Business Environment introduction lecture 1 PP.pptx

BUSINESS ENVIRONMENT
(BUE 112)
CHAPTER 1
INTRODUCTION TO BUSINESS AND
BUSINESS ENVIRONMENT

INTRODUCTION TO BUSINESS AND BUSINESS
ENVIRONMENT
Defining the term “Business”
• A business is an organization or enterprising entity engaged in
commercial, industrial, or professional activities.
• This simply means that one person can carry out a business.
Furthermore, a business can also be performed by an entity.
• Businesses can be for-profit entities or nonprofit organizations
that operate to fulfill a charitable mission or further a social cause.
• The main aim of making a business is to make profits.
• A profit is the difference between the cost of making and selling a
product and what the customers pay for it

• You should note that the profits are made while satisfying the needs
of those people who buy the products or services (customers).
• Business is also the organized efforts and activities of individuals to
produce and sell goods and services for profit.
Objectives of business
1. Profit maximization
• This is the main objective of the business.
• Making profit is normally essential for a business to survive in the
long term.
• There are unusual exceptions, such as where the owners have
sufficient funds to ignore profit levels and run the business as if it is a
hobby, but these are rare.

• In most cases, the level of profit is crucial to most
stakeholders who depend on the organisation for an
income.
• At the most basic level, the profit generated must be sufficient to
make it worthwhile to continue to operate of business.
2. Survival
• This is the prime objective of a business since, unless a business
can generate sufficient sales to cover its running costs, its start up
capital will soon be exhausted and it will fail.
• Once a firm has reached this stage, which often takes a year or
longer, it may then change its prime objective to one of the other
common business objectives.

• Survival can be a short term objective. It can be adopted by
new entrants who compete with big businesses before getting
a reasonable market share to start making profits.
• Some big businesses can also use this objective in order to
outsmart the new entrants or at a time of crisis e.g. economic
crisis.
3. Sales growth
• This is where the business tries to make as many sales as
possible. This is different from profit maximisation.
• In sales growth, the owners of the business believe that the
survival of the business depends on being large.

• This can also depend on the nature of the products being
produced. Large businesses also benefit from economies of
scale.
• Expansion or growth can be accomplished by internal and/or
external, that results in a growth in their share of the market
in that industrial sector
• Internal expansion can be achieved by increasing
manufacturing capacity, expanding the premises, purchasing
more equipment or adding a new building, for example.
• External expansion is achieved when the business joins with
another firm through a joint venture (strategic alliance),
merger (mutual agreement) or acquisition (takeover).

4. Increase market share
• Gaining a share of the market for a particular product is essential
for a business to survive.
• If it is not possible to achieve a viable level of sales, the firm will
fail.
• In the short term, most new entrants to a market aim to gain market
share through market penetration.
• However, market share is often linked to competitive advantage,
particularly in the longer-term, whereby a firm attempt to achieve
and maintain its position in the market by offering a better "deal" to
its customers than that offered by its competitors in the same
market.
• This can be in terms of price, quality, service, etc.

• Often firms are forced to grow to survive in their market sector.
• If they fail to grow, their competitors may take a more aggressive
approach and force them out of business.
5. Technical Excellence
• This is a frequent objective of research organisations and
engineering firms.
• Innovation and technological advances may be considered as
more important than sales or profit maximisation.
• The pursuit of excellence may bring the kind of reputation which
builds sales and profit in the longer term. For example, Rolls
Royce is renowned for its excellence in engine technology.

6. Corporate Social Responsibility
• Although in many cases it will not be the primary objective,
corporate social responsibility is growing in importance.
• CSR covers a wide range of goals relating to the environment
and support for social communities associated with the
business – for example:
demonstrating careful use of scarce resources
avoiding use of child labour
funding projects to help disadvantaged members of the local
community.

• Often, a reason for setting such goals is to attract consumers to
buy products based on the perception of the firm as acting for the
social good.
• For many firms, there may be a tension between these goals and
business goals.
7. Customer Satisfaction
• The customer is top priority and delivering satisfaction is a major
objective.
• Survey the customers and make an objective to always look for
ways to improve. Happy customers leave positive reviews, spread
positive word of mouth and are more likely to repeat business.

8. Employee Health
• While production and performance are important, employee
health is a major objective for many businesses.
• Fair compensation and benefits are goals every business
should strive to meet.
• Happy and healthy employees are often more productive as
well

Basic forms of business organisations
• Business organisations can be classified in a variety of ways, as
follows:
size (e.g. small, medium, large)
type of industry (e.g. primary, secondary, tertiary)
sector (e.g. private sector, public sector)
legal status (e.g. sole trader, partnership, and so on)
• In this context, let us discuss the legal status of the business
organisations which is referred to as the basic forms of business
organisations.
• There are two basic distinctions, which underlie the organisations of
business enterprise in the private sector –non-corporate and
corporate.

Non-Corporate Organisations
• Non-corporate organisations are those which do not have a separate
legal identity from their owners.
• This means that the owners are fully liable for the actions of the
organisation, including any debts. The main forms of non-corporate
organisation are:
1. sole trader
2. Partnership
Corporate Organisations
• Corporate organisations are those which have a separate legal identity
of their own. The most common corporate business organisations are:
1. Public limited companies
2. Private limited companies

1. Sole trade
• A sole trade is a business owned by one individual who is self-
employed and who may, in some cases, employ other people
on either a fulltime or a part-time basis. (Worthington, 2014).
• It is also known as sole proprietorship.
• The owner of a sole trade is known as a Sole trader or a Sole
proprietor.
• A sole trade is not a legal entity separate from the owner
individual.
• Consequently, the rights, duties, benefits and liabilities of the
sole trader’s business remain with the owner.

• There may be employees in the firm, and decision-making
may be delegated to some of them, but the final success or
failure of the business rests with the proprietor, who provides
the funds and takes the profits or the responsibility for any
losses.
• The business is not a legal entity separate from the owner, so
the proprietor has unlimited liability and all contracts with
the business are made with the individual proprietor, not with
the firm.
• As the business is not a legal entity, if it fails, or there is a
deficit in paying up its liabilities, then any other personal
resources outside the business will be called upon to pay for
the liabilities.

The business is a separate accounting entity which has accounts
prepared for it, but these do not need to be a full set of accounts
and need only be sufficient to satisfy tax liabilities.
Characteristics of Sole Proprietorship
• The distinguishing features of sole proprietorships are as follows:
a. Ownership is by a single person
• That is, sole proprietorships occur where one person owns the
business alone.
• You should note that the owner can employ other people, but the
ownership of the business rests on that person

Characteristics cont.…
b. Management and Control
• Day to day management and control of the business is usually
by the owner.
• The owner runs and controls the business by him/herself.
c. Source of Finance
• The owner provides the capital (the money for starting the
business)
• Many people use their savings to start a business.
• However, other people other peoples’ capital, or part of it is in
the form of borrowed funds.

Characteristics cont…
d. Size
• The business of the sole trader is usually small due to the amount
of capital invested since the capital is usually small.
e. The business is not a separate legal entity from the owner
• This means that the owner is liable for the debts incurred by the
business.
• However, the business is a separate accounting entity.
• This means that accounts for the business are prepared for the
business as an entity.

Characteristics cont.…
f. Unlimited liability
• The liability of the owner is not limited to the amount paid/payable
on the capital invested. (see on disadvantages of sole trader below)
g. Ease of Entry
• It is easy to start a sole proprietorship since it does not require a
large initial capital expenditure.
• Furthermore, there are no registration formalities unless a license
has to be obtained to operate the business (e.g. if selling
pharmaceuticals).

Advantages of sole trade
a. Managerial Freedom
• Decision-making can be effected quickly since the owner does
not have to consult anyone.
b. Ease and cost of formation
• Forming a sole trade is relatively inexpensive.
• In most cases, it does not require long procedures before it starts
operating.
• Thus, no formal procedures are required to set up the business
(except for types of business where a license must be obtained
e.g. operating a pharmaceutical business).

Advantages cont...
c. Distribution and use of profits
• All profits from a sole proprietorship belong exclusively to the owner.
• He/she does not have to share them with other partners or
stockholders.
• The owner decides on how to use the profits, e.g. business expansion,
salary increment for employees.
d. Easy to dissolve
• A sole proprietorship can be dissolved easily. There is no approval of
the co-owners or partners is necessary.
• The only legal condition is that all loans must be paid before
dissolving it.

Advantages cont…
e. Flexibility
• Since the owner has total control of the business, it enables
him/her to respond quickly to competitive business conditions or
to changes in the economy.
f. Personal Contact
• A sole trader is in close contact with his customers and can
therefore have knowledge of their wants and can offer good
personal services.
• Personal supervision by the owner should mean that good
customer relations can be established and that employees are well
motivated.

Advantages cont…
g. Secrecy
• Sole trade business makes possible the greatest degree of secrecy.
• The owner does not have to discuss publicly his/her operating
plans, minimizing the possibility that competitors can obtain trade
secrets.
h. Taxation
• Profits from the sole trade are considered personal income to the
owner, and therefore are taxed at individual tax rate.
i. Sole proprietors can take advantage of market niches where
larger scale corporations would be inappropriate.

Disadvantages of sole proprietorship
a. Unlimited liability
• The sole trader has unlimited liability in meeting the debts of
the business.
• In other ways, if the business can not meet or pay its
creditors, the owner may be forced to use personal non-
business property such as cars, land to pay off the debts.
b. Limited amount of capital
• The sole proprietor’s capital is usually limited and he/she has
difficulties in obtaining outside finance.

• Since it is owned and operated by one person, it is likely to
have a very limited resources in terms of financial capital.
• Often, the only financial resources are from the owner.
• Additional capital may be provided by borrowing from the
banks with security or collateral held by the banks, and with
high interest rates
• Limited capital hinders business expansion because it can
only be done by ploughing back profits of the business.

Disadvantages cont…
c. Limited management skills
• The sole proprietor is expected to perform many functions
and possess skills in diverse skills, so the sole trader may be
reliant on others for certain aspects of the business
• For example, a sole trader may be good at repairing the
bodywork of damaged cars, but completely lacking in
financial and marketing skills and need to contract with
others for these activities.

d. Lack of continuity
• The life expectancy of a sole trade is directly related to that
of the owner and his/her ability to work.
• For example, the serious illness of the owner could result in
failure if competent help can not be found.
• Usually the business does not continue after the death of the
proprietor.

e. Lack of qualified employees
• It is usually difficult for a small scale sole proprietorship to
match the wages and benefits offered by large corporations
because the proprietorship’s level of profits may not be as
high.
• As a result, they end up hiring unqualified employees.
f. Taxation
• Although we listed taxation as an advantage, it can also be a
disadvantage depending on the proprietor’s income.
• Thus, the higher the profits realized, the more the tax paid

2. Partnership
• A partnership refers to the relation which subsists between
persons carrying on a business in common, with a view to
make profits.
• Like the sole trader, this form of business organisation does
not have its own distinct legal personality and hence the
owners (partners) have unlimited personal liability both
jointly and severally.
• This means that in the case of debts or bankruptcy of the
partnership, each partner is liable in full for the whole debt
and each in turn may be sued or their assets seized until the
debt is satisfied.

Characteristics of partnerships
a. A partnership isn’t a separate legal entity from its owners.
• This means that:
A partnership cannot sue or be sued in its own name. Anyone
claiming against the firm must take action against any or all
the partners as individuals.
A contract cannot be entered into in the name of the firm.
Contracts must be in names of the partners
There is no continuity - If any partner dies, withdraws from
the firm or becomes bankrupt, the partnership dies.

b. Each partner (like a sole trader), except the limited partner,
has unlimited liability for the debts of the business.
c. Any partner can bind the partnership to a contract with third
parties
d. All partners share profits according to agreed
arrangements.
e. The name of each partner and the business address(es)
must be shown clearly on all business documents and full
names of partners must be displayed at the place of
business.

f. No account of the firm’s activities has to be published
g. All partners are jointly liable for meeting the obligations of
contracts on behalf of the partnership.
• The partners usually have joint and several liability, which
means someone could take legal action against the partners
jointly or against each partner individually –for example, in a
claim for damages due to negligent performance of the
partnership's obligations under a contract.

Partnership formation
• The maximum number of people to form a partnership is 20,
except in respect of certain professional firms such as
accountants, doctors etc.
• While it is not necessary for a partnership to have a formal
written agreement, most partnerships tend to be formally
enacted.
• A mere oral agreement is insufficient but it is better for the
partners to have a written agreement. Partners must draw an
agreement called the Partnership Agreement.

• A written partnership agreement is known as a Partnership
deed / Articles of partnership.
• A partnership deed makes it much easier to reduce
uncertainty and to ascertain intentions as it is a written
document which the partners consult.
• In other ways, a partnership deed is a constitution of the
partnership.
Contents of the Partnership Agreement
• In summary, a partnership agreement contains the following:
a. The name of the firm, purpose and location of the business
b. Names and addresses of the partners.

c. The nature of the business
d. Duration of the agreement
e. The capital of the partnership and how much each partner is
supposed to contribute.
f. Authority and responsibility of each partner
g. Character of partners (general or limited, active or silent)
h. The role to be played by each partner in the business.
i. The profit and loss sharing arrangements.
j. How much each partner is allowed to withdraw
k. Salaries of each partner

l. Death of partner
m. Sale of partnership interest
n. The duration of the partnership and the conditions under
which it may be brought to an end.
o. Arbitration of disputes
p. Required and prohibited actions
q. Absence and disability
r. Restrictive covenants
s. Buying and selling agreements

• It should be noted that in the absence of an agreement or where
there is ambiguity in the agreement, or where the agreement is
silent, the provisions of the law, principally embodied in the
Partnership Act will apply.
Types of partnerships
• There are two main basic partnerships namely: general and
limited partnership
i. General partnerships
• This involves a complete sharing in both the management and
the liability of the business. In this type of partnership, each
partner has unlimited liability for the debts of the business

ii. Limited partnerships
• It is a partnership that has at least one general partner who
assumes unlimited liability, and at least one limited partner,
whose liability is limited to his or her investment in the business
Types of Partners
i. Active Partners
• Partners who take a full part in the running of the business.
ii. Dormant/Silent Partners
• These partners agree to contribute to capital and to receive their
share of profits but to take no part in the running of the business.

iii. Limited Partners
• These are partners whose liabilities are limited to the amount of
capital contributed to the business.
• Normally, these do not take an active part in the activities of the
business
Note: In a partnership there must be at least one partner with an
unlimited liability)
Advantages of Partnership
a. Ease of formation
• As in the sole trade, starting a partnership is easy as it only
requires drawing of a partnership deed, and registering the
business name with the state

Advantages cont…
b. Combined knowledge and skill
• Since there are more people it is possible for them to divide
work among themselves according to the capabilities possessed
by each of them.
• As a result, there is division of labour among the partners as
each partner concentrates in his /her area of specialization such
as marketing, finance, production and finance.
c. Shared responsibility/strain
• The partners share the worries of the business apart from sharing
work.
• This means that problems or challenges which the business faces
are not shouldered by one person as in sole proprietorship.
Rather, they are shared among the partners.

Advantages cont…
d. Availability of capital and credit
• A number of people carrying on business together will
obviously provide or more capital than a single person, since
the capital is contributed by all partners.
• Furthermore, it is easy to get credit from different financial
institutions if you operate as a group unlike one person, as
you act as collateral for each other.
• As a result, the financial institutions become confident that
the partnership will pay back the loan.
• This permit the expansion of the business to take place
without the owners losing control of the enterprise.

Advantages cont…
Consultation
• The partners will from time to time consult each other to iron
out business problems while the sole trader does not have
anyone to share ideas with, which normally results in poor
decisions
f. Personal Contact
• Most partnerships still operate on a scale which is small
enough to permit personal contact with customers and
employees.

Advantages cont…
g. Decision making
• Small partnerships with fewer partners can react more
quickly to changes in the business environment than large
partnerships and corporations.
• Such fact reactions are possible because the partners are
involved in day to day operations of the business and can
make decisions quickly after consultations.
• However, if the partnership is comprised of many partners,
decision making is likely to be slow.

Advantages cont…
h. Regulatory controls
• Like a sole proprietorship, a partnership has fewer regulatory
controls affecting its activities than does a corporation.
• For example, a partnership does not have to submit its financial
statements with government agencies or to publicise them in the
newspapers for public consumption, as it is the case with companies
i. The legal and financial procedures of running a partnership
are relatively simple.
• For example, the accounts of the business need only be prepared for
the information of the partners and for the calculation of tax
liabilities.
• There is no obligation to publish accounts.

Advantages cont…
j. Partners may cultivate a degree of interchangeability so that
if one is ill or away from the business, other partners can
take
over the work.
k. While operating as individuals, the partners can share the
cost of common premises, staff and services, as in the cases
of doctors, dentists and solicitors.
l. Partnerships need not be too bureaucratic, and systems and
controls in the enterprise need not be too complex.

Disadvantages of partnership
a. Unlimited liability
• The liability of each of the partners (except limited partners) is
unlimited.
b. Lack of continuity
• The business is identified with its owners hence lack of
continuity because any changes in the composition of the
partnership will result in its dissolution.
• For example, a partnership is terminated when a partner dies or
withdraws.
• In a two-person partnership, if one partner withdraws, the firm’s
liabilities would be paid off and the assets divided between the
partners.

c. Distribution of profits
• Profits of the partnership are distributed to the partners in the
proportions stipulated in the partnership deed or articles of
partnership.
• This may be disadvantage if the division of the profits does not
reflect the work each partner puts into the business.
d. Business responsibility
• All partners are responsible for the business actions of all others.
• Partners may have the ability to commit the partnership to a
contract without approval of other partners.
• This is to say that a bad decision by one partner may put the other
partners’ personal resources at risk.

e. Slow decision making
• If the partnership is composed of many partners, decision
making is likely to be slow.
• Since each partner is entitled to a say in the management of
the firm, disputes can arise over decisions and it can take
time for decisions to be made if there are large numbers of
partners
f. Conflicts
• Disputes can arise over decisions and it can take time for
decisions to be made if there are large numbers of partners

Dissolution of a partnership
• The following are the factors that causes a partnership to
come to an end:
a. the death of a partner
b. withdrawal of one partner
c. when the goals of the partnership have been achieved
d. when the duration period of the partnership agreement has
elapsed

3. Limited companies
• A company is a corporate association having a legal identity
in its own right (i.e. it is distinct from the people who own it,
unlike in the case of a sole trader or partnership).
• This means that all property and other assets owned by the
company belong to the company and not to its members
(owners).
• Conversely, the personal assets of its members (the
shareholders) do not normally belong to the business.
• Furthermore, it has the right to borrow or lend money, to
enter into contracts, and to sue or be sued in its own name

• In these companies, the owners have limited liability status.
• This means that the liability of the members (owners) is
limited to the amount paid or agreed to be paid on the shares
in the company.
Methods of incorporation
• Companies are essentially business organisations consisting
of two or more individuals who have agreed to embark on a
business venture and who have decided to seek corporate
status rather than to form a partnership.
• Such status could derive from the following:

a. Statute
• This means, by Act of Parliament.
• These companies are known as Statutory Bodies or Statutory
Corporations.
• Examples include: Malawi College of Accountancy, Malawi
Housing Corporation (MHC), Electricity Supply Corporation of
Malawi (ESCOM), Agriculture Development, Marketing
Corporation (ADMARC), Malawi Broadcasting Corporation
(MBC), University of Malawi.
b. The granting of a Royal Charter
• These institutions are known as Chartered Companies.
• For example, Chartered Association of Certified Accountants
(ACCA), Chartered Institute of Bankers(CIB), Chartered Institute
of Management Accountants (CIMA).

c. Registration
• This is the commonest method of incorporation.
• A company is created or incorporated under the laws of the state
in which it incorporates.
• this is the type of company which we will put much emphasis on
Registration formalities
• A company is registered at the Registrar of companies.
Individuals seeking to form a company are required to file
numerous documents, including a Memorandum of Association
and Articles of Association, with the Registrar of Companies.

•When the registrar of companies is satisfied with the contents
of these documents and all relevant legal procedures of
incorporation, he/she issues a certificate known as Certificate
of incorporation to the new company.
•After that, the company comes into existence as a legal entity.
Memorandum of Association
•This governs the relationship of the company with the
“outside world.”
•Its main contents include:
i. The company’s name which must contain the word
‘LIMITED.’

• This is a warning to anyone dealing with the company that they
cannot look beyond the company and its resources for the redress
of any grievance (the concept of limited liability)
ii. The physical and postal addresses of the registered office of
the company
iii. The restrictions, if any, upon the business to be carried on
by the company
iv. A statement of the limited liability of members.
• This is for the benefit of potential creditors as well as
shareholders
v. The Authorized Share Capital of the company and its
division into shares of a fixed amount (also the classes of
shares of the company).

Articles of Association
• These control the internal running of the company. The
Articles cover such things as:
i. The procedure of calling for a General Meeting
ii. How directors are going to be appointed
iii. The rights and obligations of the directors
iv. The borrowing powers of the company
• As already explained, after these two documents have been
completed, they are sent to the Registrar of companies who,
after approving them, will issue a Certificate of
Incorporation.

Types of Limited Companies
• There are two types of limited companies namely:
i. Private limited company
ii. Public limited company
1. Private Limited Company
• This is a company owned by few people who are closely
involved in managing the business.
• These companies tend to be owned by families and often
smaller in size.

• Like the public limited company, the private limited company
must have a minimum of two shareholders, but its shares cannot
be offered to the public at large.
• This means that their shares can only be transferred privately and
can not be advertised for general sale.
• This restriction on the sale of shares, and hence on their ability to
raise considerable sums of money on the open market, normally
ensures that most private companies are either small or medium
sized, and are often family businesses operating in a relatively
restricted market.
• Their business names end with the word “Limited” or “Ltd”.
• A good example of a private limited company in Malawi is Mulli
Brothers Ltd.

2. Public Limited Company
• These are companies whose shares can be sold and bought by
the public on the stock exchange.
• The names of these companies end with the abbreviation
“Plc”.
• Although owned by the shareholders, day to day decision
making is taken by the company’s directors.
• A good example of a public limited company in Malawi is
FDH Bank.

• Both public and private companies act through their
directors.
• Directors are individuals chosen by a company’s shareholders
to manage its affairs and to make the important decisions
concerning the direction the company should take (e.g.
investment, market development, mergers and so on)
• The appointment and powers of directors are outlined in the
Articles of Association (the ‘internal rules’ of the
organisation), and so long as the directors do not exceed their
powers, the shareholders do not normally have the right to
intervene in the day-to-day management of the company

Differences between Private Limited Companies and
Public Limited Companies
a. Public Limited Companies can ask the public to buy shares
in the company while Private Limited Companies cannot.
b. At least two persons are required to form a company. A
Private Limited Company cannot have more than fifty (50)
members but there is no maximum number of members in
the case of a Public Limited Company.
c. The shares in a Public Limited Company can easily be
transferred while those of a Private Limited Company can
only be transferred upon the consent of the members.

The Capital of Limited Companies
• Ways of raising capital including:
issue of shares
long-term loans
short-term loans e.g. overdrafts
retained profits
In this context we will concentrate on issue of shares.

Share capital (Issue of shares)
• Promoters of a company limited by share attract contributions
from all kinds of people and institutions by offering them shares
in the business.
• Every person who buys a share in a company becomes a part-
owner of the company.
• Therefore, whoever owns a share in a limited company is called
a shareholder.
• At the end of the financial year, shareholders receive a
proportion of the profits according to their share contribution.
• The money shared to shareholders as their annual profit are
called dividends.

• The following terms relating to share capital should be
comprehended:
a. Nominal or Authorized Share Capital
• This is the maximum amount of money a company is allowed
to raise by issuing shares.
b. Issued Share Capital
• The company may not wish to issue the maximum number of
shares at the outset.
• Instead, it issues a certain number of shares which it is ready to
be bought by the public.
• The nominal value of the shares issued is referred to as the
Issued Capital

c. Called-up Capital
• When the shares have been issued, the company does not
always need the full amount to be paid immediately
• The proportion of issued share capital that the company asked
the shareholders to pay is known as the Called-up Share
Capital.
d. Paid-up Capital
• This is the proportion of issued share capital that has been paid
for.
• If the company fails, the holders of shares which are not paid
up are required to pay the difference between the nominal value
of issued share capital and the paid-up value of their shares.

Types of Shares
• The authorized shares of a company may be divided into many
different types of shares.
• The common types of shares are:
a. Preference shares
b. Ordinary shares
a. Preference Shares
• Preference Shares carry a prior right to a share in the profits of a
company.
• The holders of these shares must receive their dividends before
holders of other types of shares.
• They rank after lenders of the company.
• The rate of return (dividends) on preference shares is a fixed
percentage of their nominal value.

Types of Preference Shares
i. Basic Preference Shares
• Holders of which receive a fixed dividend out of profits before
anything is paid to ordinary shareholders.
ii. Cumulative Preference Shares
• If a dividend is missed in one year due to lack of distributable
profits, the right to the dividend is carried forward to the next
year
iii. Participating Preference Shares
• These do not only carry a fixed rate of dividend but also
entitle their holders to a further share of the profits once they
reach a certain level.

b. Ordinary Shares
• The dividend on ordinary shares is not fixed and entirely
depends on the profitability of the company and the policy of
directors with regard to the amount of profit to be retained in
the company.
• The dividend may be very high or zero.
• The ordinary share capital or a company is also known as the
“Equity”.

Advantages of a Limited company
a. Limited Liability
• The liability of the members is limited to the amount of
capital subscribed or payable on the shares.
• Because the company’s assets and liabilities are separate
from its owners, in most cases the shareholder/stockholders
are not personally held responsible for the company’s debts if
it fails to pay
b. Transferability of Membership
• Shareholders can sell or trade shares of stock to other people
without causing the termination of the company, and can do
this without the approval of other shareholders

Advantages cont…
c. Ability to Raise Capital
• Of all the forms of business organisations, the public limited
company finds it difficult easiest to raise money by selling
shares to the public at the stock exchange.
• These companies can raise a large amount of capital because it
is subscribed by many members.
d. Perpetual life
• A limited company is chartered to last forever unless its articles
of incorporation stipulates otherwise.
• The existence of the company is unaffected by the death or
withdrawal of any of its shareholders.

Advantages cont…
e. Expansion potential
• Because large public limited companies can find long-term
financing readily, they can easily expand into national and
international markets.
• Furthermore, as a company with legal entity, it can enter into
contracts without as much difficulty as a partnership would.
f. Economies of Scale
• Since they have a large amount of capital and they operate on
a large scale they can exploit the economies of scale.

Disadvantages of Limited a company
a. Company formation
• The formation of a company can be costly because it
involves too many documentation and legal requirements.
• Formal Procedures are required to set up a business as a
company, hence it takes longer to start business as a
company.
b. Disclosure of information
• The books of the company are open to the general public for
inspection.
• Limited companies must make information available to their
owners usually through an annual report to shareholders.

• The annual report contains financial information about the
company’s profits, sales, assets, liabilities, etc.
• Public limited companies are also required to publish their annual
financial report in the newspaper.
c. Employee-Ownership separation
• Many employees are not shareholders of the company for which
they work.
• This separation of owners and employees may cause employees to
feel that their work benefits only the owners.
• Employees without an ownership stake do not always see how
they fit into the company and may not understand the importance
of profits to the health of the organization.

d. Slow Decision Making
• All members have to take part in the decision-making process
of the company.
• This may result into unnecessary delays to reach a decision.
e. Double taxation
• As a legal entity, the company must pay taxes on its income
known as a corporate tax.
• When after tax corporate profits are paid out as dividends to
shareholders, the dividends are taxed a second time as part of
the individual owner’s known as Pay As You Earn (PAYE)

Dissolution of a company
• A company can stop existing in two main ways.
1. Striking Off
• This is an informal way of ending a company due to non-
compliance with regulatory framework.
• The company stops trading and pays off its creditors.
• Its directors resign.
• This may occur when the Registrar of Companies wants an
annual return and reports from the company, and gets no
response.
• As a result he/she will just strike off its name from his/her
register hence the name Striking Off.

2. Winding Up
• A company may wind up in two ways, voluntarily or
involuntarily.
a. Voluntary Winding Up
• A company may be wound up voluntarily in the following
circumstances:
i. When the period fixed for its duration expires
ii. If an event occurs, on the occurrence of which the
Memorandum or Articles provide that the company is to be
dissolved.
iii. If the shareholders believe that the company is not going to
continue a special resolution is passed to dissolve the company

• The shareholders will appoint a Liquidator who will have the
following functions:

to sell all company property or assets

to pay off all the creditors

to distribute the balance among the shareholder, etc.
• A liquidator is an officer or entity appointed to carry out all necessary
legal procedures when winding up a company.
b. Involuntary Winding Up
• A company winds up involuntarily if it is forced to do so by a court
order.
• This means that the company has no choice but to follow the rule of
law.

CLASSIFICATION OF BUSINESS ENVIRONMENT
• In general sense, an environment can be defined as
everything that surrounds a system.
• A business can be seen as a system, whose performance is
influenced by a whole range of phenomena in its
environment.
• Each and every business organisation does not operate in
isolation.
• It operates in an environment which has different aspects
which interact with it.

• Business organisations exist to turn inputs from their
environment (e.g. materials, labour and capital) into goods
and services that customers in the environment want to
purchase and consume- i.e. Transformation Process (TP)

• The Transformation Process within the organisation can not be seen
as a steady state because external influences have a tendency to be
continually shifting, having the effect of undermining the current
balance within the system.

CLASSIFICATION OF THE BUSINESS ENVIRONMENT
• Business environment is classified into internal, external, micro
and macro environments.
INTERNAL ENVIRONMENT
• The internal environment of the business consists of all the
factors that are directly involved with the organisation and
which have a direct impact on its business and routine
activities.
• These are factors that managers must take into account from
within other functions of their own firm/business.

EXTERNAL ENVIRONMENT
• An external environment refers to all outside factors or influences
that impact or impinge the operation of the business.
• You should remember that an organization does not operate in
isolation.
• Therefore, there are other factors which are outside it but can
have a great impact if not managed properly.
Types of external environment
• There are two types of external environment namely:
i. Micro external environment
ii. Macro external environment

Micro environment
• Also known as operational, or immediate environment, micro
environment consists of the factors that directly affect or
impact the operation of the organization.
• The following are the factors that falls under the micro
environment.
a. Customers
• These are individuals or organisations that buy the company’s
products or services.
• Customers are crucial in an organization`s
microenvironment, as no customers means no business.

• An organization should note the changing requirements and
keep in touch with the changing needs of its customers.
• This should be done using appropriate information-gathering
system. Customer buying behavior may be affected
influencers, users, deciders and gatekeepers.
• These have a bearing on whether the company`s product is
bought.
• Customers need to be satisfied always, because their
dissatisfaction can have a direct negative impact on the
company.

b. Suppliers
• These are individuals or organisations which provide the
organization with necessary supplies, for example raw materials,
components, services.
• They provide a business with goods and services that are
transformed by the organization into value-added products for
customers.
• Suppliers are also very important because the company relies on
these suppliers in order to produce and deliver products or services
to its customers.
• Suppliers are crucial to an organization’s success, for example-
shortage in supply of factors of production being constraint on an
organization selling more of its product.

c. Competitors
• These are organisations who are in the same business and
they target the same customers.
• If not managed properly, competitors can get large market
share which can have a direct negative impact, as it can lose
more customers to those competitors.
• It is crucial to keep an eye on competitors and try to
understand their likely next moves.

Types of Competitors
• Direct Competitors- Are generally similar in form and
satisfy customer’s needs in a similar way - e.g, Zodiak
radio and Times radio.
• Indirect Competitors- May appear different in form, but
satisfy a fundamentally similar need. Can be the most
difficult to identify and understand – e.g. Zodiak radio and
Nation Publications Limited

d. Financial Community
• These are individuals or organisations which provide
financial assistance to the organization.
• The financial community includes the following:
i. Financial institutions that have supported, are currently
supporting or may support the organization in the future.
ii. Shareholders- both private and institutional form part of
this community , looking for reassurance that the
organization is going to achieve its stated objectives.

e. Intermediaries
• These are organisations who act as middlemen between the
company and customers.
• Depending on the nature of the business, there are other
businesses who do not sell directly to end consumers.
• Instead, they use intermediaries who are in the channels of
distribution.
• Channels of distribution comprise all those people and
organisations involved in the process of transferring title to a
product from the producer to a consumer.e.g. wholesalers and
retailers who resell the product to the customers.
• Therefore, intermediaries provide a valuable link between an
organisation and its customers.

• Intermediaries need reassurance about the company’s
capabilities as a supplier that is capable of working with
intermediaries to supply goods and services in a reliable and
ethical manner.

f. Pressure groups
• Many members of pressure groups may never have been
customers of a company and are probably never likely to be.
• However, a pressure group can distract seriously on the
image that the company has worked hard to develop.
• Ignoring pressure groups may be costly to the business.
• Companies enhance their image with the community through
the use of the following:
Charitable contributions
Sponsorship of local events
Supporting the local environment

Macro environment
• Macro environment comprises general trends and forces that
may not immediately affect the relationships that a company
has with its customers, suppliers and intermediaries, but
sooner or later macro environmental change will alter the
nature of the relationships.
• Macro environment are general and external factors that
impact the working style, decision making process, strategy
and the performance of the business.
• They are also known as general or contextual environment.
• Macro environment factors affect a wide variety of
businesses and emanate not only from local and national
sources but also from international developments.

• Due to their nature of impact, it is very difficult for an organization
to control them.
• The macro environment factors are collectively known as PESTLE
and are as follows:
a. Political environment
• Political changes on the global, regional, national and local level
may have an impact on organisational activity.
• For example, war within the Middle East may affect global oil prices
and therefore would affect cost of goods and services.
• Local political factors such as planning regulations may affect a
local organisation’s ability to extend its factory.
• Politicians are instrumental in shaping the general nature of the
external environment as well as being responsible for passing
legislation that affects specific types of organization.

Political environment cont…
• Political environmentalso includes pressure groups and trade unions
that can be influential in changing government policy.
• The government has a great influence on business activity.
• In the first place it dictates the legal framework within which the
business must operate and imposes regulations that must be adhered
to
• These can cover:
health and safety issues
consumer protection
advertising standards
employment conditions
environmental factors

• This can have an impact on the business, for example new laws
regarding the labelling and packaging of goods for the added
protection of the consumer will usually result in increased costs.
• Governments also influence business through the tax system.
• Indirect taxes make goods more expensive for the consumer
while subsidies reduce the market price and increase demand.
• Other influences include items such as planning permission,
financial incentives regarding location or the promotion of
exports.
• This may influence where a firm locates or who it targets its
products at.

• The Government is the largest spender in the economy. In
some countries, government accounts for over 40% of all
spending.
• Obviously the government can influence business by its
decisions on what to spend, where to spend and with which
firms.

b. Economic environment
• The particular conditions existing in an economy will have
very significant effects on business organisations.
• They will affect both the cost of the factors of production
(land, labour and capital) and the future plans of the business.
• The state of the economy in general is one of the most
important influences.
• Most economies exhibit a trade cycle of growth and perhaps
boom followed by a slow-down and possibly recession.
• This will affect the level of demand for a firm's products.
• In a recession the general level of demand falls which will
limit the ability of the firm to sell its goods at their full
price.

Economic environment cont…
• In a period of recovery or boom the general level of demand rises,
which will increase the ability of the firm to sell its goods at
profitable prices.
• It will also provide the opportunity for new firms to emerge.
• Firms will also be affected by changes in unemployment levels or
interest rates.
• Growing unemployment will reduce demand while rising interest
rates will increase business costs.
• The reverse is true for falling unemployment and cuts in interest
rates.
• In a similar way, changes in the exchange rate will affect the ability
of firms to compete against foreign companies in their own markets
and to be competitive abroad.

• Other economic factors are:
Inflation
• Inflation can be defined as a rise in the general price level of an
economy over a period of time.
• It represents a loss in the purchasing power of money
• Inflation can be caused by:
Cost push Inflation - caused by businesses needing to pay higher
prices for factors of production which are increasingly scarce.
Demand Pull Inflation-caused where there is excess demand for
the available goods and services in the economy and firms are
unable to satisfy the current level of demand. As a result, they
increase prices to ration off this excess.

Exchange rates - The exchange rate is the price of one country’s
currency expressed in terms of another.
• Exchange rate changes are crucial to any business that trades
internationally as the smallest change can lead to significant
changes to its finances, and it has no control over the processes
which may lead to such fluctuations.
• If it (the exchange rate) falls, then it can aid exporters as they will
enjoy increased international competitiveness.
• However, if the exchange rate rises, then this competitiveness
falls and profit margins are reduced.

• In this scenario a business faces both reduced export sales
and the possibility of reduced domestic sales in its home
markets, as consumers might seek cheaper priced imports.

c. Social environment
• Both demand and supply are influenced by social, cultural
and demographic factors.
• Cultural factors, for example, 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 organisational resource and a fundamental
part of the market for goods and services.
• Accordingly, socio-cultural influences and developments
have an important effect on business operations, as do
demographic changes.

Social environment cont…
• Demography is the study of populations and population change.
• Demographics refers to a range of characteristics about a
population, and demographic change is a particularly strong
factor in the business environment.
• Changes in:
Population
social structures
social attitudes
can have profound effects on the market and the firm.

• Perhaps the biggest effect of social change is its effect on
demand.
• As the population changes –both in size and composition –demand
for different types of goods and services changes.
• For example:
othe ageing population can lead to greater demands for health care
and nursing homes
oAn expanding, younger population will experience rising demand
for children's clothes, childcare facilities and schools
oAs societies grow wealthier, the population spends a greater
proportion of its money on leisure pursuits such as foreign
holidays, sports and pastimes.

• Immigration into other economies can increase competition
for jobs.
• This has a number of effects –for example, in driving down
wages in certain unskilled sectors such as agriculture and
hotel and catering, and in filling skills gaps in other sectors
such as computer industries.

d. Technological environment
• Technology is both an input and an output of business
organisations 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. Changes in technology are likely to occur
that might affect the organisation.
• Changed methods of recording, storing and retrieving
information, on a scale never previously imagined, have
transformed all aspects of business.

Technological environment cont…
• For Computers now play a major role in the design and
manufacture of products, particularly through the
development of high-speed, fully automated flow production
systems–think of the way in which cars are made today as
compared with the large numbers of workers employed on
assembly lines just forty years ago.
• The routines of accounting, administration and much of
communication are now entirely or partly automated, with
consequent savings in cost, largely achieved through
shedding staff.

Technological environment cont…
• In many companies, the emphasis now is on the
interpretation and application of this information to gain
competitive advantage –for example, through a better
understanding of customer needs and wants, developing
understanding about their products and increasing their
availability through the Internet, and enhancing their brands
by creating communities and developing customer
involvement through their websites and social media.

Ecological environment
• Ecological environment relates to the environmental factors
that will impact an organisation.
• Concerns about global warming, the potential exhaustion of
natural resources and threats to the diversity of life –plants and
animals –are all real and business has a key role in assuring the
future of the planet.
• Concerns are also felt at more local levels, for example:
Environmental regulations - in respect of dealing with waste
and used products.
oThere are now a whole range of measures in place to require
businesses to play their part in addressing these concerns, and
they represent threats as well as opportunities.

Ecological environment cont…
The reduction of an organisation’s carbon footprint
oRising levels of taxation on fuel forms part of countries’ international
obligation to reduce carbon emissions.
oHowever, one effect of this is to increase the costs to business of the
transportation of goods.
oFirms are faced with the decision as to whether to pass this cost on the
consumer in the form of higher prices, to absorb the costs themselves or
to seek more efficient methods of transportation and supply.
oIn practice, they adopt a mixture of these strategies, but the search for
competitive advantage means that it is likely they will prioritise the latter
two.

Ecological environment cont…
Recycling is now a major business in itself and most organisations are
acutely aware of their obligations
oLocal authorities provide facilities for the collection of a wide range of
items –principally paper, glass and plastics – and most large
supermarkets also provide collection points.
oMany firms now collect and recycle large amounts of materials which
were simply scrapped at one time.
oEuropean car manufacturers have agreed standards for car construction
which make them virtually 100% recyclable, including difficult
materials like plastics.
• Increasingly, firms are recognising that failure to consider the
ecological effects of their activities can lead to consumer boycotts, and
that an ethical approach to the environment can be good for business.

Legal environment
• Current and impending legislation might affect the industry
and how an organisation might be able to operate.
• Businesses operate within a framework of law which has a
significant impact on various aspects of their existence.
• Laws usually govern, among other things, the status of the
organisation, its relationship with its customers and suppliers
and certain internal procedures and activities.
Government Legislation
• Businesses operate within the confines of the rules set out by
the governments of the countries within which they operate.

Legal environment cont…
• This legislation can, on occasions, have a profound effect on
how the business functions. Indeed, failure to work within
the law can affect a firm’s reputation and incur financial
penalties.
• By and large, the legislation affecting business has been
passed to regulate the way in which organisations carry out
their operations with the aim of protecting consumers,
employees and other stakeholders from exploitation and
harm.

Employment legislation
• Businesses must also ensure that they work within rules
concerning the employment of labour
• Legislation first began to be passed in the 19th century to limit
the exploitation of the workforce –for example, in respect of the
employment of children.
• There is now a mass of such legislation covering virtually all
aspects of the employment relationship, including the following
areas:
Contract of employment –all employees must have a written
contract which specifies the conditions under which they are
employed, including such issues as hours worked and pay

Minimum wage – a feature in many countries and introduced
in the UK in 1998
Anti-discrimination or equality – to ensure the fair and
equal treatment of all employees and prevent discrimination
against workers on the basis of, among other things, their sex,
ethnic origin or any disability
Unfair dismissal –to protect workers against losing their job
without good reason
• Trade unions –giving workers the right to join (and not to join) a
trade union and the right of unions to be recognised as representatives
of a workforce (although not necessarily for employers to negotiate
with them) and to take industrial action, including strikes, in certain
circumstances and after certain steps have been complied with

STAKEHOLDERS AND THE BUSINESS
• A stakeholder is an individual or group of people that have a
legitimate interest in the organization and can either affect or
be affected by the organization. As already stated, an
organization doesn’t operate in isolation. It is always linked
to other interested parties called stakeholders.
• Stakeholders are classified into two, thus internal and
external stakeholders
a. Internal stakeholders
• These are stakeholders who are directly involved in the
operations and strategy of the organization.
• There are three internal stakeholders of the organization.

• These are:
i. Employees
• They are mainly concerned with implementation of the
strategy and objective of the organization.
• Their main interest is employment income and safety
ii. Managers
• These have a substantial role in determining the strategy of the
organization, and a significant voice in operational decisions.
• Furthermore, managers are also accountable for decisions
made, and act as contact point between owners, the board of
directors and the organization itself.
• Again, they are interested in employment income and safety

iii. Owners (shareholder – in a public limited company)
• These are individuals who hold significant shares in the
organization. They are mainly interested in return on their
investment (profit)
b. External stakeholders
Examples of external stakeholders are:
i. Customers
• These are individuals or organisations that buy the company’s
products or services.
• Their interest on the company is product/service quality and value.

ii. Suppliers
• These sell goods or services to the organization.
• They rely on the organization for revenue generation and ongoing
income.
• This means that they are more interested in revenues and safety
iii. Government
• Companies pay tax to the government.
• Government also provide regulatory oversight, ensuring that
accounting procedures, ethical practices and legal concerns are
being handled responsibly.

iv. Creditors
• They provide financial capital, raw materials and services on
credit to the organization
v. Local community
• They provide jobs which generate economic activity within the
community
vi. Broader society
• A business can have a significant impact on the society, due to the
digital and global economy

REFERENCES
• Worthington, I and Britton, C (2014), The Business
Environment, 7th
Edition, Pearson Education
• Ferrell, O.C, Geoffrey, H and Ferrell, L (2008), Business, a
changing world, 6th
Edition, McGraw-Hill

Business Environment introduction lecture 1 PP.pptx

More Related Content

Similar to Business Environment introduction lecture 1 PP.pptx

Recently uploaded

Business Environment introduction lecture 1 PP.pptx