questions.) Q.1.a. “The main aim of business is to produce goods and services that people want. This cannot take place without people.” – Discuss the statement in the light of different dimensions of people. Q.2.a. Write short notes on “Technology” and “Natural Resources” as factors of production.
Corporate Responsibility of Business and the Environment Following topics will come under this chapter: 1. Introduction
2. A move toward social concern: a. An Age of Discontinuity b. A Call for Greater Social Responsibility c. Areas of Social Responsibility (Which are expanding) 3. Business as a Part of the Larger Social System: a. A System Concept b. What is a Social System? c. Subsystems that make an Interrelated Whole d. Dynamic and Stabilizing Tendencies e. Viability f. Interface with an External Environment g. Public visibility h. Values and 4. Viewing the Whole Business System
1. Introduction: We shall start our discussion with two quotations: 1. Business leadership does not end at the plant gate, and business leaders cannot insulate themselves from those responsibilities that do not bear directly on profit. ---- Charles B. McCoy
2. What we seek is not a problem-free society but a problemsolving society. ----- Herbert D. Doan Business executives today need to think and consider things well beyond their business objective of making money. Three examples will help us to understand why and how this happen. Example 1: one wholesaling firm of a suburban Maryland community was contemplating decision as to what they should do with an alcoholic salesman whom the management earlier warned and advised him to consult community agency. But he did not see the agency rather continued drinking alcohol which seriously affected the sales of the district under him. What mgt. should do in this situation? should more corrective action be tried? If so, what action? Example 2: Due to implementation of the program change with NASA, a private contractor under NASA required to lay off around 300 men. They knew that the program change was unexpected and would materially affect the economy of a community near the work site. What standards of action should be expected of the contractor in this situation? What standards would he actually apply? Would he cause political repercussions for this sensitive govt. activity? Was this situation a joint contractor-NASA responsibility? Example 3: In Africa, GM of a British subsidiary tossed restlessly in his bed, wondering whether to reduce prices of a retail product in an overpriced, semi cartelized market. With his new production facilities he was sure he had the lowest costs in the country and could win any price war. But the questions are: how would the community and govt. react to a price war? How would his labor union react if he caused layoffs of its members in competitors’ plants? What about effects on investors in native plants of this capital-poor country if he bankrupted a few native businesses in this price war? Above three incidents are just a moment in time in a day involving thousands of similar decisions concerning business and society. Each new day brings thousands of more new decisions, and so does the next. BUSINESSMEN THROUGHOUT THE WORLD ARE BUSILY TRYING TO MAKE SOCIOECONOMIC SYSTEMS FUNCTION EFFECTIVELY,
AND THEY CONTINUALLY FACE DECISIONS INVOLVING THE SOCIAL SYSTEM OUTSIDE THE FIRM. THIS “WORLD BEYOND THE COMPANY GATE” IS THE SUBJECT MATTER OF THIS COURSE. GENERALLY FOLLOWING WILL COME UNDER THE SUBJECT MATTER OF THIS COURSE: 1. How does bus. affect society? 2. How does society affect bus. in our modern, complex world? 3. How can each live with the other so that the potential benefits of each may be received? 2. A MOVE TOWARD SOCIAL CONCERN: Modern society presents business with immensely complicated problems that did not have formerly. In earlier years societal relationships were simpler than today. Decisions were simpler. If a man could not perform his job rightly or would become alcoholic, for example, he would have been dismissed. Things were considered from economic point of view, not social. A shift to social concern started since 1950s. Since business interacts much with society, perhaps more of these demands were made on business than any other institution. After 1950s with economic problems minimally out of the way, social problems became more visible. The most visible challenges were the social issues such as URBAN BLIGHT(bad influence), DISADVANTAGED PEOPLE, ECOLOGY, AND EQUALITY OF OPPORTUNITY.
a. An age of discontinuity: The demands made on business are part of a larger series of changes occurring throughout the social system. Many difficult problems are arising because of very rapid change which is upsetting the delicate equilibrium in our complex society. Our society is passing through an age of discontinuity in which change is so severe that it will create whole new institutions and significantly alter existing institutions. The four most significant discontinuities are: 1. Technological innovations such as computer and television, which are not only affecting business but also the whole society. (Jet air travel for example, which has enable people of different regions to be in frequent contact, seeing the strengths and weaknesses of their own communities and
to increase pressures for change therein. – CONFORMITY IN GARMENT IS AN EXAMPLE). 2. Development of a world economy of one market but without suitable institution for handling it, with the one exception of multinational corporation. 3. A pluralistic social system in which social tasks are mostly entrusted to large institutions (municipal corporation for graveyard for example). 4. A knowledge revolution which has made knowledge the crucial resource of society.
b. A Call for Greater Social Responsibility: As the changing public mood applies to business, it is insisting upon a greater social conscience, social concern, and social responsibility. The idea of social responsibility is that decision makers are obliged to take actions which protect and improve the welfare of society as a whole along with their own interests. The businessman acts in a manner that will accomplish social benefits along with the traditional economic gains which the firm seeks. It also requires thinking in terms of the whole social system, rather than the narrow interests of a single organization, group, or person. It is clearly a system way of thinking.
c. Areas of Social Responsibility Social responsibilities of businesses are increasing day by day as shown below:
The inner circle represents the traditional responsibility of business for its basic economic functions. The intermediate circle represents the widening area of responsibility that arises directly from performance of the basic economic functions. Examples are: equal employment opportunity and prevention of pollution from business operations. The outer circle represents an area that is still not well defined, but there is a rising public expectations for business to modify its singular pursuit of economic goals and help society with some of its unsolved general social problems. Examples are: prevention of urban decay and training hard-core unemployed. Proposed areas of social involvement include the following: Ecology and environmental quality: Cleanup of existing pollution Design of processes to prevent pollution Aesthetic improvements Noise control Dispersion of industry Control of land use Required recycling Consumerism Truth in lending, in advertising, and in all bus. activities Product warranty and service Control of harmful products Community Needs Use of bus. expertise and community problems Reduction of businesses’ role in community power structure Aid with health care facilities Aid with urban renewal Government Relations Restrictions on lobbying Control of bus. political action Extensive new regulation of business Restrictions on international operations
Business Giving Financial support for artistic activities Gifts to education Financial support for assorted charities Minorities and disadvantaged persons Training of hard-core unemployed Equal employment opportunity and quota for minority employment Operation of programs for alcoholic and drug addicts Employment of persons with prison records Building of plants and offices in minority areas Purchasing from minority businessmen Retraining of workers displaced by technology Labor relations Improvement of occupational health and safety Prohibition of export of jobs through setting bus. in low labor cost areas Provision of day care centers for children of working mothers Expansion of employee rights Control of pension, especially vesting(legal right) of pension rights Impatience with authoritarian structure, demand for participation Stockholder relations Opening of boards of directors to public members Prohibition of operation in nations with racist or colonial govt. Improvement of financial disclosure Disclosure of activities affecting the environmental & social issues Economic activities Control of conglomerates Breakup of giant industry Restriction of patent use
3. Business as a Part of the Larger Social System a. A system concept: The complex relationship of business to society becomes evident when expressed in terms of a system concept. We can better understand the contributions which bus. and society make to each other in terms of considering them as a system. Every action bus takes is related to the external world around it; and, in turn, everything which occurs in the external world is related to bus. If we can identify the significant relationships business has with external world, we can relate business effectively to that larger framework we call the social system. In this manner we can better understand the contributions which business and society make to each other. b. What is a social system? All systems are not social system such as mechanical, biological, economic etc. A system is a combination of interrelated parts operating as a whole. It becomes a social system when it relates to people. A social system involves people and/or their organizations in relationships consisting of some observable whole. The basic operation of a system is that it receives inputs from its environment, processes these in some way, and then releases outputs to the environment. c. Subsystems that make an interrelated whole: A system consists of different subsystems which make up the whole. But each subsystem has its own function which may be entirely different from what other parts are doing. For example, in a biological system, hands perform one function, ears perform another, but they are interrelated and affecting each other in various ways through their inputs and outputs among themselves. Any system, again, is a part of the larger system, which is part of even larger system and so on. When one refers to a smaller system in relation to a larger one, the smaller system is called a subsystem. d.
Dynamic and Stabilizing Tendencies: A social system is understood to be dynamic. People contribute to this dynamism because they are living, thinking, and acting beings. They add the variability and uncertainty of human behavior to systems, making social systems a difficult challenge for administrators who must manage them.
In spite of its dynamic nature a social system tends to operate in some degree of equilibrium, which means a degree of accommodation and working harmony both among its parts and with its external environment. Normally an organization maintains effective equilibrium by continuously taking corrective action as minor imbalances occur. e. Viability: Viability means the drive to live and grow, to accomplish potential not yet reached, and to achieve all that a living system is capable of becoming. People bring viability to the business system. They seek growth. Thus the system which they operate can move beyond simple maintenance and achieve growth in the quality and quantity of services it renders. In order to keep competitive and growing, a business must constantly strive to upset the same equilibrium it is trying to achieve. f. Interface with an external environment: A system such as an individual business relates to other businesses and social groups throughout the society. This area of contact between one system and another is the system interface. Areas of interface are important because they are sources of inputs into the system. g. Public visibility: In its interface with the environment business has prominent public visibility compared with other institutions. Public visibility refers to the extent that an organization’s activities are known to persons outside the organization. The activities may be directly observed, such as polluting smoke seen coming from a smokestack or purchase of a product with deficient. Activities also may be indirectly communicated by news media, neighbors, and other sources. The importance of public visibility is that it makes business activities subject to public examination, discussion, and judgment. Example: Magurchara Gas field accident. h. Values: A source of business drives: Business operates in an environment of social values, both those of society and those which bus. has. For an individual bus, values derive from a multitude of sources, such as the mission of bus as a social institution, the nation in which bus is located, the type of industry in which it is active, and the nature of its employees. With regard to the bus and society these values perform two imp functions. First, they become guides for employee decisions in the interface of bus and its environment. Second, they become strong
motivators for people in a business. Thus they become a key factor in the system relationship of bus with society.
4. Viewing the Whole Business System: To understand business as a whole and to perceive its interface with the society, integration of knowledge from a number of disciplines is required. It is also important to integrate a number of value systems affecting business to understand business environment as a whole. We should realize that the total system is generally something different from the sum of its parts. Consider an animal dissected and described in a laboratory. Even if the parts are sewn (stitched) back together, they do not restore the living animal and show its living responses as a system. A similar situation exists with the business system.
MBA Program (Evening) Department of Marketing Fall Semester Exam 2007 Course # MKT – 512/510 Title: Business Environment
Time: 2 hours
Full Marks: 40
(N.B.: Questions Carry equal marks. Answer any four of the following questions.) Q.1.a. Why it is said that businesses are involved in the transformation process? b. Show how a business organization is influenced by the environmental influences in the transformation process of inputs into outputs.
Q.2. “We are in an economy which more and more is being politically directed and ordered” – Explain the statement in the light of the businesses’ interface with government. Q. 3. “The main aim of business is to produce goods and services that people want. This cannot take place without people.” – Discuss the statement in the light of different dimensions of people.
Q. 4. “Law not only constrains business activity, but it also assists, and in doing so helps an enterprise to achieve its commercial and other objectives.” – Discuss the statement in the light of the legal environment of business. Q.5. Write short notes on “Technology” and “Natural Resources” as factors of production.
Evening MBA Program
Department of Marketing, University of Dhaka Winter Semester Exam 2008 Course # MKT – 510 (Business Environment) 2nd Mid-Term Examination
Time: 60 minutes
Date: 13.05.2008
Full Marks: 15
(N.B.: Questions Carry equal marks. Answer any one of the following questions.)
Q.1.a. Discuss briefly the two main political systems. b. Name the democratic institutions, processes, and political institutions that prevail in democratic states. c. Given an idea about the legislative branch of government under democratic political system. Q.2. Discuss different types of economic systems and their business implications.
Department of Marketing, University of Dhaka Winter Semester Exam 2008 Course # MKT – 510 (Business Environment) 2nd Mid-Term Examination Time: 60 minutes
Date: 13.05.2008
Full Marks: 15
(N.B.: Questions Carry equal marks. Answer any one of the following questions.)
Q.1.a. Discuss briefly the two main political systems. b. Name the democratic institutions, processes, and political institutions that prevail in democratic states. c. Given an idea about the legislative branch of government under democratic political system. Q.2. Discuss different types of economic systems and their business implications. MBA Program (Evening) Department of Marketing Winter Semester Exam 2008 Course # MKT –510, Title: Business Environment
Time: 2 hours
Full Marks: 40
(N.B.: Questions Carry equal marks. Answer any four of the following questions.) Q.1.a. Why it is said that businesses are involved in the transformation process? b. Show how a business organization is influenced by the environmental influences in the transformation process of inputs into outputs.
Q.2. “We are in an economy which more and more is being politically directed and ordered” – Explain the statement in the light of the businesses’ interface with government. Q. 3. “The main aim of business is to produce goods and services that people want. This cannot take place without people.” – Discuss the statement in the light of different dimensions of people.
Q. 4. “Law not only constrains business activity, but it also assists, and in doing so helps an enterprise to achieve its commercial and other objectives.” – Discuss the statement in the light of the legal environment of business. Q.5. Write short notes on “Technology” and “Natural Resources” as factors of production.
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