Table of Contents
Task 1: Identify different types organizational objectives and responsibilities which lead for organizational success. 4
T 1.1 Identify at least four different types of organizations that exist in the U.K 4
T1.2 Select an organization of your choice and identify its vision, mission and values. 11
T 1.3 Select an organization of your choice and describe the extent to which this organization meets the objectives of its stakeholders. 13
T 1.4 Explain the responsibilities of the organization you selected in Q1.2. In addition, explain the strategies employed to meet these responsibilities. 15
Task 2: Evaluate the concepts of Economic, social and global environment. 17
T 2.1: Explain how economic systems attempt to allocate resources effectively. 17
T 2.2 Assess the impact fiscal and monetary policy on business organizations and their activities. 23
T 2.3 Evaluate the impact of industrial policy, welfare policy other regulatory mechanisms on the activities of a UK organization of your choice. 27
Task 1: Identify different types organizational objectives and responsibilities which lead for organizational success.
T 1.1 Identify at least four different types of organizations that exist in the U.K
1) Privet Limited Company
Private limited company is held by few individuals privately having a separate legal entity. In this, the shareholders cannot trade publicly shares. It restricts its number of shares to 50. Shareholders cannot sell their shares without the approval of other shareholders. It is a company which restricts the right of its members to transfer its shares and it doesn’t send the invitation to the public for subscription of its shares. The private limited company is a proven, successful business model. The business owners hold all shares of the company privately. Shareholders may operate the business themselves, or hire directors to manage the company on their behalf. Forming a private limited company results in protection of personal assets, access to more resources, financial assistance and greater tax cuts.
Private Limited Company is a more complex business structure than a sole trader or ordinary Partnership. A company limited by shares is simply referred to as a Private Limited Company. A private company limited by shares indicates that the company has shareholders whose liability is limited to their capital investment. The shares of a private limited company may not be offered to the general public, unlike those of a public limited company (plc.) and cannot be traded on a public exchange.
Private limited company has main nine characteristics. These characteristics help to control the Private Limited Company. There are;
i. Members – To start a company, a minimum number of 2 members are required and a maximum number of 200 members as per the provisions of the companies act 2013.
ii. Limited Liability – The liability of each member or shareholders is limited. The personal, individual assets of the shareholders are not at risk.
iii. Perpetual succession – The company keeps on existing in the eyes of law even in the case of death, insolvency, the bankruptcy of any of its members. This leads to the perpetual succession of the company. The life of the company keeps on existing forever.
iv. Index of members – A private company has a privilege over the public company as they don’t have to keep an index of its members whereas the public company is required to maintain an index of its members.
v. A number of directors – When it comes to directors a private company needs to have only two directors. With the existence of 2 directors, a private company can come into operations.
vi. Paid up capital– It must have a minimum paid up capital or such higher amount which may be prescribed from time to time.
vii. Prospectus – Prospectus is a detailed statement of the company affairs which is issued by a company for its public.
viii. Minimum subscription – It is the amount received by the company which is 90% of the shares issued within a certain period of time. If the company is not able to receive 90% of the amount, then they cannot commence further business. In the case of a private limited company, shares can be allotted to the public without receiving the minimum subscription.
ix. Name – It is mandatory for all the private companies to use the word private limited after its name.
In the case, if any private limited company doesn’t follow any of the above mentioned characteristics, it ceases to be a private company. Private Limited Company have a more valuable advantages and some drawbacks.
? Advantages of Private Limited Company
? A Private Limited Company is a legal entity; the company’s finances are separate from its owner’s finances.
? The Private Limited Company structure is suitable for profit or non-profit use.
? Protection from personal liability to Limited company owners.
? Private Limited Companies have a reliable legal precedent to guide and direct the shareholders and directors.
? Private Limited Companies have an unlimited life.
? Ltd companies’ may bring additional taxes benefits, and are subject to lower corporation tax.
? Added credibility for Private Limited Companies, which can make it easier for a Private Limited Company to borrow money, raise capital and achieve financing without personal risk.
? Disadvantages of Private Limited Company
? Private Limited Companies must hold annual meetings and the shareholder and directors have specific formalities to observe.
? Owners of the limited companies have less personal control over the company compared to sole traders due to compliance issues.
? A Limited Company is more expensive to set up than a sole trader or partnership.
? Private Limited Companies pay annual fees and have periodic filing obligations.
2) Public Limited Company – PLC
A public limited company (PLC) is the legal designation of a limited liability company which has offered shares to the general public and has limited liability. A PLC’s stock is offered to the general public and can be acquired by anyone, either privately, during an initial public offering or through trades on the stock market. The appellation PLC is more commonly used in the United Kingdom and some Commonwealth countries. The mandatory use of the PLC abbreviation after the name of the company serves to instantly inform investors, or anyone dealing with the company, that the company is public and probably fairly large. A company that trades on the stock exchange. The shares can be traded and sold by any member of the public. It is governed by a set of strict regulations. They are required that they publish a true financial position so investors can determine the exact worth of any shares that they hold in the company. In the PLC if demand is increase its automatically increase the price.
PLC shared have a two types of values.
1. Normand value
2. Market value
While a PLC is also a limited company and shares the advantages of that structure, there are additional benefits. As with any company formation there are some disadvantages for changing to a PLC.
? Advantages of Public Limited Company
? A PLC can, first and foremost, raise capital by selling shares in the company. This is usually a lot greater than the amount which can be raised when you are only a limited company
? Having Company stock listed on a recognized exchange.
? If organization have a large number of shareholders, its essentially spreading risk in the company which can be useful. If managed properly, it can also prevent just one individual holding so many shares that they have an unreasonable control over the future and growth of the business
? The tag of PLC can be a more attractive proposition when it comes to finding finance for growth or for certain new projects. Because creditworthiness is increased. That means banks and other avenues of finance might be more willing to offer loans and credit arrangements than they would if just dealing with a limited company
? That availability of readily available finance, particularly in difficult economic periods, can enable a company to push forward with expansion plans, acquire other businesses and to fund research and development which would otherwise have to be put on hold
? Shareholders benefit from the fact that shares can be bought and sold and there is better liquidity overall.
? There is more prestige and people feel more confident about a business and its reputation and that acts as a form of free publicity
? Disadvantages of Public Limited Company
? The focus is more on protecting the shareholders. That means there are more statutory and legal requirements that your company now has to adhere to
? The level of transparency required for a PLC is much higher than with a limited company. Accounts need to be audited, providing fuller information concerning performance should be made available to anyone who wants to see them
? While with a limited company can maintain control over who has shares, this is a lot more difficult to achieve with a PLC.
? Organization may become far too focused on the short term benefits of the share price, particularly when the business is initially floated on the stock exchange. That could mean compromising or missing out on business overall strategic plan for growth
? The amount of finance that is required to go PLC is higher than with a limited company.
The pros and cons of becoming a Public Limited Company (PLC) mean that most businesses opt for this solution when they have forged a strong enough path in the market and their future success is more or less guaranteed. Getting it right can seriously improve the financial strength of business and move forward to the next stage of company development. Getting it wrong can be catastrophic and always get the best advice before going down this route.
3) Limited Liability Partnerships
A limited liability partnership (LLP) is basically a general partnership, but with the addition of giving the partners at least some limited personal liability. There is only one class of partner. The degree of liability limitation for an LLP varies from state to state. Some states provide a limitation of personal liability that is similar to a corporation. Some states only limit personal liability for the negligence of a partner. Some states take a middle ground, and limit personal liability for a partner’s negligence, as well as for partnership contracts and other debts. Because an LLP is a partnership, it must have two or more owners. A business partner is a co-owner of the business. A limited liability partnership is designed for businesses that usually operate as a traditional partnership. This tends to be accountancy firms, solicitors, dentists, veterinary practices, architects, chartered surveyors, medical practitioners and other professional services firms.
There are no general partners in a limited liability partnership, but an LLP is similar to a general partnership. Each limited liability partner contributes to the everyday business operations. However, each partner enjoys limited personal liability for the other partners’ acts. All states allow some form of LLP, though state laws vary. Note that some states only allow LLP status for professional partnerships, like accountants, lawyers or architects. In all states, limited liability partnerships can only be formed by registering with the appropriate state office.
Limited Liability Partnerships also have a pros and cons.
? Advantages of a Limited Liability Partnership
? The main advantage of an LLP is the limited personal liability provided to each of the partners. Generally speaking, each partner’s personal liability for another partner’s acts is limited to the partnership’s assets.
? Liability protection for all partners. The main advantage of an LLP is that all partners are protected by some form of liability protection, but this also means each partner gets a say in how the business is ran.
? Securities laws. Since all members of an LLP are considered general partners, security laws do not generally come into play when the members change ownership.
? Required by law. In some states, certain professions are not allowed to form other types of business structures, and are required by law to become a limited liability partnership.
? Disadvantages of a Limited Liability Partnership
? Multi-state considerations. Some states recognize LLPs formed in other states, and some do not. This could affect the limitation of liability in the other states.
? Liability protection. Although an LLP offers all members some form of liability protection, corporations and limited liability companies offer more comprehensive protections and are very popular with business owners.
4) Guarantee Company/ Non-profit Company
Limited by guarantee companies are most often formed by non-profit organizations such as sports clubs, workers’ co-operatives and membership organizations, whose owners wish to have the benefit of limited financial liability. A company limited by guarantee does not have any shares or shareholders but is owned by guarantors who agree to pay a set amount of money towards company debts. Furthermore, there will generally be no profits distributed to the guarantors as they will instead be re-invested to help promote the non-profit objectives of the company. If any profits are distributed to the owners, then the company will forfeit its right to apply for a charitable status.
Guarantors can certainly take a portion of company profits for themselves, but most of the time this does not happen because limited by guarantee companies are usually set up for non-profit purposes. This means that all of the money generated by this type of company is kept in the business or used to promote its non-profit purpose and activities. If guarantors do keep any profit for themselves, the company will no longer be considered ‘non-profit’ and it will be ineligible for charitable status. There is nothing to prevent someone setting up this type of company to run a profit-making business in which the guarantors will keep the profits, but a limited by shares structure simply makes more sense for that purpose.
? Advantages of Non-profit company.
? Eternal Life: Nonprofit organizations can exist long after their founders leave as long, as their purpose stays relevant and they continue to generate revenue
? Organization at Scale: If organization a mission-driven individual who wants to make the world a better place, organizing a nonprofit around their chosen cause is the best way to build a team to expand their efforts and make a bigger impact.
? Protection from Personal Liability: Employees of nonprofits are not personally liable for the debts of the nonprofit.
? Tax-Exempt Status on Net Income: Nonprofits do not pay taxes, so all earnings can be cycled back into the organization to improve it.
? Public and Private Incentive to Help Out: Donations made by individuals and corporations are tax-deductible, thereby incentivizing people to contribute to nonprofits.
? Grants Eligibility: An additional source of funding for nonprofits is through government grants.
? Employee Benefits: If nonprofit has enough employees, it may qualify for group discounts to health or life insurance benefit programs.
? Volunteer Board Members: Typically, nonprofits do not pay their board members, which can save a lot of money.
? Highly Motivated Employees: Research shows nonprofit employees are highly motivated by intrinsic rewards like achievements of their clients and a good work/life balance, rather than pay.
? Disadvantages of Non-profits company
? Continued Maintenance: All nonprofits are required to submit annual filings and comply with all laws of incorporation.
? Public Scrutiny: Anyone may request copies of any nonprofit’s filings and review their expenditures, salaries, and income.
? No Profits: No individuals or shareholders can receive profits from nonprofit. This can make it more difficult to generate interest from potential investors. Volunteers and Volunteer Board Members:
? Volunteers are a pro and a con: From a con perspective, sometimes it may be had to find willing volunteers to help you achieve mission and even when do, they can be difficult to manage.
? Funding Difficulty: While listed as a pro before, getting funding for nonprofit can be a constant struggle.
? Overworked Employees: Small to medium-sized nonprofits typically have tight budgets and only a handful of employees, meaning more work for less pay. It’s a scenario some are calling “The Plight of the Overworked Nonprofit Employee.”
? The “Nonprofit Employees Should Get Paid Less” Trap: Many people justify paying nonprofit employees less, because they “should be dedicated to the cause rather than the salary”.
If the advantages and disadvantages of nonprofits line up with personal values and goals, then almost ready to take the first step to jump into a nonprofit role. But before, consider these five pieces of advice from seasoned nonprofit professionals.
T1.2 Select an organization of your choice and identify its vision, mission and values.
The stated mission, vision and values of a business should provide a key insight into the strategy and culture of a business. Of course, it’s not always the case that stated vision & values are consistent with the way a company does business. However, for many successful businesses there is a clear and sustained link between the two.
Company Name: – Walmart
i. Walmart’s Vision Statement.
The company traces its success to the ideals of its founder, Sam Walton. These ideals are emphasized in Walmart’s vision statement: “To be the best retailer in the hearts and minds of consumers and employees.” The company aims to achieve a top position in the retail industry. Based on its current situation, the firm has already fulfilled the “best retailer” part of the vision. Walmart’s vision statement also points to the minds and hearts of the people that matter most to the business, i.e. consumers and employees. The company has realistically influenced the minds of consumers and employees on the basis of financial benefits. Employees earn wages, while consumers save money through Walmart’s low prices. However, the “heart” component of the vision statement remains to be proven.
ii. Walmart’s Mission Statement.
The company’s strategic decisions are also a direct manifestation of its mission. Walmart’s mission statement is “Saving people money so they can live better.” This statement is synonymous to the company’s slogan, “Save money. Live better.” The firm follows and succeeds in fulfilling the “saving people money” component of the mission statement. Consumers save money through Walmart’s low selling prices. However, it is not yet clear if the company satisfies the “live better” component of the mission statement. There are criticisms on Walmart’s very low wages that are barely enough for employees to make ends meet. There are also criticisms about the long-term effects of the firm’s continued large-scale sales of cheap and sometimes hazardous imported goods.
? Service to the Customer
Customer First – Listen to, anticipate and serve customer wants and needs
Frontline Focused – Support and empower associates to serve customer everyday
Innovative and Agile – Be creative, take smart risks and move with speed
? Respect for the Individual
Listen – Be visible and available; collaborate with others and be open to feedback
Lead by Example – Be humble, teach and trust others to do their jobs; give honest and direct feedback
Inclusive – Seek and embrace differences in people, ideas, and experiences
? Strive for Excellence
High performance – Set and achieve aggressive goals
Accountable – Take ownership, celebrate successes and be responsible for results
Strategic – Make clear choices, anticipate changing conditions and plan for the future
? Act with Integrity
Honest – Tell the truth, keep your promises and be trustworthy
Fair – Do right by others; be open and transparent
Courageous – Speak up, ask for help, make tough calls and say no when appropriate
Brea-Solis, H., Casadesus-Masanell, R., ; Grifell-Tatje, E. (2012).
Hicks, M. J., Keil, S. R., ; Spector, L. C. (2012).
T 1.3 Select an organization of your choice and describe the extent to which this organization meets the objectives of its stakeholders.
What is a Stakeholder?
A stakeholder is either an individual, group or organization who is impacted by the outcome of a project. They have an interest in the success of the project, and can be within or outside the organization that is sponsoring the project. Stakeholders can have a positive or negative influence on the project. There are a lot of people involved in getting a project from inception to a successful completion. Any organization going to have to know how to manage each and everyone one of them, even those who don’t work directly under them. One such person is the project stakeholder. A stakeholder is a person, like any other member of the project, and some will be easier to manage than others. Company going to have to learn to deal with a variety of personalities and make sure in productive dialogue with them to know the project goals been hired to meet.
I chose the Starbucks organization and identify its stakeholders. Starbucks continues to
improve its corporate social responsibility practices to address the concerns of different
stakeholder groups. The following are the main stakeholders in Starbucks Coffee’s business:
1. Employees (baristas, partners)
3. Suppliers (supply firms, coffee farmers)
? Employees: Starbucks prioritizes employees in its corporate social responsibility efforts. As stakeholders, employees typically demand for better working conditions, job security and
higher wages. Starbucks’ organizational culture emphasizes the employees first attitude.
Employees are also given wages above the legally mandated minimum wage. In 2014,
Starbucks boosted its CSR performance for this stakeholder group by giving scholarships
to employees based on a partnership with Arizona State University. In this partnership,
Starbucks pays for 56% of tuition fees for employees’ junior and senior years at the
University. However, the company’s performance in addressing employees as
stakeholders have room for improvement. In some countries like New Zealand, Starbucks
gives very low wages to juvenile workers. These youth rates are often criticized. The firm
can improve its corporate social responsibility performance by addressing such issue in
this stakeholder group.
? Customers: Starbucks considers customers as among its top stakeholders. The interests
of this stakeholder group are high quality service and products, such as coffee and related beverages. As the world’s most popular specialty coffeehouse chain, Starbucks effectively addresses this interest. The company also includes customers as major stakeholders by
extending the Starbucks culture to customers at its cafes. For example, warm and friendly relations are emphasized within the company and in how baristas interact with customers. Thus, Starbucks Coffee’s corporate social responsibility efforts fulfill the interests of this
? Suppliers: Starbucks suppliers are composed of wholesale supply firms and coffee
farmers. The main interest of this stakeholder group is compensation and a growing
demand from Starbucks. Farmers aim to increase coffee yield to generate more revenues. Starbucks addresses the interests of these stakeholders through a number of corporate
social responsibility programs. For example, the firm’s supplier diversity program ensures
that more suppliers from around the world are included in the supply chain Thus,
Starbucks’ corporate social responsibility efforts comprehensively address the interests of this stakeholder group.
? Environment: Starbucks has corporate social responsibility programs for environmentally
sound business. The company’s CAFE program has led to higher biodiversity and shade
quality in certified coffee farms. Currently, 90% of Starbucks’ supply is from CAFE-certified farms. This significant figure shows that Starbucks is effective in addressing its corporate
social responsibility to this stakeholder group, although there is room for improvement.
? Investors: As in any business, Starbucks must address investors as stakeholders.
Investors have interests in high financial performance of the company. Starbucks’ global
expansion and continued dominance in the coffeehouse industry indicates high financial
performance. Even though it suffered considerable decline in 2007, Starbucks has
recovered and is on a growth path once more. Thus, the firm satisfies this stakeholder
? Governments: Starbucks must address the interests of numerous governments as
stakeholders, considering the company’s global presence. In general, Starbucks
complies with rules and regulations. However, the company has been criticized for tax
evasion in Europe. Starbucks uses a network of locations in different European countries
to exploit tax advantages. At present, much of this system remains, with Starbucks paying unexpectedly low taxes in the U.K. Thus, the company’s comprehensive corporate social responsibility efforts can be improved to address this stakeholder group.
T 1.4 Explain the responsibilities of the organization you selected in Q1.2. In addition, explain the strategies employed to meet these responsibilities.
Walmart provides food, apparel and household products to hundreds of millions of customers in 28 countries around the world. They are committed to doing so in a way that creates economic opportunity for associates, suppliers and others in retail supply chains; enhances the
environmental and social sustainability of supply chains; and strengthens the communities
where they live and work.
For 10 years, they have been leading initiatives with their stakeholders in these arenas of opportunity, sustainability and community. They aspire to use their strengths to help others while also strengthening business, and reshaping the systems they all rely on to help improve social,
environmental and economic outcomes.
? Walmart approach to global responsibility:
? Shared value
For Walmart, unlocking the full potential of our business means that use Walmart strengths to
support and improve the social and environmental systems upon which all rely. Whole-system
change. Working with others, Walmart aspire to reshape whole systems to achieve significant
and lasting improvement in social, environmental and economic outcomes. For example,
enhancing environmental sustainability in retail supply chains means addressing their social and economic dimensions, too. Walmart organization have placed, and will continue to place,
increasing emphasis on social issues such as empowering women and supporting worker safety and dignity.
? Create shared value for business and society.
Walmart seek to create value for stakeholders across business and society, because shared
value enhances the quality and viability of solutions. They believe that social and environmental programs are of interest to long-term shareholders because they strengthen the systems rely on as a retailer.
? Lead through the business.
Walmart work to integrate their social and environmental priorities into routine business
activities such as merchandising, sourcing, store operations, logistics, human resources and
technology, through leadership practices, organizational roles, operational processes and tools.
? Focus on actions that draw on Walmart’s particular strengths.
Walmart company can make the most significant difference when they draw on particular
strengths as a retailer. These strengths include their 2.3 million associates globally, supplier
relationships, purchasing in categories like food and apparel, physical assets and capabilities in logistics, marketing, operations and merchandising.
? Use philanthropy to complement business initiatives.
This organization complement and extend the impact of Walmart’s social and environmental
initiatives through philanthropic efforts. Through both in kind and cash gifts, Walmart and the
Walmart Foundation give over $1 billion annually to projects that create opportunity, enhance
sustainability and strengthen community.
? Collaborate with others.
Since Walmart believe that collective action is essential to the transformation of systems, they
shape their programs in collaboration with other leaders and stakeholders. They are also
investing in enhancing the effectiveness and ease of dialogue and action across sectors through support for organizations and tools, such as the Consumer Good Forum and the Sustainability
Index. At Walmart, continually engage stakeholders to understand their perspectives, improve
the effectiveness and relevance of Walmart initiatives, increase transparency and trust and
collaborate on addressing business and societal challenges.
? Children’s Food Safety ; Nutrition
Walmart will carry out a children’s food safety program in partnership with Children and
Teenagers’ Foundation, which is an important portion of the National Campaign on the
Safeguarding of Children’s Food Safety. It is designed to promote the awareness of children’s
food safety and improve children’s behaviors and habits through food safety education on
children in the forms of “walking into families, schools and communities”. This program will be officially launched by the end of 2016.
? Sustainability Initiatives
While providing better service and quality goods to customers, Walmart actively shoulders the
social responsibility of sustainability and protecting the environment. Walmart keeps improving
sustainability practices in its operations in China that would have benefits throughout the supply chain. Walmart launched its Sustainability 360 Program demonstrating that sustainability has
become an essential ingredient to its global strategy, maintaining goals to be supplied 100
percent by renewable energy; create zero waste; and sell products that sustain people and the environment.
Task 2: Evaluate the concepts of Economic, social and global environment.
T 2.1: Explain how economic systems attempt to allocate resources effectively.
Any system that involves the mechanism for production, distribution, and exchange of goods apart from consumption of the goods and services within the different entities can be classified as an Economic System. The various kinds of economic systems and their classifications broadly follow the methods by which means of ownership are established. Thus, the mode of ownership of capital leads to the different kinds of economic systems in vogue. and governments distribute resources and trade goods and services. They are used to control the five factors of production, including: labor, capital, entrepreneurs, physical resources and information resources. In everyday terms, these production factors involve the employees and money a company has at its disposal, as well as access to entrepreneurs, the people who want to run companies or start their own businesses. The physical materials and resources needed to run a business, along with the data and knowledge companies use to be successful, are also factors in production. Different economic systems view the use of these factors in different ways.
An economy is a system whereby goods are produced and exchanged. Without a viable economy, a state will collapse. The different kinds of economic systems are Free Market Economy, Mixed Economy and Command Economy. All these are characterized by the ownership of the economics resources and the allocation of the same.
1) Free Market Economy.
Market economies are based on consumers and their buying decisions rather than under government control. All economic resources are owned by the people. Market trends and product popularity generate what businesses produce. The producers choose how to make products based on the most economically sound decision: that might mean machine labor to save costs or human labor for specific skills. The buyers decide who gets which products by what they are willing to pay for what they want. Complete market economies do not utilize price controls or subsidies and prefer less regulation of industry and production. Market decisions rely on supply and demand for pricing. Government’s role is to create a stable economy for the market to operate properly. The government plays only a peripheral role in setting up the basic structure and rules controlling the markets. The market system relies on many factors to ensure its success. The profit motive or incentive for a financial reward for enterprise stimulates production. Information regarding available products and services needs to be available to producers and consumers. Producers use the information to set accurate prices and procure supplies at the lowest cost. Price relates directly to the costs and benefits of product creation and use and required profit. The market forces of demand and supply determine the equilibrium market price, which in turn determines profits. This profit motive is the driving force behind the whole economy. Market economy believes in Laissez-faire meaning non-intervention by the government in the functioning of the economy. Consumers reign supreme in a market economy.
Characteristics of a Market Economy.
? A market economy is a type of economic system where supply and demand regulate the economy, rather than government intervention. These decisions in a free-market economy are influenced by the pressures of competition, supply, and demand.
? One of the most important characteristics of a market economy, also called a free enterprise economy, is the role of a limited government. However, a number of limitations and undesirable outcomes associated with the market system result in an active, but limited economic role for government.
? In a market economy, almost everything is owned by individuals and private businesses not by the government. Natural and capital resources like equipment and buildings are not government-owned.
? A market economy has freedom of choice and free enterprise. Private entrepreneurs are free to get and use resources and use them to produce goods and services. Workers are free to seek any jobs for which they are qualified.
? A market economy is driven by the motive of self-interest. Consumers have the motive of trying to get the greatest benefits from their budgets.
? Competition is another important characteristic of a market economy. Instead of government regulation, competition limits abuse of economic power by one business or individual against another.
? A system of markets and prices working together are the structure of a market economy, not the central planning by government.
2) Mixed Economy.
The government’s role in other areas depends upon the priorities of the citizens. In some, the government creates a central plan that guides the economy. Other mixed economies allow the government to own key industries. These include aerospace, energy production and even banking. The government may also manage health care, welfare and retirement programs. Most mixed economies retain characteristics of a traditional economy. But those traditions don’t guide how the economy functions. The traditions are so ingrained that the people aren’t even aware of them. The government only sets up the basic regulations within which the private businesses can play. There is generally no more government intervention in this sector. The government does not intervene in the day to day operation/administration of this sector. Then there is a parallel public sector, totally under government control. Here the economic resources are owned by the government.
The government outlines the demarcation between legal and illegal, aspects of how the market can work. This sector generally operates in those economic areas where there is a high social need little to no profit margin.
Characteristics of Mixed Economy
1. Co-existence of the Private and Public Sectors.
Co-existence of the private and public sectors is the outstanding feature of mixed economy. In mixed economy, both public sector as well as private sector industries will be functioning. Certain industries will be in the public sector and certain industries in the private sector.
2. Existence of Joint Sector
Joint sector is one where both Government and private individuals establish an organization jointly by contributing the necessary capital.
3. Regulation of Private Sector
Under mixed economy, Government exercises strict control and regulation over private sector industries.
4. Planned Economy
The entire economic structure is subject to the planning of the Government. Mixed economy is a planned economy.
5. Private Property
Under mixed economy, private firms and individuals have right to own and use property.
6. Provision of Social Security
Under mixed economy, Government takes steps to provide social security.
7. Motive of Business Concerns
The motive of the business concerns is profit but coupled with the objective of social welfare.
Advantages of Mixed Economy
There will be competition between public and private industries, which will result in greater efficiency and production in a mixed economy.
? Reduced inequality
The profit of public sector industries goes to the Government and as a result inequalities of income will be reduced in mixed economy.
? Systematic plan
In a mixed economy, economic activities are carried out as per plan. The entire economic system is subject to systematic planning of the Government.
? Economic Stability
The economic activities take place in a planned manner. So there will be economic stability in mixed economy.
? Consumer sovereignty
Goods are produced as per the wishes of the consumers, which results in consumer’s sovereignty in a mixed economy.
In mixed economy, freedom of enterprise and profit motive are the important features. Further there is competition between public and private sectors
? Promotion of social welfare
Mixed economic system gives importance to the promotion of social welfare. Under this system, both private and public sectors work for the welfare of people.
? Rights of Individual
Under mixed economy, individual rights are protected. People have freedom to buy any commodity.
Disadvantages of Mixed Economy
? Unhealthy Competition
There is unhealthy competition between private and public sectors in a mixed economy.
? No freedom to pvt sector
There is no freedom to private sector in mixed economy. This is because Government regulates private industries through its various regulations and licensing.
? Inefficient public sector
Inefficiency of public sector is another demerits of mixed economy. They may suffer heavy losses. People will have to bear these losses. The objective and targets of economic planning also may not be achieved in a mixed economy.
? Unemployment and Uncertainties
On account of capital scarcity, Government regulation and control, the growth of private sector may be less than what is fixed in plan. It may lead to unemployment and uncertainties in a mixed economy.
? Threat of Nationalization
There is always a threat of nationalization in the mixed economic system because of which the private sector does not work actively.
3) Command Economy.
In a command economy, it is also called a planned economy, the government controls all economic activity. In a government directed economy, the market plays little to no role in production decisions. Command economies are less flexible than market economies and react slower to changes in consumer purchasing patterns and fluctuations in supply and demand. There is government regulation controlling almost every aspect of people’s lives. Here the government owns all the economic resources and all the factors of production. Since people do not own the economic resources, there is no place for private initiative and no incentives at work.
Five Characteristics of a Command Economy
1. The government creates the economic plan for all regions of the country.
2. The government allocates all resources according to the economic plan. The goal is to use the nation’s money, labor and natural resources in the most efficient way possible.
3. The economic plan sets the priorities for producing all the goods and services. These include quotas and price controls on all goods.
4. The government owns the monopoly business in industries deemed necessary to the goals of the economy, which usually includes finance, utilities, and automotive.
5. The gov’t creates laws, regulates the society, and directs to enforce the economic plan. Businesses follow the plan’s production and hiring targets.
Advantages of Command Economy
? The command economy mobilizes economic resources quickly, powerfully, and on a large scale.
? They execute massive projects, create industrial power, and meet social goals.
? They aren’t slowed by lawsuits from individuals or environment impact statements.
? Command economies often transform societies to conform to the government’s vision.
? They often use violence to enforce their rules and regulations.
? The before elder is kicked out or assassinated, and the new gov’t nationalizes private companies.
? All workers are assigned new jobs according to how the gov’t wants them to work.
Disadvantage of Command Economy
? rapid mobilization means command economies mow down other societal needs.
? workers are often told what jobs they must fulfill.
? They often develop a shadow economy, or black market, to buy and sell the things the command economy isn’t producing.
? The efforts can weaken support for the central planning authority.
? Command economies often result in overproduction of one good and not enough of another.
? It’s difficult for central planners to get up-to-date info about consumer’s needs.
? Prices are set by the central plan, and they can’t be used to measure or control demand.
T 2.2 Assess the impact fiscal and monetary policy on business organizations and their activities.
Monetary and fiscal policies affect businesses directly and indirectly, it is important for business owners to understand and monitor changes in government policies. Fiscal and monetary
policies are tools used by the government to stabilize the ebb and flow of the economy.
In a 2012 survey by the National Federation of Independent Business, business owners
revealed that two of their main concerns were the economy and fiscal policies.
What is the Fiscal Policy?
Fiscal policy is the means by which a government adjusts its spending levels and tax rates to
monitor and influence a nation’s economy. It is the sister strategy to monetary policy through
which a central bank influences a nation’s money supply. The fiscal policy reflects the priorities of individual lawmakers. They focus on the needs of their constituencies. These local needs
overrule national economic priorities. As a result, fiscal policy is hotly debated, whether at the
federal, state, county or municipal level.
There are two types of fiscal policy. The first and most widely used is expansionary. It stimulates economic growth. It’s most critical to the contraction phase of the business cycle. That’s when
voters are clamoring for relief from a recession.
The second type, contractionary fiscal policy, is rarely used. That’s because its goal is to slow
economic growth. Why would ever want to do that? One reason only, and that’s to stamp out
inflation. That’s because the long term impact of inflation can damage the standard of living as much as a recession.
How to impact fiscal policy on business organization?
Fiscal policy refers to economic decisions and actions of a government used to control and
stabilize a country’s economy. In the UK, Federal Reserve Board sets monetary policy.
Decisions on federal interest rates and tax policy are core policies that ultimately affect
8. Costs of Borrowing
A main component of U.S. fiscal policy is the setting of federal funds rates. These are the rates
the government charges banks for the money they use to make residential and commercial
loans. Typically, banks pass on increases or decreases in rates to customers. If the government raises borrowing rates to combat inflation, businesses usually experience higher borrowing
costs. If the government lowers rate to encourage economic growth, businesses can usually get lower cost financing.
9. Consumer Spending
Consumer spending is a major driving force behind economic success. Government fiscal policy is often used to encourage or stabilize consumer spending for a healthy economy. If the
government sets policies of easing loan rates and investing in bonds and financial securities to
jump start the economy, this can ultimately result in consumer confidence and spending. In
general, if the economy is growing and consumers have money, businesses of all sizes benefit.
10. Tax Policies
A major way in which businesses are affected by fiscal policy is in tax rates. Over time, the U.K. government constantly establishes tax policies that raise or lower business taxes. If policies
reduce tax burden, earnings after taxes grow. This increased profit allows greater opportunities
to reinvest into business growth or to pay out dividends to company owners.
Overall levels of unemployment are often a factor in government fiscal decisions.
If unemployment is relatively high, the government is more likely to implement or maintain low
interest rates and other growth oriented fiscal policies. The motive is to encourage business
expansion and additional hiring. In some industries, companies base decisions on future human resources needs on current fiscal policy. If the government wants to curb overheated economic expansion with tighter fiscal policies, some companies immediately respond by curbing further
What is ‘Monetary Policy’?
Monetary policy consists of the actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as modifying the interest rate, buying or selling government bonds, and changing the amount of money banks are required to keep in the vault.
Monetary policy is the macroeconomic policy laid down by the central bank. It involves management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.
Two Types and six tools in Monetary Policy
Central banks use contractionary monetary policy to reduce inflation. They have many tools to do this. The most common are raising interest rates and selling securities through open market operations.
They use expansionary monetary policy to lower unemployment and avoid recession. They lower interest rates, buy securities from member banks and use other tools to increase liquidity.
The Fed has six major tools.
1. First, it sets a reserve requirement, which tells banks how much of their money they must have on reserve each night.
2. The Fed requires that banks keep 10 percent of deposits on reserve. That way, they have enough cash on hand to meet most demands for redemption. When the Fed wants to restrict liquidity, it raises the reserve requirement.
3. The Fed’s third tool is its discount rate. That’s how it charges banks to borrow funds from the Fed’s fourth tool.
4. The discount window is the fourth tool. The OMC usually sets the discount rate a
half-point higher than the Fed funds rate. That’s because the Fed prefer banks to borrow from each other.
5. Fifth, the Fed uses open market operations to buy and sell treasuries and other securities from its member banks. This changes the reserve amount that banks have on hand without changing the reserve requirement.
6. Sixth, many central banks including the Fed use inflation targeting.
How does monetary policy effect on business organization?
The effects of monetary policy on business are manifold. Though in a direct sense it affects only domestic business enterprises, foreign business entity who has an interest and stake in domestic market also gets affected to an extent. for simplicity, I am explaining few major points impact on domestic business units.
? By changing say interest rate, Monetary policy can affect the amount of liquidity in the system. Say RBI increases Repo Rate. The borrowing cost of commercial banks will now go up and they will pass the same to their borrowers. Generally, an industry needs loan from Banks to expand its business or any kind of investment. Now since loan has become costlier, it will negatively affect their investment decision.
? Continuing from above scenario of increased Repo: Apart from this direct effect on business entity, there is also another effect which plays through consumers. The people who are working in different business industries are also consumers of different goods in market. If a business industry shuns its investment decision, it means it is not generating extra employment which could have been there if the business had hired people for its new investment or increase the salary of existing ones for their increased effort.
? Also stocks can be traded as goods by consumers on exchange. As mentioned in the previous point, monetary policy can affect one’s income and hence demand for various goods, so stock price can also vary based on the demand and thus market capitalization of a business can change.
? Long-term interest rates reflect, in part, what people in financial markets expect the Fed to do in the future. For instance, if they think the Fed isn’t focused on containing inflation, they’ll be concerned that inflation might move up over the next few years. So they’ll add a risk premium to long-term rates, which will make them higher. In other words, the markets’ expectations about monetary policy tomorrow have a substantial impact on long-term interest rates today.
? These policies induced changes in real interest rates affect the economy.
Changes in real interest rates affect the public’s demand for goods and services mainly by altering borrowing costs, the availability of bank loans, the wealth of households, and foreign exchange rates. In addition, lower real rates and a healthy economy may increase banks’ willingness to lend to businesses and households. This may increase spending, especially by smaller borrowers who have few sources of credit other than banks.
The increase in aggregate demand for the economy’s output through these different channels leads firms to raise production and employment, which in turn increases business spending on capital goods even further by making greater demands on existing factory capacity. It also boosts consumption further because of the income gains that result from the higher level of economic output.
? Monetary policy affect inflation.
Wages and prices will begin to rise at faster rates if monetary policy stimulates aggregate demand enough to push labor and capital markets beyond their long run capacities. In fact, a monetary policy that persistently attempts to keep short term real rates low will lead eventually to higher inflation and higher nominal interest rates, with no permanent increases in the growth of output or decreases in unemployment. As noted earlier, in the long run, output and employment cannot be set by monetary policy. Policy also affects inflation directly through people’s expectations about future inflation. For example, suppose the Fed eases monetary policy. If consumers and businesspeople figure that will mean higher inflation in the future, they’ll ask for bigger increases in wages and prices. That in itself will raise inflation without big changes in employment and output.
T 2.3 Evaluate the impact of industrial policy, welfare policy other regulatory mechanisms on the activities of a UK organization of your choice.