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Assignment title: Organization and Business Environment
Business environment is a collection of all internal and external factors that influence a business. The external factors include political, microeconomics, macroeconomic, social and technological factors. Businesses do not operate in a vacuum but are constantly affected and shaped by the external opportunities and constraints.
Task 1 – Scenario 1
- Explain why some companies are set up in public sector? Also discuss the impacts of these in an economy.
The part of theeconomy which is concerned withproviding the basicbasicgovernmentservices is known as the public sector. It is usually composed of organizations that are owned and operated by the government. This includes federal, provincial, state, or municipal governments, which varies according to countries. Examples of public sector companies in Pakistan include Pakistan Mineral Development Corporation (Pvt) Ltd, Pakistan Petroleum Ltd, Pakistan Post Office Department, Pakistan Railways, Pakistan State Oil Company Ltd (PSO) and many others.
Public sector organizations and government departments are created to fulfill responsibilities of government and are expected to cooperate in the policy development and the delivery of services. Companies in the public sector are owned and controlled by the government. Thus, planning can be coordinated through central control. The capital is raised from the state treasury or the local rates. The profits earned are handed back to the government or the local authority. In this way, everyone shares in the profit from public ownership and wasteful duplication of services is eliminated.
Some services are essential and must be provided, but their cost is so high that a private ownership would not be interested in setting it up as they would not make profit. So such services are set up in the public sector. Also, in many cases, it would be unsafe for private people to run dangerous industries such as the provision of atomic energy. The public sector ownerships prevent large, powerful, privately owned firms from existing and being able to set high prices for their services, therefore, helping to abolish private monopoly.
The economy of a country is influenced by the public sector ownerships. In some instances, where a business is failing, the government takes over in order to save jobs.
- Essential services are provided.
- Everyone shares in the profit from public ownership.
- Wasteful duplication of services is eliminated.
- Planning can be co-ordinated through central control.
- Inefficiency results due to the size of the organisation.
- There is a lack of incentive for employees to perform if there is no share in the profit or there is an absence of other motivators such as productivity bonuses - accelerated promotion; (this factor can also apply in the private sector if the employee is not given any incentive to perform).
- Losses must be met by the taxpayer.
- Political interference can occur.
- They interfere with the free market forces.
- There may be difficulties in finding someone to deal with complaints, though this factor is applicable to any large organisation.
Public-sector involvement in economic development, while not always successful, often stems from legitimate concerns about the following:
Information market failures – The regional economy will benefit to the extent that the public sector can improve the flow of information in a regional economy in a cost-effective manner.
Spillovers – Self-interested buyers and sellers fail to take into account the spillover effects that result in larger costs or benefits for a community or region.
Sunk investment – If public infrastructure or private resources are left idle, an area misses out on the economic potential of its sunken investment.
Social impacts – Improvements in the well-being of specific people and places may be particularly important for low-income, low-skilled residents who are less likely to move from declining areas to growing ones.
Political pressure – Serious concerns about the state of a region’s economy will lead to public-sector economic development efforts, good or bad.
- Identify the different stakeholders in this motorway project. Explain the disadvantages to any two stakeholders of this project.
Stakeholders refer to a party that has an interest in an enterprise or project. The primary stakeholders in a typical corporation are its investors, employees, customers and suppliers. However, modern theory goes beyond this conventional notion to embrace additional stakeholders such as the community, government and trade associations. (http://www.investopedia.com/terms/s/stakeholder.asp)
Stakeholders can be internal or external to the business. A stake is a vital interest in the business or its activities. It can include ownership and property interests, legal interests and obligations, and moral rights. A legal obligation may be the duty to pay wages or to honor contacts. A moral right may include the right of a consumer not to be intentionally harmed by business activities. Stakeholders can:
- Affect a business
- Be affected by a business
- Be both affected by a business and affect a business
- A stakeholder is often contrasted against a shareholder, which has an ownership interest in the business.
Internal stakeholders include the employees, managers and the owners, while external stakeholders include the suppliers, government, creditors, shareholders, customers and the society.
Murree is a popular hill station, summer resort, famous tourist attraction and the administrative centre of Murree Tehsil Pakistan. It is located in the Pir Panjal Range, nearly 60 kilometres away towards the North of Islamabad and Rawalpindi.The Murree Expressway (N-75), also known as the Islamabad-Murree Expressway was completed in 2011.
The external stakeholders in this project included the residents of the area, i.e. the villagers, the government, the travelers to Murree Hills, the respective department of the government for forestry, the construction engineers and highway authorities. It also consisted of pressure groups, suppliers and investors.
Some of these can be categorized as negative stakeholders, as they are those who have had a detrimental impact on the project. An example would be the local residents with concerns about loss of public areas to a new project. The residents who had homes on the mountainous areas had been forced to find other places to live in order to construct this road. Other than this, a river had to be diverted which caused issues in the water supply to the area’s residents.
Another concern was deforestation. A lush green forest had to be cut down and destroyed for this project, giving way to a loss of not only a natural habitat, but also a source of food. Removing trees deprives the forest of portions of its canopy, which blocks the sun’s rays during the day and holds in heat at night. This disruption leads to more extreme temperatures swings that can be harmful to plants and animals. Therefore, at a hill station like Murree, where the temperatures are usually low, turn out to be gradually increasing due to the loss of trees. (http://environment.nationalgeographic.com/environment/global-warming/deforestation-overview/)
Trees absorb water in large quantities during heavy rains. But due to large scale deforestation there are very less tress to retain water. This again led to heavy floods causing heavy loss of life and property. There has been land sliding in the area and soil erosion, altogether deforestation damaged not only the natural environment, but also the physical structures including roads and houses.
- In your opinion does this project contribute positively to economy and how can it ensure desirable allocation of resources.
Mobility is one of the key factors that determine economic development and growth in most countries all over the world. Moreover, economic development is directly associated with quality of life, as people tend to satisfy their advancing need for mobility with the aid of transport infrastructures.
This project is beneficial for the economy in several ways. Studies suggest that new infrastructures reduce transport costs by 15-20% on average, with as much as 40-50% of this being attributed to time saving. Also the construction itself led to tourist frequentation which generates income for all kinds of industries present in this area and thus adds up to the country’s GDP. Several new hotels were constructed along the motorway to serve tourists. Other than this, employment opportunities are also increased. Jobs are created by concessionary companies like toll collectors, road maintenance personnel, local police, and fuel sales. On average, motorway operations are estimated to generate between three to four jobs per kilometer. (OECD 2002)
A resource is an economic or productive factor required to accomplish an activity to achieve a desired outcome. The three basic resources are land, labor and capital. The land includes all the natural resources used in the project, for example, the arable land, forests, water resources.
Labor consists of the physical and mental talents of individuals that are part of the project. And capital refers to the money, and also the machinery and equipment used.
According to economists, efficient allocation happens when consumers are able to choose the goods and services that they want. Companies that do not offer desirable services decline and fail and resources move away from them. In these ways, resources move to those firms that make the things that people want. This is efficient allocation of resources.
Resources are being allocated efficiently when they are being used to produce the proper quantities of the goods and services that consumers desire the most. This project seeks to ensure that road safety funding mechanisms are established, sufficient and sustainable. At the same time, a rational framework for resource allocation allows the making of a strong business case for road safety investments based on cost-effectiveness and cost benefit analyses. To achieve more ambitious performance targets, new funding sources and mechanisms may need to be established. (OECD)
Most countries need to improve their knowledge of expenditure on the consequences of road crashes, both by government and injury insurance companies, and investment in road safety improvement and trauma prevention. Road safety authorities need this information to prepare financial and economic evidence on the costs and effectiveness of proposed interventions in order to win whole-of-government support for funding innovative programmes and for transparency in resource allocation for crash prevention and treatment. There are opportunities for targeted road safety investments that provide competitive returns. Road safety practitioners and authorities should develop business cases for this investment. A step change in resources invested in road safety management and in safer transport systems is required to realize the achievement of ambitious road safety targets in most of the world. Revenue sources for road funds typically come from fuel taxes, vehicle registration and licensing fees, and road user charges for heavy vehicles. There are few examples of road funds being used to finance road safety investments.
- Analyze whether resources are allocated more efficiently in private sector or public sector.
Efficient allocation of resources is a characteristic of an efficient market in which capital is allocated in a way that benefits all participants. It occurs when organizations in the public and private sectors can obtain funding for the projects that will be the most profitable, thereby promoting economic growth. http://www.investopedia.com/terms/a/allocationalefficiency.asp
In a perfect market, an efficient allocation of resources will be achieved by the forces of supply and demand, through the price mechanism, without the need for public intervention. However, public intervention may be justified in cases of market failure, where the price mechanism results in an allocation of resources that diverges from the social optimum. This may occur for a number of reasons: in the case of public goods, externalities, natural monopolies or asymmetrical information. The appropriate public sector response – distinguishing public provision, financing or regulation – and level of public spending will depend on the type and degree of market failure that the public sector seeks to correct.
Analysis of the conditions of supply and demand for public and private goods: Public money is spent where the state has a comparative advantage. This approach does not provide the basis for determining allocation of resources across the public sector nor their appropriate level.
Marginal utility and assessment of cost effectiveness: Problems are encountered when transforming the principles into an operational environment.
Allocative efficiency and cost benefit analysis: Whilst useful for appraising large-scale investment projects, this technique cannot be used to assist inter-sectoral and inter-programme allocation decisions.
Resources allocated according to citizens’ preferences and through collective decision-making: Representative democracy does not necessarily produce efficient outcomes, some political and bureaucratic intervention is generally considered necessary.
Equity and targeting of the poor: Determining the extent and means of redistribution is a political issue and cannot be determined by economic modelling.
These principles and techniques remain imperfect because they do not account for institutional politics. http://www.eldis.org/go/home&id=29494&type=Document#.VHz1lGeSyOg
When targets are set individually for each organization, the resulting incentives normally induce inefficient resource allocations. If the principal impose shared targets, this may improve the incentives to coordinate but the success of this instrument depends in general on the imprecision and distortion of performance measures, as well as agent motivation. Besides decreasing available resources, imprecise performance measures also affect agents' possibility to learn the function that determines value. Simulations with a least squares learning rule show that the one-shot model is a good approximation when the imprecision of performance measures is low to moderate and one parameter is initially unknown. However, substantial and lengthy deviations from equilibrium values are frequent when three parameters have to be learned.
- Differentiate between fiscal and monetary policy, also assess if it is feasible to implement fiscal policy to stimulate economic growth.
Economic policy-makers are said to have two kinds of tools to influence a country's economy: fiscal and monetary.
Fiscal policy is when the government uses its spending and taxing powers to have an impact on the economy. The direct and indirect effects of fiscal policy can influence personal spending, capital expenditure, exchange rates, deficit levels and even interest rates, which are usually associated with monetary policy.
Monetary policy can also be used to ignite or control the pace of the economy but is controlled by the central bank, the Federal Reserve with the ultimate goal of creating an easy money environment.
The main difference is that monetary policy uses interest rates set by the Central Bank. Fiscal policy involves changing government spending and taxes to influence the level of aggregate demand. http://www.economicshelp.org/blog/534/economics/define-fiscal-and-monetary-policy/
Economic performance can be illustrated through the concepts of aggregate supply and aggregate demand. Aggregate supply is the total supply of goods and services produced in the nation’s economy. It is upward-sloping because at higher prices firms have an incentive to produce more, and at lower prices they are likely to produce less. Aggregate demand is the total demand for goods and services in the nation’s economy. It is downward-sloping because at higher prices, consumers, firms, government, and foreign customers are less willing to buy, while they will likely buy more at lower prices. Aggregate supply and demand are shown in the graph. Shifts in the aggregate supply and aggregate demand curves can illustrate changes in the performance of our economy. If consumer confidence in the economy falls and people reduce their spending, aggregate demand can fall, reducing real output and prices and possibly dropping the country into a recession. However, if the money supply is too large, excessive consumer demand can push up the aggregate demand, raising real output and prices and possibly pushing the country into serious inflation.
Monetary policy is set by the Central Bank, and therefore reduces political influence (e.g. politicians may cut interest rates in desire to have a booming economy before a general election)
Fiscal Policy can have more supply side effects on the wider economy. E.g. to reduce inflation – higher tax and lower spending would not be popular and the government may be reluctant to purse this. Also lower spending could lead to reduced public services and the higher income tax could create disincentives to work.
Monetarists argue expansionary fiscal policy (larger budget deficit) is likely to cause crowding out – higher government spending reduces private sector spending, and higher government borrowing pushes up interest rates. (However, this analysis is disputed)
Expansionary fiscal policy (e.g. more government spending) may lead to special interest groups pushing for spending which isn’t really helpful and then proves difficult to reduce when recession is over.
Monetary policy is quicker to implement. Interest rates can be set every month. A decision to increase government spending may take time to decide where to spend the money.
However, the recent recession shows that Monetary Policy too can have many limitations. Targeting inflation is too narrow. This meant Central banks ignored an unsustainable boom in housing market and bank lending.
Liquidity Trap; in a recession, cutting interest rates may prove insufficient to boost demand because banks don’t want to lend and consumers are too nervous to spend. Interest rates were cut from 5% to 0.5% in March 2009, but this didn’t solve recession in UK.
Even quantitative easing – creating money may be ineffective if banks just want to keep the extra money in their balance sheets.
Government spending directly creates demand in the economy and can provide a kick-start to get the economy out of recession. Thus in a deep recession, relying on monetary policy alone, may be insufficient to restore equilibrium in the economy.
In a liquidity trap, expansionary fiscal policy will not cause crowding out because the government is making use of surplus saving to inject demand into the economy.
In a deep recession, expansionary fiscal policy may be important for confidence – if monetary policy has proved to be a failure.
- Write a brief note on the impact of competition policy and regulatory mechanisms on companies like TESCO.
Learner: Osama Javaid Unit 1: Business and Environment Assessor: Abroo Asad