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Business environment

1.1 Identify the vision, mission objectives and values of

the selected organization

Mission can be defined as a statement which demonstrates the purpose of the
organization; this will indicate the nature of the business “What business are you in”.
That simply means, mission is the reason which organization exist for.

This is an important concept for any organization since this demonstrates the direction of
decision making.

Characteristics of mission:

 Demonstrate a purpose.
 Indicate a specific value system.
 Explains a specific target market (customers)
 Indicates stakeholders
 Demonstrate a specific business process.

Examples of mission statement:

BMW :- “The ultimate driving machine”

Samsung :- “A better world is our business”
HSBC :- “Worlds local bank”
NOKIA :- “Connecting people”
Coca-Cola :- “We refresh the world”
Mercedes :- “Future of auto mobile”

However, mission cannot be used directly for decision making since this cannot be
proven (mission is qualitative).

This means futures state vision to be in.

 It is talk about future states.

 It is a philosophical in nature.
 It cannot be quantified.

Bill Gates vision statement is:-

“A computer in every desk and in every home”

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This simply means the perception of what is good or bad, right or wrong.
Example of Dialog Corporate Values:

 Total commitment to our customers

 Dynamic & human centered leadership
 Commitment to task & team work
 Uncompromising integrity
 Professionalism and accountability
 Foremost concern for respect & care

I have selected HNB PLC to explain the my assignment tasks

Private Origination

Our Vision:
To be the acknowledged leader and chosen partner in providing financial solutions
through inspired people.

Our Mission:
Combining entrepreneurial spirit with empowered people and leading edge technology to
constantly exceed stakeholder expectations

Our Values:
  Treasure professional & personal integrity at all times
 Demonstrate mutual respect in all our interactions
 Passionate in everything we do
 Committed to being customer centric
 Courage to change, challenge and be different
 Demonstrate unity in diversity

Banking History

The Formation & History of HNB

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The roots of Hatton National Bank can be traced back to 1888. A Bank called Hatton
Bank commenced business in 1888 to cater to the investors in large scale plantations, as
well as to the small savers amongst the plantation workers. Whilst the big banks operated
from the City, this little bank became popular in the hills far away from Colombo, working
through mobile banks and undertaking special fee levying services such as delivery of
labour pay. It maintained a close rapport with the architects of the economic activity in
that era.

The interests of the original investors, Mr R D Banks and Mr A T Atkin were acquired by
Brown & Company Ltd. in 1948. This was the year that Sri Lanka negotiated its freedom
from Britain. With the acquisition, the Bank saw a change in its structure with a higher Sri
Lankan participation.

The small Hatton Bank however continued in an unique way upto 1970 assisting in the
growth of the Plantation Economy, which was the main stay of the post-independent Sri
Lanka (Ceylon).

The Birth of HNB

The year 1970 was a major landmark for the Hatton Bank. That year, we witnessed the
birth of a well structured, commercially viable national bank to harness the potential
emerging from a new economic order which emphasized on self sustainability.

On 5th March 1970, HNB was born by the amalgamation of Hatton Bank with the Kandy
& Nuwara Eliya branches of the then National & Grindlays Bank Ltd. Simultaneously five
branches were opened to intensify it's commercial banking activities.

The first Board of Directors of HNB comprised of Mr. Edmund J Cooray (Chairman), Mr.
C B Ferguson, Mr. S. Shearer and Mr. W K Gash. Mr. M Dharmaraja was appointed as
the General Manager.

Within 18 months of incorporation, the new Bank announced a share issue which
provided 35% to the public whilst Brown & Company and National & Grindlays Bank
retained 37% and 28% respectively.

The initial staff strength of the Bank was around 51. The Bank established a wide
network of correspondent banks and agency arrangements with overseas banks,
capitalizing on the strength of the HNB-Grindlays relationship.

On 8th December 1983, HNB's new Head Office at No. 10, R A De Mel Mawatha,
Colombo 3 was ceremonially opened by the then Minister of Finance & Planning, Mr
Ronnie de Mel.

The Bank believed in gradual but steady growth from the inception. In April 1974 the
Bank made a significant move in acquiring a part interest in the very prestigious
Mercantile Bank Ltd. The present City Office and Pettah branches were thus annexed to
the branch net work.

In 1989 when Emirates Bank International, a reputed Bank with its Head Office in Dubai,
decided to sell their interests in Sri Lanka, HNB having realized the opportunities

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available for development of international activities, successfully negotiated for the

transfer of the business conducted by their Colombo branch. This acquisition added an
additional FCBU unit to the Bank.

The Bank acquired the business of the Banque Indosuez, Colombo branch in 1996,
which continues to make a substantial contribution to the profitability of the Bank. This
acquisition enabled the Bank to bring in the third FCBU license within its wing.

Overseas Operations
The Bank has set up overseas extension offices in Chennai in India and Karachi in
Pakistan. It has also appointed a credit card service representative in Republic of
Maldives. The Bank also has plans to upgrade the present extension office at Chennai to
a branch office.

1.2 Explain different types of stakeholders in the

selected organization and their influence on the

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Any individual, group or business with a vested interest in the success of an organization
is considered to be a stakeholder. A stakeholder is typically concerned with an
organization delivering intended results and meeting its financial objectives. In general, a
stakeholder can be one of two types: internal or external. Examples of a stakeholder are
an owner, manager, shareholder, investor, employee, customer, partner and/or supplier,
among others. A stakeholder may contribute directly or indirectly to an organization’s
business activities. Other than traditional business, a stakeholder may also be concerned
with the outcome of a specific project, effort or activity, such as a community
development project or the delivery of local health services. A stakeholder usually stands
to gain or lose depending on the decisions taken or policies implemented.

A Stakeholder Analysis is an approach that is frequently used to identify and investigate

the Force Field formed by any group or individual who can affect or is affected by the
achievement of the objectives of an organization. Stakeholder Analysis identifies the
ways in which stakeholders may influence the organization or may be influenced by its
activities, as well as their attitude towards the organization and its targets.

The role of management is to formulate and implement strategies and to make decisions
that satisfy all or most of the stakeholders, or to ensure at least that no powerful and
legitimate stakeholders are left too unhappy.

Common and conflicting interests of stakeholders

The different stakeholder groups have different interests some in common with other
stakeholders and some in conflict.

Examples of common interests:

 Shareholders and employees have a common interest in the success of the

 High profits which not only lead to high dividends but also job security.
 Suppliers have an interest in the growth and prosperity of the firm.

Examples of conflicting interests:

 Wage rises might be at the expense of dividend.

 Managers have an interest in organisational growth but this might be at the
expense of short term profits.
 Growth of the organisation might be at the expense of the local community
and the environment.

The activities of stakeholders may effect the direction of the company strategy.

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 The stakeholder can disrupt the organisations plans.

 The stakeholder causes uncertainty in the plans.
 The organisation needs and relies on the stakeholder.

Here is a comprehensive list of typical stakeholders of HNB

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More individuals or groups may be identifiable in specific circumstances. Some

individuals can be part of multiple stakeholder groups. Some stakeholders may have an
explicit, formal organization, others may not. There are Internal Stakeholders (such as
employees) and External Stakeholders (such as government).

The interests of all stakeholders are closely related with the general success and wealth
of the organization. However, certain stakeholders’ interests are particularly important at
times when certain issues must be addressed, for example:
 Customers are important when quality of products is discussed.
 Employees are important when circumstances or safety at work is
 Government is important when dealing with the environment or legislation.

We can also distinguish between Primary Stakeholders (such as stockholders) and

Secondary Stakeholders (such as government). Where the line is drawn precisely, is a
source of much debate

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Influences of Stakeholders in HNB

Board of directors
They are responsible for decision making, controlling the organization and sometime they
solve inter personnel problems
They will involve day today work in order to achieve organizational goals and objectives.
Employees are considering about job security.
This means, they consider that how long their job is secure
Foreign investors
They are the ones who motivate the industry by investing funds

The suppliers provide various kinds of goods and services to business.


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Consumers are people expect the product with the reasonable price wit quality.
They consider about safety.


They compete against us.

You concern about each other.


Government refers to governmental agencies.

Various government agencies are such as

Tax department, Labor department, Police, Consumer production authority, Central bank,
Customers etc…
They consider about public welfare.

General public

Public are interested in business activity.

They have right to information.
Public opinion is very important.
Public include Potential investors, Potential customers, Media

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1.3 How does the organization achieve the objectives of

its stake holders

Stakeholders are the individuals and groups who can affect and are affected by the
strategic outcomes achieved and who have enforceable claims on a company’s

The stakeholder concept reflects that individuals and groups have a "stake" in the
strategic outcomes of the company because they can be either positively or negatively
affected by those outcomes and because achieving the strategic outcomes may be
dependent upon the support or active participation of certain stakeholder groups.

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Primary Stakeholder Groups

 Capital market stakeholders

 Product market stakeholders
 Organisational stakeholders
 Secondary stakeholders

Beyond these primary stakeholders there are other secondary stakeholders as well and
include entities like the community at large, environmental groups, government, etc.

Each type of stakeholders has different expectations or demands. This leads to potential
conflicts between these stakeholders leading to friction. The primary expectations of
each group are summarised in Table below.

When we review the primary expectations or demands of each stakeholder group, it

becomes obvious that a potential for conflict exists. For instance, shareholders generally
invest for wealth-maximisation purposes and are therefore interested in a company’s
maximising its return on investment or ROI. However, if a company increases its ROI by
making short-term decisions, the company can negatively affect employee or customer

If the company is strategically competitive and earns above average returns, it can afford
to simultaneously satisfy all stakeholders. When earning average or below-average
returns, tradeoffs must be made. At the level of average returns, companies must
minimally satisfy all stakeholders. When returns are below average, some stakeholders
can be minimally satisfied, while others may be dissatisfied.

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Stakeholder Membership Primary expectation or demand


Capital market Shareholders Wealth enhancement

Lenders Wealth preservation

Product market Customers Product reliability at lowest possible price

Suppliers Receive highest sustainable prices

Organisational Employees Secure, dynamic, stimulating and rewarding

career environment
Unions Ideal working conditions and job security for

Secondary Environment Environment Protection

Stakeholders Groups
Government Honest tax payments, Safety of public, proper
utilisation of resources

Expectations of Primary Stakeholder Groups

For example, reducing the level of research and development expenditures (to increase
short-term profits) enables the company to pay out the additional short-term profits to
shareholders as dividends. However, if reducing R&D expenditure results in a decline in
the long-term strategic competitiveness of the company’s products or services, it is
possible that employees will not enjoy a secure or rewarding career environment (this
also violates a primary union expectation or demand for job security for its membership).
At the same time, customers may be offered products that are less reliable at unattractive
prices, relative to those offered by companies that did not reduce R&D expenditures.
This would lead to lower profitability and even lower returns for the shareholders.

Thus, the stakeholder management process may involve a series of trade-offs that is
dependent on the extent to which the company is dependent on the support of each
affected stakeholder and the company’s ability to earn above-average returns.While it is
dependent on the size of the company, all companies have a CEO or top manager and
this individual is the primary organisational strategist in every company. Small
companies may have a single strategist: the CEO or owner. Large companies may have
few or several top-level managers, executives or a top management team. All of these
individuals are organisational strategists.

Top managers play decisive roles in firms’ efforts to achieve their desired strategic
outcomes. As organisational strategists, top managers are responsible for deciding how
resources will be developed or acquired, at what cost and how they will be used or
allocated throughout the company. Strategists also must consider the risks of actions
under consideration, along with the company’s strategic intent and managers’ strategic

Organisational strategists also are responsible for determining how the company does
business. This responsibility is reflected in the organisational culture, which refers to the
complex set of ideologies, symbols, and core values shared throughout the company and

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that influences the way it conducts business. The company’s culture is the social energy
that drives, or fails to drive, the company.

While it seems simplistic, performing their role effectively requires strategists to work
hard, perform thorough analyses of available information, be brutally honest, exercise
common sense, think clearly, and ask questions and listen. Additionally, the proliferation
of e-commerce requires strategists to emphasise speed and flexibility—key sources of
competitive advantage.

Strategists face ambiguous decision situations, but also have opportunities to dream and
act in concert with a compelling strategic intent that motivates others in creating
competitive advantage.

Objectives of Stakeholders

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Simply I described the stakeholders’ objectives in a chart



Reasonable salary
Working condition


Reasonable rate



Pressure group
Understand- needs
Not disturb- environment (Natural, Wildlife)

Operate with in social value
Life style

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Organization operates with a variety of stakeholders demonstrating a variety of interest

and objectives.
They are

1) Financial objective:- mainly shareholders

2) Non financial objective:- stakeholders (other than shareholders)

Maximizing shareholder wealth as an objective

The shareholders require a maximum financial return through profit maximization

(financial objective).

Advantages of this approach:

 This emphasis on maximizing profit which satisfies the real ownership.

 This improves the market value of the firm (based on higher earnings).
 This provides a clear direction for decision making.
 This can be measured and communicated effectively.
 This can be used to integrate the entire organization.
 This will increase the market confidence at future capital generation.

Problems of financial objectives:

 Profit can be manipulated based on creative accounting

 This leads to singular view of decision making.
 This ignores the customer preference trend and satisfaction.
 This ignores the benefits to employees and management.
 This ignores the contribution to society social values and environmental uses.
 This leads to short term decision making ignoring qualitative factors.

Development of Non financial objectives

This will demonstrate a broad perspective of thinking beyond the profit.

However, this will demonstrate the following problems.

1) Identify what objective to be developed.

e.g.-: Customer satisfaction, Employee benefits, Social concern
2) Difficult to measure non financial objectives.
3) This leads to conflicting objectives since the interest of different stakeholders are
4) Identifying and prioritizing the objectives are difficult.
5) Communicating the objectives are complicated.
6) This does not provide a specific direction for decision making.

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Increasing market share

The market for a product is the system of buyers and sellers of that product. All
businesses operate in the markets for their products. The more buyers, or customers, a
business has for its product the higher the volume of sales it will achieve. Higher sales
mean more income and therefore profit. The market share that a business has is the
value of its sales as a proportion of the total sales by all businesses operating in that
market. In order to make more profit another aim of most businesses is therefore to
increase its market share.

Providing goods and services

Businesses can only make sales by providing goods and services. These are what
customers buy and provide the business with an income.
The goods and services that businesses provide must therefore be what
customers want, and sold at a price that customers are prepared to pay. When people
want a product they create a demand for it. To be effective, that demand must be
backed up by the willingness and ability to pay for it – few businesses will supply you
with something if you are not prepared or able to pay for it.
All businesses must therefore aim to provide a product for which there is effective
demand: in other words a product that people want and are prepared to pay a price at
which the business can produce the product and make a profit. This means the product
must meet the needs of customers and be competitive with the products of other
businesses. If the product of a business either does not meet the needs of customers, or
is not competitive, customers will simply buy from another supplier.

Improving quality

One of the things customers look for in a product is quality. All things being equal,
customers will buy from a supplier who offers the best quality product. In order to attract
and keep customers, therefore, a business must aim to provide a high quality product.
However, it is no good providing a product of such high quality that no-one can
afford to buy it. When striving to improve the quality of its product a business must take
into consideration the cost of producing the product and the price at which it can be sold.

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Other aims

While these are the main aims of most businesses, some businesses also have other
aims. These include:
• Providing employment for the owner and others who work in the business
• Development and growth, either internally (that is occurring within the business
itself) through increasing sales and production, or externally (that is occurring
outside the business) by merging with or taking over other businesses

SMART objectives and targets

As well as aims such as making a profit, increasing market share, providing goods and
services, and improving quality, businesses must set clear objectives that establish what
they have to do in order to achieve their aims.

For example a business may aim to make a profit – but what does it have to do
to achieve this? We have seen that in order to make a profit the income of a business
must exceed its expenditure. In planning how it is going to make a profit, therefore, the
business must set targets that establish:

• How much it intends to spend

• How much income it expects to receive

These targets should be

• Specific as to what must be achieved

• Measurable, so that their achievement can be judged
• Achievable, so that those responsible know that the target can be met
• Relevant to the aims of the business
• Time based to give a framework for timescale of the target

Targets that fulfill these criteria are called SMART targets, using the initial letter of each

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 This provides a long term strategy for survival and performance

 This identifies the need of every stakeholder.

e.g.:- Suppliers, Customers

 This provides a firm foundation for the organizational existence in society.

(Positive social image)

 This will enable the organization to generate maximum results through the
support of stakeholders.
e.g.:- Motivated work force

 This will enable the organization to develop a strong reputation within the society.

 This will enable the organization to retain the best employees.

 This will enable the organization to create positive customer attitude and develop

Problems of satisfying the Stakeholders

 This creates complicated decisions due to focus on a single objective
(Variety of objectives)

 This deviates the business focus of creating value.

 This creates a higher cost especially protect the environment.

 This creates lack of control based on non-organizational activities.

 This creates stakeholder conflicts.

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Mendelow identified the stakeholders of an organisation based on the respective power

and interest at any given point of time.
This framework is used to prioritise the needs and to strike a balance in satisfying the

[High] [Low]

Keep them keep them

Involved Satisfied
(Key players)


Keep them Minimal effort

[Low] Informed (Ignore)

Minimal effort

These are stakeholders demonstrate low power as well as low interest.

The organization can generate a minimal effort in managing them or ignore them.

e.g.-: Public, Employees, even pressure groups

Keep them informed

These stakeholders demonstrate a higher interest with low power.

The organization should manage them by providing information.

e.g.-: Pressure groups, Employees, Public

Keep them satisfied

These stakeholders demonstrate high power however limited interest regarding day to
day organizational decisions.
The organization should satisfy their needs in order to ensure goal congruence.

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e.g.-: Government, Lenders, Suppliers, Customers, Shareholders, Employees

Keep them involved (Key players)

These are the stakeholders who demonstrate very high power and highly interest. These
are the stakeholders who drive the business of any given point of time.
The organization should identify these stakeholders and ensure that their needs are met.

e.g.-: Management, Shareholders, Customers, Employees

Shareholders influence
In small private firms shareholders are in direct contact with managers and in, many
cases, are directors of the company. They have the ability to influence the objectives
and directions of the organization.

But the individual shareholder in a large public company has very little influence.
In theory they can exert influence through voting at the annual shareholders meeting but
unless individuals group together their votes will have little impact.

In any case they are likely to be outvoted by the big institutional investors (e.g. pension
funds) who own large blocks of shares.

However, shareholders can exert influence through threatening to “vote with their feet”
by selling shares. As a result, managers and directors must at least keep shareholders

Any stakeholder can become a minimal effort or a key player, at any given point of time

In my conclusion:
Stakeholders not only depend on the organization to fulfill their own goals but also
organization depends on them to fulfill their goals. If you satisfy them, they will satisfy
you. Therefore, every organization should have to manage their stakeholders perfectly.

By these methods HNB satisfy their customers

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Business environment

1.4 Explain the responsibilities of the selected

organization to the business environment
To stakeholders, key legal responsibilities e.g. consumer, employment, disability
discrimination and health and safety, diversity and equal opportunities, stakeholder
pensions; wider responsibilities including ethical, environmental ethical practice

 Physical performance
 Measuring efficiency
 Health And Safety
 Equal opportunities
 Responsibilities related to consumer and employment law
 Ethical practice

A consumer is any person who buys goods or services. Examples of goods are food or
clothing, a car or a TV. Services include dry cleaning, car repairs or a meal in a
restaurant. The Canadian market place is highly competitive and offers consumers a
broad array of goods and services. As a consumer, you have the right to expect the
marketplace to be fair. You also have the responsibility in making it a fair place for

Consumer Rights

Consumer rights are what every consumer should expect from people selling goods and
services. For example, consumers should expect manufacturers and retail stores to
honour warranties or should only expect to pay for the services provided.

Consumer Responsibilities

Consumer responsibilities are actions that you should take to make sure that

• You are well informed before buying a product or service.

• You get what you pay for.
• Any problems with a product or service are solved quickly and to your

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Right to... Responsibility to...

Read instructions on products and use them as
Be protected against goods and services that
intended. Check the qualifications of service
are hazardous to health and life.
Be given all the facts and information to help
Ask for the information you need.
choose the best product.
Be provided with opportunities to obtain the Inform yourself about goods and services you
knowledge and skills for making informed buy by reading consumer reports, following the
decisions. news and asking questions.
Compare prices, find out about differences
Choose among a good variety of quality
between products and services and make
products and services.
informed decisions.

Receive compensation - a fair settlement to Insist on a fair and reasonable deal if you are not
make up for unsatisfactory goods or services. satisfied with your purchase.

Help build a healthy environment by conserving

Live in a healthy environment. natural resources and choosing products that do
not harm the environment.

Have a say in making government policies for Make your needs and expectations known to
the marketplace. vendors and to the government.

You are a consumer in a variety of situations: when you buy groceries or open a bank
account, order a telephone service or ride a bus, pay taxes or plan for a wedding. This
section touches on a broad range of topics and issues. Our subtopics listed on the index
page include information on particular aspects of being a consumer.

Supplier Relations

Wherever HNB does business, they strive to be trusted partners and good citizens
through emphasis given to ethical practices. We propagate this emphasis upstream
along our supply chain amongst our existing suppliers as well as by developing
relationships with suppliers that share similar values and conduct business in an ethical

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Employer Rights & Responsibilities

As an employer you must provide a safe and healthy workplace for your workers and
contractors. This includes:

• providing and maintaining safe plant (such as machinery and equipment) and
safe systems of work (such as controlling entry to high risk areas, controlling
work pace and frequency and providing systems to prevent falls from heights)
• implementing arrangements for the safe use, handling, storage and transport of
chemicals (such as dangerous goods and other harmful materials)
• maintaining the workplace in a safe condition (such as ensuring fire exits are not
blocked, emergency equipment is serviceable, and the worksite is generally tidy)
• providing workers and contractors with adequate facilities (such as clean toilets,
cool and clean drinking water, and hygienic eating areas)
• making sure workers have adequate information, instruction, training and
supervision to work in a safe and healthy manner.

You must also see

The company takes into consideration employee opinion and ideas by means of
a suggestion box scheme and company wide surveys. Employee surveys are
conducted periodically to find out employee opinion with regard to a wide range
of topics. The feedback received is presented to the management and results
considered for planned operational changes.

Previous injuries

• When hiring new employees you should inform them, in writing, of the nature of
the work and ask if they have any pre-existing injury or illness that may be
affected by the work.
• You should also inform them, in writing, that failing to notify or hiding a pre-
existing injury or illness which might be affected by the nature of the proposed
employment, could result in that injury or illness being ineligible for future
compensation claims.

You have additional specific obligations if your business involves the:

• manufacture, importation, transportation, supply, storage, handling or use of

dangerous goods
• design, manufacture, importation, supply, erection or installation of plant
• manufacture, importation, or supply of substances.

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You also have obligations to:

• meet particular licensing, registration and certification requirements

• immediately notify Work Safe of certain dangerous incidents
• co-operate with Work Safe Inspectors

Responsibilities of Employees

As a general guide, if you are an employee, then you must make sure that your actions
at work do not affect the health and safety of either yourself, or others, such as co-
workers and members of the public.

You must also make sure that you use any personal protective equipment e.g. safety
boots, goggles which may be provided to you by your employer

Failure to comply with your legal duties may result in enforcement action being taken
against you

Health & Safety

It is the intention of HNB PLC, that the Company shall achieve the highest
possible standards in the areas of Health & Safety Management. We follow
relevant statutory provisions and all reasonable practicable measures to avoid
risks to our employees or others who may be affected by our operations. As
such, establishment of a Health & Safety policy and code ensures that a
spectrum of issues related to the business ranging from fitness to work on
towers, manual handling/loading, posturing, working with chemicals to motor
vehicle care & safe driving are encompassed.

Training & Education

Innovative leadership is essential in the dynamic communications market and is
therefore one of our strategic objectives. We provide a host of training and
development measures to continuously develop the know-how at every level of
the organization. In particular, this enables us to motivate our top performers and
high potentials by offering them attractive prospects.


HNB complies with all legal and regulatory requirements associated with its
activities. Our strategic investments to conserve the environment are updated by
constantly monitoring the laws of the land, benchmarking against international
health and environmental standards and by listening to our stakeholders. The
relentless pressures exerted on the planet for its natural resources and
consequent environmental degradation reaffirm the need for society to
understand its actions in relation to the environment and act responsibly. HNB

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About the Project

HNB has always taken measures to comply with all environmental, social and
economic regulations of the country.

This project is totally based on to minimize wastage of the stationary and power
such s electricity, water etc….

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1.5 Evaluate the strategies that organization use to meet

these responsibilities.

The strategies used by the organization to meet them.


HNB strategies are visible in the company's corporate, business and functional levels.
They have already diversified their business across many areas during the last few
years. For instance, by acquiring Habib Bank, HNB managed to strengthen its
transmission backbone. Also recent past it has join with DFCC in securities. In addition
to reach the customer, HNB has created many facilities with other business
corporations. Keels super is now join hands with HNB to pay credit card bills form the
shops and Arpico, nolimit also offer discounts to HNB credit card holders..

The business plan is formulated at the beginning of the year considering main objectives
of the company. The progress of each project is monitored in a monthly basis through
different strategic committee meetings.

On the other hand, HNB tries to introduce latest technologies into the market considering
global mega trends through it's comprehensive Research & Development wing.



Functional Strategy

Most of these functional strategies are developed considering HNB operations, hence
they cannot be applied directly to HNB other strategic business units like ACUITY

Functional strategies based on the strategic choice of corporate and business strategies
should be as follows.

• The Marketing strategy currently followed by HNB should be slightly modified to

accommodate the business strategy of cost focus. There should be new savings
acconts to attract new customers as keeping existing customers who require the
service. This product development for the existing market can be supported by
improving the current “pull” marketing strategy for advertising and promotion.

• HNB should not do any changes to there current Financial strategy as they are
going to have pause/proceed stability corporate strategy. Hence they could
further improve there financial stability as there are no major growth strategies to
be implemented.

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• HNB being a financial leader, FINACLE CORE SYSTEM is critical for its
performance. They should further improve by having strategic alliances with their
major technology.

• The Operational strategy of HNB should be streamlined to have a common,

more efficient and effective operations flow with all business units. This
requirement has arisen from the recent expansions and acquisitions. Also
change management would be required in creating a common culture among

• The Human Resource Management strategy is another key functional strategy

for HNB. It should review its programs and procedures to suit the new stabilizing
corporate strategy. It should improve on its current team based working
environment to self-managing work teams which is more suited for an
organization where rapid growth is anticipated in future.

• The current Information Systems strategy should also be changed to handle

enterprise development in much more strategic level. The Information Systems
developed should be aligned with corporate and business level objectives. And
also there should be an integrated approach among business units as much as
possible. Currently HNB uses FINACLE system a banking solution with was
developed by INFOSYS in india..

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2.1 Explain in detail different economic system and how

the allocate and make effective use of the resources
To resolve basic economic problems, society has to organize.

The way society has organised itself to resolve basic economic problem is known as an

Basic economy problems:

There are 3 basic economic problems facing any economy.

 What to produce: - What type of goods and services, we are going to produce
using process.
e.g.:- Whether it is produce capital goods or consumer goods.
 How to produce: - Choosing the production technique.
There are basically 2 production techniques.
1) Labour intensive technique: - using more labour than other factor.
e.g.:- Srilanka (In agriculture they use labours)
2) Capital intensive technique: - using more capital than other factor.
e.g.:- USA (In agriculture they use machine)
 To whom it is produce: - This means how to distribute goods and services
e.g.:- Whether it is for rich people or poor people.

There are different, different systems in the world.

Different economies in the world are divided into 3 main categories depending on the
usage and ownership of resources.
They are,
1) Market economy
2) Command economy
3) Mixed economy

Market Economy

In a market economy, the allocation of resources is the outcome of millions of

independent decisions mace by consumers and producers, all acting through the
medium of markets.

Simply market economy means, an economy in which the factors of production (e.g.:-
land, capital) are owned by individuals; basic allocation decisions are made by market
This is known as Capitalist economy.

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Characteristics of market economy:

 Resources are owned by private individuals:-

Land, labour, Capital and Enterprise are used by individuals at their wills.

 Basic economic problems are solve through “Price mechanism (or Market
Price mechanism means demand and supply
It is an invisible hand (no one see, but things are happening automatically).
Price mechanism gives direction to the market.
Price mechanism co-ordinates millions of economic decision.

 There are huge gap with in the rich and poor:-

Everything is determine by price
Distribution of goods and services determine by people’s income.

 Government intervention is minimum in the economy:-

According to Adam Smith, government should play minimum role in economy.
He says government should perform only 3 tasks.
o Provision of public goods.
o Maintaining law and order.
o National security or defense.

 There is consumer sovereignty:-

This means consumer is a king.
Consumer has the wealth of information.
Therefore, pick and make a choice.

Command Economy

A command economy is an economic system planned economy or directed economy is

an economic system in which the government or workers' councils manage the

Simply command economy means, an economy in which the factors of production (e.g.:-
land, capital) are owned by government.
This is known as Socialist economy.

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Characteristics of command economy:

 Resources are owned by government:-

Major sectors of the economy are in the hands.

 Central planning decision ( Government directives):-

There is a planning commission which take decision on What to produce, How to
produce and To whom it is produced
There are experts to make decision.
e.g.:- In Srilanka 5 year plan (1972-1977)
In Soviet Union 10 year plan.

 Most of the people have a minimum standard of living:-

Government sets the salary prices of labour. Thus people effort to buy the basic

 The social welfare is very high:-

Everyone have access to education and health. Thus the nation will filled by
highly educate and healthy people.

Comparison of Market Mechanism and Central Planning

Market Mechanism:

Adam Smith had an answer back in 1776 and he said the “invisible hand” determines
what gets produced, how and for whom.
Adam Smith’s invisible hand is now called as Market mechanism (Price mechanism).
Notice that it does not require any direct contact between consumers and producers.
Communication is indirect, transmitted by market prices and sales.

The essential feature of the market mechanism is price signal. If you want something
and have sufficient income, you buy it. If enough people do the same thing, the total
sales of that product will rise, and perhaps its price will as well. Producers, seeing sales
and prices rise, will want to exploit this profit potential. Thus, they will attempt to acquire
a larger share of available resources and use it to produce the goods we desire.

The market mechanism can also answer the HOW question. To maximize their profits,
producers will seek to use the lowest-cost method of producing a good. By observing
prices in the marketplace, they can identify the cheapest method and adopt it.

The market mechanism can also resolve the FOR WHOM question. A market effectively
distributes goods to the highest bidder. Individuals who are willing and able to pay the
most for a good will tend to get it in a pure market economy.

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Adam Smith was so impressed with the ability of the market mechanism to answer the
basic WHAT, HOW, and FOR WHOM questions, that he urged government to “leave it
alone”. In his view the price signals and responses of the marketplace were likely to do a
better job of allocating resources than any government.

Central Planning:
We don’t have to let the market mechanism make all these decisions. Rich people end
up with most of the output when the market mechanism handles the FOR WHOM
question. Thus, the government must step in to redress this inequity. In the communist
vision, people would get as much output as they “needed”. To accomplish this, the
government would guarantee everyone a roof overhead, food on the table, and other
necessities. Income alone would not determine who get fed, clothed, housed, or
provided with medical care.

The invisible hand built mansions for millionaires but left thousands of people homeless.
The market allocated massive resources to conspicuous consumption, but left public
needs understaffed and underfunded. Marx believed that central planners could produce
a more desirable mix of output. Central planners would also be bound to choose
production methods on the basis of cost alone. They could take into take account
environmental and other social values when deciding HOW to produce.

Drawback of Market Mechanism and Central Planning

The goal of every society is to attain the best-possible (optimal) economic outcomes-the
most desirable mix of output, the most efficient production methods, and fair distribution
of income.

Market failure:

As we have seen, market mechanism (or price mechanism) is capable of answering all
these basic questions. But the answers may not be the best–possible ones. If that
happens, we say the market mechanism has failed.
Specifically, market failure means that the invisible hand has failed to achieve the best-
possible outcomes.
If the market fails, we may end up with the wrong mix of output, too much
unemployment, polluted air, or an inequitable distribution of income.

In a market economy, for example, producers will select production methods based on
cost. As we noted earlier, however, cost-driven production decisions may lead a factory
to spew pollution into the environment rather than using cleaner but more expensive
methods of production. The resulting pollution may be so bad that society ends up worse
off as a result of the extra production.
In such a case we may need government intervention to force better answers to the
WHAT and HOW questions.

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Government failure:

Government intervention may move us closer to our economic goals. But government
intervention may fail as well.
Government failure occurs when government intervention fails to improve economic

The government might also fail if it interferes with the market’s answer to the For
Whom question.

My Suggestion:

In my opinion
I think, full and full Market mechanism (or Price mechanism) is not good and also the
Central planning is not good.

Mixed Economy

There is neither fully free-market economy nor is there any fully command economy.
Simply means incorporates aspects of more than one economic system.

The main purpose of mixed economy is to take advantages of positive aspects of both
free-market and command economy.

In practice, every economy is a mixed economy in the sense that it combines significant
elements of both systems- command and market- in determining economic behaviour.

Characteristics of mixed economy:

 There is a strong private sector as well as public sector:-

e.g.:- Private bus & C.T.B bus
Private hospital & Government hospital

 There is a price mechanism. But at the same time government intervents

when necessary:-
e.g.:- Maximum price, minimum price, consumer protection etc.

 Public goods are provided by government:-

e.g.:- Law and order, Street lighting, Light house, Defense

 Welfare goods are provided by government free of charge:-

e.g.:- Educational, Heal

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let us now see which is more suitable for srilanka

What is the best option For Srilankan Economy?

The foreign indebtedness of the country has been rising while internally the cost of living
is raising sky high.

This backward march of the economy is visible in the fields of agriculture, industry, which
are the live focus of the economy as well as in the fields of education, health, transport
and infrastructural areas such as energy and road construction.

Is this mean that both models have not been successful in Sri Lanka or conversely is
that the faulty implementation of those models by the respective governments?

Presently it deems that a system of open economy is in operation. The objective of this
paper is to look as to what model is of the best advantage for this country.

 Sri Lankan economics system is Mixed economy.

A mixed economy employs features of both Government/Planned economy and a Free

market. Thus, it has features of both. It has 2 sectors. Public and Private. The public
sector, being the government, takes care of public services that private businesses
cannot afford to finance e.g. street lighting, public transportation, law and order, public
healthcare, defense and the Judicial system. Their motive is social welfare. The private
sector however is owned, controlled and managed by individuals, whose motive is
profits. Examples include private owned companies and private schools.

Basically, a mixed economy is a free market economy with government intervention

thrown in. They control some aspects of the economy while indiviuals control the rest.

in a mixed economy ,there is the gain of low general price level which ultimately lead to
increased production and which may generate more employment capacity.

Scarcity of resources means that choices must be made about how the resources will be
allocated leading to the five basic questions of resource allocation.

 What goods and services will be produced?

 How will these goods and services will be produced?
 To whom the goods and services will be distributed?
 When these goods and services to be produced?
 How much goods and services to be produced?

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The economic system decides how scarce resources would be allotted among competing
industries. The world has so far witnessed six such economic systems; namely, tribalism,
slavery, feudalism, capitalism, socialism and the mixed economy.

Whatever the economic system the basic economic issues confronted are the same. The
way in which the resource allocation choices are made, the way the value is measured and
the forms of ownership of economic wealth vary according to the type of the economic
system that exists in a society.

Mixed Economy

In a mixed economy the decisions and choices are made partly by free market forces of
supply and demand, and partly by government decisions. Economic wealth is divided
between the private sector and the public sector.

In practice, all modern national economies are mixed economies, although with differing
proportions of free market and centrally planning decision-making from one country to the

Many of the disadvantages of the free market economy listed above indicate that there are
reasons why the government may intervene in the workings of the economy. In mixed
economy, market mechanisms exist, but the state also plays an important role. A
government may intervene:

1. To restrain the unfair use of economic power by monopolies or other bodies which
might be able to impose their wishes on the rest of society.

2. To correct inequalities of the free market system redistributing wealth between

individuals and between regions.

3. To provide goods and services that private enterprise would be reluctant or unable to
provide in sufficient quantities and at an acceptable price, for example:
 Goods that is socially desirable but unprofitable for private producers - for
example, special equipment for handicapped people.
 Services those are unsuitable for private enterprise because such ownership
would be against the public interest - such as the armed forces or the legal
 Services that are 'natural' monopolies, being very large and complex - for
example, the provision of domestic electricity or the railway system.

4. To remove socially undesirable consequences of private production - for example,

pollution and regional imbalances in unemployment.

5. To direct changes in the structure of the nation's industries, by retraining programmes,

and to new industries, or investment in research and development, and so on.

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6. To manage inflation rates, employment levels, balance of payments and the economic

To moderate the ups and downs in the trade cycle trying to stimulate economic activity
during a recession, and to dampen demand when it is so high that steep price inflation

A mixed economy is an economic system that incorporates aspects of more than one

Elements of a mixed economy

The elements of a mixed economy typically include a variety of freedoms:

• to possess means of production (farms, factories, stores, etc.)

• to participate in managerial decisions (cooperative and participatory economics)
• to travel (needed to transport all the items in commerce, to make deals in person,
for workers and owners to go to where needed)
• to buy (items for personal use, for resale; buy whole enterprises to make the
organization that creates wealth a form of wealth itself)
• to sell (same as buy)
• to hire (to create organizations that create wealth)
• to fire (to maintain organizations that create wealth)
• to organize (private enterprise for profit, labor unions, workers' and professional
associations, non-profit groups, religions, etc.)
• to communicate (free speech, newspapers, books, advertisements, make deals,
create business partners, create markets)
• to protest peacefully (marches, petitions, sue the government, make laws friendly
to profit making and workers alike, remove pointless inefficiencies to maximize
wealth creation)

With tax-funded, subsidized, or state-owned factors of production, infrastructure,

and services:

• libraries and other information services

• roads and other transportation services
• schools and other education services
• hospitals and other health services
• banks and other financial services
• telephone, mail and other communication services
• electricity and other energy services (eg oil, gas)
• water systems for drinking, agriculture, and waste disposal
• subsidies to agriculture and other businesses
• government-granted monopolies to otherwise private businesses
• legal assistance

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and providing some autonomy over personal finances but including involuntary
spending and investments such as transfer payments and other cash benefits
such as:

• welfare for the poor

• social security for the aged and infirm
• government subsidies to business
• mandatory insurance (example: automobile)

and restricted by various laws, regulations:

• environmental regulation (example: toxins in land, water, air)

• labor regulation including minimum wage laws
• consumer regulation (example: product safety)
• antitrust laws
• intellectual property laws
• incorporation laws
• protectionism
• import and export controls, such as tariffs and quotas

In my opinion mixed economy is very much suitable to a country like srilanka

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2.2 Explain the term “policy” and discuss the impact of

social welfare policy and industrial policy initiations on
organizations and the community at large
policy refers to government attempts to influence the direction of the economy through
changes in government taxes, or through some spending. Fiscal policy refers to the
overall effect of the budget outcome on economic activity.

Fiscal policy can be contrasted with the other main type of economic policy, monetary
policy, which attempts to stabilize the economy by controlling interest rates and the
supply of money. The two main instruments of fiscal policy are government spending
and taxation. Changes in the level and composition of taxation and government
spending can impact on the following variables in the economy:

• Aggregate demand and the level of economic activity;

• The pattern of resource allocation;
• The distribution of income.

Industrial policy

Industrial policy of a nation is the true determinant of foreign investment as well as

domestic investment. Today most industrial policy is subordinated to tax, tariff and trade
rules of the General Agreement on Tariffs and Trade and various trade pacts promising
various degrees of free trade, which in practice means limited subsidy and no
protectionism of any one industry. Objective of the Industrial policy should be for
bringing higher growth and prosperity for a country.

Objectives of the Industrial Policy

• Maintaining a sustained growth in productivity;

• Enhancing gainful employment;
• Achieving optimal utilisation of human resources;
• Attaining international competitiveness and
• Transforming the country into a major partner and player in the globa arena.

Policy focus

• Deregulating industry;
• Allowing the industry freedom and flexibility in responding to market forces and
• Providing a policy regime that facilitates and fosters growth of industry.

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Social Welfare Policy

Social welfare refers to the overall welfare of society. With sufficiently strong
assumptions, it can be specified as the summation of the welfare of all the individuals in
the society. Welfare may be measured ordially in Pareto efficiency. The utils is seldom
used in pure theory today because of aggregation problems that make the meaning of
the method doubtful, except on widely challenged underlying assumptions. In applied
welfare economics, such as in cost-benefit analysis money-value estimates are often
used, particularly where income-distribution effects are factored into the analysis or
seem unlikely to undercut the analysis.

Other problems in welfare economics include externalities, equity, justice, inequality, and

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2.3 Evaluate how macroeconomic policy of a country

effect organizations and its stakeholders
In order to try to avoid major economic shocks, such as The Great Depression,
governments make adjustments through policy changes which they hope will succeed in
stabilizing the economy. Governments believe that the success of these adjustments is
necessary to maintain stability and continue growth. This economic management is
achieved through two types of strategies.

 Fiscal Policy
 Monetary Policy

Fiscal Policies:

Fiscal policy involves government revenue (basically taxation) and government

Government budget is use to achieve economic objective.

Base of achieving economic objectives through Fiscal policies:

 Government should allocate funds for infrastructure development.

Infrastructure means, facilities which reduce the cost of production
There are 2 types of infrastructure.
1. Economic Infrastructure (e.g.:- Road, Bridge, Transportation, Energy)
2. Social infrastructure (e.g.:- Education, Health)

 Giving Tax concession.

This will encourage investors.

 Reducing budget deficit.

Budget deficit means, government expenditure exceeds government revenue.
If the deficit increases, government will borrow money from banks. Then banks
do not have money to private sector.

Monetary Policies:

Monetary policy means, controlling money supply and interest rates to achieve
economic objectives.

Base of achieving economic objectives through

Monetary policies:

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 Reducing the interest rates:

Interest change on loans with reduce interest rates private sector businessman
have access to money. This can help the organization to get loans from local
banks when money needed.

 Reducing the print of currency.

When currencies are printed, it increases money supply.

Increase in money supply lead to Inflation.

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Quick Reference to Macroeconomic policies



Fiscal Monetary

Taxation Money supply

Open Market
Discount rate

Central Bank
statutory return

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Impacts of Macroeconomic policies organization and stake holders

Monetary Policy: Monetary policy influences the decisions that we make about how
much we save, borrow and spend. Under this, main features are Inflation and Interest

 Inflation:
Inflation is best defined as a sustained increase in the general price
level leading to a fall in the purchasing power or value of money.
The rate of inflation is measured by the annual percentage change in the level
of consumer prices.

 Interest Rates:
There is no unique rate of interest in the economy. For example we distinguish
between savings rates and borrowing rates. However interest rates tend to
move in the same direction. For example if the Bank of England cuts the base
rate of interest then we expect to see lower mortgage rates and lower rates on
savings accounts with Banks and Building Societies.
The real rate of interest is often important to businesses and consumers when
making spending and saving decisions. The real rate of return on savings, for
example, is the money rate of interest minus the rate of inflation.

The Job of Monetary Policy

“…to deliver price stability (as defined by the Government’s inflation target) and,
subject to this objective, to support the Government’s economic policy, including
its objectives for economic growth and employment…”

Fluctuations in interest rates do not have a uniform impact on the economy.

Some industries are more affected by interest rate changes than others (for
example exporters and industries connected to the housing market). And, some
regions of the British economy are also more exposed (sensitive) to a change in
the direction of interest rates.

We now turn to the revenue that flows into the government’s accounts from
taxation. There are so many different kinds of taxation and the tax system itself
often appears to be horrendously complex! But one important distinction to make
is between direct and indirect taxes.

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Direct taxation is levied on income, wealth and profit. Direct taxes include
income tax, national insurance contributions, capital gains tax, and corporation
Indirect taxes are taxes on spending – such as excise duties on fuel, cigarettes
and alcohol and Value Added Tax (VAT) on many different goods and services.
This is mainly effect the organization pricing decisions. Normally
organizations pay these taxes from the customers by increasing the price
of the goods

Causes of inequality

There are many reasons for economic inequality within societies. These causes are
often inter-related, non-linear, and complex. Acknowledged factors that impact economic
inequality include the labour market, innate ability, education, race, gender, culture,
wealth condensation, development patterns and personal preference for work, leisure
and risk.


A major cause of economic inequality within modern market economics is the

determination of wages by the market. In this view, inequality is caused by the
differences in the supply and demand for different types of work.

A job where there are many willing workers competing for a job that few require will
result in a low wage for that job. This is because competition between workers drives
down the wage. Competition amongst workers tends to drive down wages due to the
expendable nature of the worker in relation to his or her particular job.

A job where there are few able or willing workers but a large need for the positions will
result in high wages for that job. This is because competition between employers for
employees will drive up the wage. Competition amongst employers tends to drive up
wages due to the nature of the job, since there is a relative shortage of workers for the
particular position.

The final results amongst these supply and demand interactions are a gradation of
different wages representing income inequality within society.


Trade liberalization may shift economic inequality from a global to a domestic scale
when rich countries trade with poor countries, the low-skilled workers in the rich
countries may see reduced wages as a result of the competition, while low-skilled
workers in the poor countries may see increased wages.

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High inflation, caused by a country's monetary policy, can contribute to economic

inequality. This theory argues that inflation of the money supply is a coercive measure
that favors those who already have money, thus aggravating inequality.

Mitigating factors

There are many factors that tend to constrain the amount of economic inequality within
society. These factors may be divided into two general classes: government sponsored,
and market driven. The relative merits and effectiveness of each approach is a subject of
heated debate.

Proponents of government sponsored approaches to reducing economic inequality

generally believe that economic inequality represents a fundamental injustice, and that it
is the right and duty of the government to correct this injustice. Government sponsored
approaches to reducing economic inequality include:

• Public education - to increase the supply of skilled labor and reduce income
inequality due to education differentials;

• Progressive taxation, where the rich are taxed more than the poor - to reduce the
amount of income inequality in society.

• Minimum wage legislation - to raise the income of the poorest working group.
This is debated as it may also cut the least skilled out of the employment market

• The Nationalization of essential goods and services such as food, healthcare,

education, and housing - to reduce the amount of inequality in society - by
providing goods and services that everyone needs cheaply or freely,
governments can effectively increase the disposable income of the poorer
members of society.

There are also some market forces which work to reduce economic inequality:

• In a market-driven economy, too much economic disparity could generate

pressure for its own removal. In an extreme example, if one person owned
everything, that person would immediately have to hire people to maintain his
property, and that person's wealth would immediately begin to dissipate.

• By a concept known as the decreasing marginal utility of wealth This could tend
to move wealth from the rich to the poor.

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Effects of inequality

Research has shown a link between income inequality and social cohesion. In more
equal societies, people are much more likely to trust each other, measures of social
capital suggest greater community involvement, and homicide rates are consistently

Equality is correlated with higher levels of social capital

• In addition to affecting levels of trust and civic engagement, inequality in society

has also shown to be highly correlated with crime rates


Mortality is strongly associated with higher income inequality, but, within levels of income
inequality, not with per capita income.

.Socioeconomic status strongly affects health even when controlling for economic
resources and access to health care.

The effects of inequality on health are not limited to human populations. among many
primate species, less egalitarian social structures correlated with higher levels of stress
hormones among socially subordinate individuals.


Economic inequality is thought to reduce distributive efficiency within society. That is to

say, inequality reduces the sum total of personal utility because of the decreasing
marginal utility of wealth.. The marginal utility of wealth is lowest among the richest. In
other words, an additional dollar spent by a poor person will go to things providing a
great deal of utility to that person, such as basic necessities like food, water, and
healthcare; meanwhile, an additional dollar spent by a much richer person will most
likely go to things providing relatively less utility to that person, such as luxury items.
From this standpoint, for any given amount of wealth in society, a society with more
equality will have higher aggregate utility.


Many people accept inequality as a given, and argue that the prospect of greater
material wealth provides incentives for competition and innovation within an economy.

A functioning economy entails a certain level of unemployment. These theories argue

that unemployment benefits must be below the wage level to provide an incentive to
work, thereby mandating inequality and that additionally, it is impossible to lower
unemployment down to zero. Hypotheses dispute this positive role of unemployment.

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Several recent economists have investigated the relationship between inequality and
economic growth using econometrics.

They reach policy conclusions as to the optimal distribution of income. They conclude
that too much equality negatively impacts growth due to incentive traps, free-riding,
labor shirking, high supervision costs. They also claim that high levels of inequality
negatively impacts growth, due to incentive traps, erosion of social cohesion, social
conflicts, uncertain property rights. They advocate for policies which put equality at the
low end of this efficient range.

Perspectives regarding economic inequality

There are various schools of thought regarding economic inequality.


Marxism favors an eventual society where distribution is based on an individual's needs

rather than his ability to produce, social class, inheritance, or other such factors. In such
a system inequality would be low or non-existent.


Meritocracy favors an eventual society where an individual's success is a direct function

of his merit, or contribution. Therefore, economic inequality is beneficial inasmuch as it
reflects individual skills and effort, and detrimental inasmuch as it represent inherited or
unjustified wealth or opportunities. From a meritocratic point of view, measuring
economic equality as one parameter, not distinguishing these two opposite contributing
factors, serves no good purpose.


Classical liberals and libertarians generally do not take a stance on wealth inequality, but
believe in equality under the law regardless of whether it leads to unequal wealth


Pure meritocracy is incoherent because, without redistribution, one generation's

successful individuals would become the next generation's embedded caste, hoarding
the wealth they had accumulated.

They also state that social justice requires redistribution of high incomes and large
concentrations of wealth in a way that spreads it more widely, in order to recognize the
contribution made by all sections of the community to building the nation's wealth.

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In most western democracies, the desire to eliminate or reduce economic inequality is

generally associated with the political left. One practical argument in favor of reduction is
the idea that economic inequality reduces social cohesion and increases social unrest,
thereby weakening the society.


The acceptance of economic inequality is generally associated with the political right.
One argument in favor of the acceptance of economic inequality is that, as long as the
cause is mainly due to differences in behavior, the inequality provides incentives that
eliminate poverty for all, by pushing the society towards economically healthy and
efficient behavior. Capitalists see free competition and individual initiative as crucial to
economic prosperity and accordingly believe that eliminating poverty through economic
freedom is more important than equalizing poverty through redistribution.


Just may express ethical acceptance of some possible social state against which other
possible social states are measured.


The existence of different genders, races and cultures within a society is also thought to
contribute to economic inequality. Race and gender group differences in wealth though
this assertion is highly controversial.

The idea of the gender gap tries to explain differences in income between genders.
Culture and religion are thought to play a role in creating inequality by either
encouraging or discouraging wealth-acquiring behavior, and by providing a basis for
discrimination. In many countries individuals belonging to certain racial and ethnic
minorities are more likely to be poor. Proposed causes include cultural differences
amongst different races, an educational achievement gap, and racism.

Proponents of government sponsored approaches to reducing economic inequality

generally believe that economic inequality represents a fundamental injustice, and that it
is the right and duty of the government to correct this injustice. Government sponsored
approaches to reducing economic inequality include:

• Public education - to increase the supply of skilled labor and reduce income
inequality due to education differentials;

• Progressive taxation, where the rich are taxed more than the poor - to reduce the
amount of income inequality in society.

• Minimum wage legislation - to raise the income of the poorest working group.
This is debated as it may also cut the least skilled out of the employment market

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Business environment

• The Nationalization of essential goods and services such as food, healthcare,

education, and housing - to reduce the amount of inequality in society - by
providing goods and services that everyone needs cheaply or freely,
governments can effectively increase the disposable income of the poorer
members of society.

However targeted government spending and tax decisions can have a positive impact
the key is to help provide the right incentives for individuals and businesses – for
example the incentives to find work and incentives for businesses to increase
employment and investment.

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2.4 Explain the impact of the global economic policy of

country effect organizations and its stakeholders
Due to globalization each country is linked, in business transactions, with any
organization. Some organizations have Braches around the world such as Coca Cola, so
they have every organization in the world to manage. if there is a positive or negative
impact on an organization affects all organizations in the world.
Recently, we know that because of the global economic crisis, there was a fall in stocks
in the world market, which led to a collapse of major financial organizations. This does
not only affect developing countries, but also the richest countries. This is because these
countries have invested resources around the world. So investment down the prices of
stocks will fall, which eventually will include all organizations

The globalization process impacts significantly on the country economy with benefits and
costs along the way: some examples included.

 High levels of foreign direct investment (both inwards and outwards) - The
economy has been a favoured venue for overseas direct investment. Many
factors explain this trend – including improvements in the supply-side
performance of the economy, a favourable tax system and a much improved
record on industrial relations.

 Rising level of import penetration – particularly in those industries where

previous comparative advantage has been eroded.

 Competitive forces nearly all sectors- Globalization increases the importance

of continuing to develop a competitive advantage in industries with major growth-
potential as a means of improving living standards in the long term. Globalization
has involved a speeding up of the process by which comparative advantage can
change over time – not least because of the faster diffusion of technological
progress. Greater investment is needed in high value goods and services – for
example in high and medium-high technology manufacturing and in knowledge-
intensive service sectors.

 Structural changes in industries – for example the long-term loss of output and
employment in industries such as textiles and other manufacturing sectors. This
creates problems where factor resources are occupationally and geographically

 It has increased competitive pressures on British businesses in tradable goods

industries. Has this helped to improve the trade-off between unemployment and
inflation? Cheaper prices for many international commodities and finished

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manufactured goods have certainly helped to control inflation in recent years and
therefore reduce inflationary expectations

 The current global economic policies places increasingly heavy emphasis on the
importance of human capital as a factor determining long run economic growth. It
has probably lost forever its comparative advantage in producing relatively low-
value added manufacturing products. Whereas the global demand for high skill
services and high value-added manufacturing output remains strong. This will
require a substantial improvement in the skills and flexibility of the workforce

 Acid rain- Current concern over acid rain is not with the naturally produced
variety, but rather with that which results from modern industrial activity and
the acid gases it produces. The continuing growth of transportation systems
using the internal combustion engine contributes to acid rain through the release
of oxides of nitrogen (NOx) into the atmosphere.

 Money is moved around the world more easily, making currencies and
economies more vulnerable to financial speculation. Therefore, some cases
financial crisis will cause. In this case, some oraganisations faced bankruptcy.
Therefore, people lose their jobs. Thus, unemployment rise mount.
e.g.:- Subprime crisis (2007), Global financial crisis (2008)

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3.1 How does different market structures in practice

deviate from the model of perfect competition

Market is situations where buyers and sellers interact perform certain transactions.
That simply means any context where buyers and sellers meet.
To be a market, it need not be a specific geographical area.
e.g.:- Tele-banking, e-commerce

Market Structure:

The term market structure refers to all the features that may affect the behaviour and
performance of the firms in a market.
For example: the number of firms in the market OR the type of product that they sell

 Competitive market structure:

The competitiveness of the market refers to the extent to which individual firms
have power to influence market prices or the terms on which their product is sold.

 Competitive behaviour:

In everyday language, the term “competitive behavior” refers to the degree to

which individual firms actively compete with one another.
(For example, Shell Oil Company and British Petroleum certainly engage in
competitive behavior. It is also true, that both companies have some real power
over their market. Either firm could raise its prices and still continue to attract
customers. Each has the power to decide, within limits set by buyers’ tastes and
the prices of competing products, the price that people will pay for their petrol
and oil. So even though they actively compete with each other, they do so in a
market that does not have a perfectly competitive structure)

Market structure is best defined as the organisational and other characteristics of a

market. We focus on those characteristics which affect the nature of competition and
pricing – but it is important not to place too much emphasis simply on the market share
of the existing firms in an industry.

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Traditionally, the most important features of market structure are:

• The number of firms (including the scale and extent of foreign competition)
• The market share of the largest firms (measured by the concentration ratio –
see below)
• The nature of costs (including the potential for firms to exploit economies of
scale and also the presence of sunk costs which affects market contestability in
the long term)
• The degree to which the industry is vertically integrated - vertical integration
explains the process by which different stages in production and distribution of a
product are under the ownership and control of a single enterprise. A good
example of vertical integration is the oil industry, where the major oil companies
own the rights to extract from oilfields, they run a fleet of tankers, operate
refineries and have control of sales at their own filling stations.
• The extent of product differentiation (which affects cross-price elasticity of
• The structure of buyers in the industry (including the possibility of monopsony
• The turnover of customers (sometimes known as “market churn”) – i.e. how
many customers are prepared to switch their supplier over a given time period
when market conditions change. The rate of customer churn is affected by the
degree of consumer or brand loyalty and the influence of persuasive advertising
and marketing


Talk to an economist and she’ll define market structure according to how the industry
serving the market is arranged. In economics, there are four general market structures.

These four are:

o Monopoly: A monopoly exists when one company and one only provide services
in a particular industry, or one company dominates and consumers cannot
substitute anything that comes close. Today, very few industries are monopolies.
Utility companies such as water companies or electric companies may be
considered monopolies. Consumers can’t exactly substitute something else for
electricity from the local provider, unless they switch to firewood and candles!

• Firm = Industry
• Natural Monopolies
• 25%+ Market Share
• Control over price OR output
• Price discrimination?
• High Barriers to Entry
• Consumer choice
• Abnormal Profits

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o Oligopoly: An oligopoly consists of only a handful of companies selling similar

products. Consumers can substitute products, but only one company’s offerings
for another. An example would be the three big American car companies of
today: Ford, GM and Chrysler.

• Competition amongst the few

• Concentration ratio
• High Barriers to entry
• Non-Price competition
• Price stability?
• Kinked Demand Curve
• Product differentation
• Collusion?
• Abnormal Profits
• Interdependence between firms

o Monopolistic Competition: In monopolistic competition, many sellers sell

different products. It’s very similar to competition, below, with the exception that
the products themselves are a bit different from one another, so consumers look
for those differences rather than price differences. An example is the restaurant
industry. Anyone can obtain the proper permits, licenses and such and open a
restaurant offering any cuisine or food in the world. Whether the restaurant is
successful or not depends upon whether or not consumers like the food, service,
décor, location, and all the other factors that make restaurants successful.

• Many Buyers and Sellers

• Differentiated products
• Relatively free entry and exit
• Some control over price
• Tiny monopoly over product

o Competition: In markets with perfect competition, there are no barriers to entry,

and many offering different goods. Consumers often shop on price differences
alone. Wal Mart may be viewed as a purely competitive company within the
grocery industry for its super centers that offer lower prices than competing
grocery chains.

• Many Buyers and Sellers

• Freedom of entry and exit

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• Homogenous products
• Perfect information
• Sellers - price takers
• Long run normal profit

Characteristic Perfect Competition Oligopoly Monopoly

Number of firms Many Few One
Type of product Homogenous Differentiated Limited
Barriers to entry None High High
Pricing Price taker Price maker Price maker
Profit maximization? ü Not always Usually, but not
Non price competition û ü ü
Economic efficiency High Low Low
Innovative behaviour Weak Very Strong Potentially strong

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Comparison of Monopoly and Perfect Competition

Monopoly Perfect Competition

One supplier, large number of buyers. There are large number of buyers and
e.g.:- Market for agricultural

There is no competition. There is large competition.

There are barriers to entry. No barriers to entry

(There are agreements with government. (Legal, technological or resources)
e.g.:- Prima, Tobacco, Railway )

Firms earn super normal profit. Firms earn normal profit.

(Excessive profit) (Profit is enough to cover the cost, not
huge profit)

Firms are price-makers. Firms are price-takers

(They can set the price) (They are taking price in the market price,
not setting the price)

There is hardly any promotion There is no promoted

The perfectly competitive market structure-usually referred to simply as perfect

competition-applies directly to a number of real-world markets. It also provides an
important benchmark for comparison with other market structures.
The Perfect competition is not an ideal market structure in the present world.

 There are large number of buyers and sellers:

A perfectly competitive industry contains a large number of small firms (There is
large competition), each of which is relatively small compared to the overall size
of the market. This ensures that no single firm can exert market control over
price or quantity. If one firm decides to double its output or stop producing
entirely, the market is unaffected. The price does not change and there is not
discernible change in the quantity exchanged in the market.

 No barriers to entry:

Perfectly competitive firms are free to enter and exit an industry. They are not
restricted by government rules and regulations, start-up cost, or other barriers to
entry. While some firms incur high start-up cost or need government permits to
enter an industry, this is not the case for perfectly competitive firms. Therefore,
large number of firms comes into the market and competition will be high.
Likewise, a perfectly competitive firm is not prevented from leaving an industry as
is the case for government-regulated public utilities. If economic profits are
available, more firms will enter the industry.

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 Firms are price-takers:

In perfect competition, buyers are completely aware of sellers' prices, such that
one firm cannot sell its good at a higher price than other firms. Each seller also
has complete information about the prices charged by other sellers so they do
not inadvertently charge less than the going market price. Perfect knowledge
also extends to technology. All perfectly competitive firms have access to the
same production techniques. No firm can produce its good faster, better, or
cheaper because of special knowledge of information.

 Firms earn normal profit:

They set a production level based on the price determined in the market and do
not have any leverage. For example, in a perfectly competitive market, should a
single firm decide to increase its selling price of a good, the consumers can just
turn to the nearest competitor for a better price, causing any firm that increases
its prices to lose market share and profits. Therefore, profit is enough to cover
the cost, not huge profit. Thus, sellers earn normal profit.

 Identical products:

Each firm in a perfectly competitive market sells an identical product, what is

often termed "homogeneous goods." The essential feature of this characteristic is
not so much that the goods themselves are exactly, perfectly the same, but that
buyers are unable to discern any difference. In particular, buyers cannot tell
which firm produces a given product. There are no brand names or distinguishing
features that differentiate products.

Due to these reasons, the perfect competition is not an ideal market in this world.

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3.2 Define supply and demand and use different

examples to illustrate the relationship between market
forces and organization response
Demand means, the willingness to buy goods and services backed by purchasing

More having a desire is not enough to be termed as demand

In economics, we always refer to effective demand.

Effective demand: - must be willing and able to pay.

Demand function:
Demand function shows, the factors affecting the demand for a particular good or
It is as follows,
Qdx = ƒ (Px, Py, T, I, G …)

Qdx- - - Quantity demanded of good x

ƒ - - - Function
Px - - - Price of good x
Py - - - Price of other goods
T - - - Consumer taste or preference
I - - - Consumer income

Demand theory:

Demand theory means, the negative relationship between the price and the quantity
demanded of a good or service.

According to this theory, if price goes up, quantity demanded goes down.
Similar, if price goes down, quantity demanded goes up.

Demand formula:

Demand formula is the mathematical expression of the negative relationship between

the price and quantity demanded.
In others, this is the mathematical expression of demand theory.

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Qdx = a-bp

Qdx - - - Quantity demanded of good x

a - - - Quantity demanded when the price is at “0” level

(-) - - - This implies that, there is a negative relationship price and quantity demanded
b = ΔQ / ΔP

ΔQ - - - Changing quantity demanded

ΔP - - - Changing price
p - - - Price

Demand schedule means, the quantity demanded

at various price levels.

The reasons for demand theory:

There are should be reason as to why people decrease the quantity that the price goes
1) Income effect
2) Substitute effect

Movement along the demand curve:

Government along the demand curve takes place there is changing price, while other
factors effect in demand do not change.
It is as follows,

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Shift in demand curve:

The shift in demand curve means, the demand curve shift can be either to right or left.
This happens, when factors other than price change, while price does not change.
It is as follows,

If demand curve shift to left that

means less demanded at each
price which means decrease in

If demand curve shift to right,

more demand at in price, which
means increasing demand.

Elasticity of demand:
Elasticity means, responsiveness of one variable to changes in another.

Demand elasticity means, measuring the change in quantity demanded in relation to

changing factors effecting demand.

Elasticity measures the extent to which demand will change.

Elasticity of demand has 3 aspects.
1) Price elasticity of demand
2) Income elasticity of demand
3) Cross elasticity of demand

Price elasticity of demand:

The responsiveness of quantity demanded to changes in price is known as price
elasticity of demand.
The changes always refer to % change.

Where % change in quantity demanded is greater than % change in Price-Elastic.

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Where % change in quantity demanded is less than % change in Price-Inelastic.

In the case of agricultural products, goods are Price-Inelastic.

In this case what happen is, whenever there is a good harvest, prices of agricultural
products go down.

Naturally farmers expect an increase in the quantity demanded even though quantity
demanded increases; the change in quantity demanded is less than changing price.
Therefore, farmers cannot expect a rise in their income.

In international trade, Srilanka faces this problem. Because, Srilanka and other Third
world countries produce and export agricultural products which are inelastic. The
demands for agricultural products are price-inelastic.
The demands for industrial products are price-elastic. Due to these things, developing
country obviously cannot get the expected rise of income.

Income elasticity of demand:

Income elasticity of demand measures the responsiveness of demand to changes in

consumer income.
There are 2 types of goods.

 Normal goods:- Normal goods have a positive income elasticity of demand so

as consumers’ income rises, so more is demanded at each price level i.e. there
is an outward shift of the demand curve

 Inferior goods:- Inferior goods have a negative income elasticity of demand.

Demand falls as income rises

Cross elasticity of demand:

Cross elasticity means, the responsiveness of demand of one good to changes in the
price of a related good-either a substitute or a complement.

Complements:- The stronger the relationship between two products, the higher is the
co-efficient of cross-price elasticity of demand. When there is a strong complementary
relationship between two products, the cross-price elasticity will be highly negative.
e.g.:- Personal Computers (desktops and laptops)
Printing devices
Consumables such as ink cartridges
Hard disk drives
Communication devices
Computer software

Substitutes:- With substitute goods such as brands of cereal or washing powder, an

increase in the price of one good will lead to an increase in demand for the rival product.
Cross price elasticity for two substitutes will be positive.

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e.g.:- Tea – Coffee

Supply is the willingness on the part of producers to provide goods and services at given

Supply function:
Supply function shows, the factors affecting the supply for a particular good or service.
It is as follows.
Qsx = ƒ (Px, Py, C, T, W …)
Qsx - - - Quantity supplied of product x
ƒ - - - Function
Px - - - Price of product x
Py - - - Price of other goods
C - - - Cost of product
T - - - Technology
W - - - Weather

Supply theory:

Supply theory means, the positive relationship between the price and the quantity
supplied of a good or service.
This means, if the price goes up, quantity supplied goes up.
Similar, if the price goes down, quantity supplied goes down.

Supply formula:

Supply formula is the mathematical expression of the positive relationship between the
price and quantity supplied.
It is as follows.
Qsx = a+bp

Qsx - - - Quantity supplied of product x

a - - - Quantity supplied when the price is at “0”
(+) - - - the positive relationship between price and
quantity supplied
b = ΔQ / ΔP
ΔQ - - - Changing quantity supplied
ΔP - - - Changing price
p - - - Price

Supply schedule means, the quantity supplied at various price levels.

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Movement along the supply curve:

Movement along the supply curve happens, only when price changes, while other
factors effecting supply remains factors.

Shift in the supply curve:

This happens, when other factors effecting supply change while price does not change.
The shift can be either to left or right.

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Market is made up of two forces, demand and supply.
In market economy price and quantity is a consensus between supply and demand.

There is a point where,

suppliers and consumers
agree on the price and
quantity. That point is known
as Equilibrium.

Equilibrium price = £0.35

Equilibrium quantity = 250

Main forces which influence an organization

PEST Analysis

PEST is a strategic planning tool used to evaluate the impact political, economic, social,
and technological factors might have on a project. It involves an organisation considering
the external environment before starting a project.

The PEST analysis is an important part of the project planning process:

Political factors include areas such as tax policy, employment laws, environmental
regulations, trade restrictions and tariffs and political stability.

Economic factors are economic growth, interest rates, exchange rates and inflation

Social factors often look at the cultural aspects and include health consciousness,
population growth rate, age distribution, career attitudes and emphasis on safety.

Technological factors look at elements such as R&D activity, automation,

technology incentives and the rate of technological change.

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Swot analysis

SWOT is a strategic planning tool used to evaluate the strengths, weaknesses,

opportunities, and threats to a project. It involves specifying the objective of the project
and identifying the internal and external factors that are favourable and unfavourable to
achieving that objective. The strengths and weaknesses usually arise from within an
organisation, and the opportunities and threats from external sources.

Five forces analysis

Michael Porter's famous Five Forces of Competitive Position model provides a simple
perspective for assessing and analysing the competitive strength and position of a
corporation or business organization

porter's five forces

1. Existing competitive rivalry between suppliers

2. Threat of new market entrants
3. Bargaining power of buyers
4. Power of suppliers
5. Threat of substitute products





Sri Lanka has very positive foreign investment policies. However, though Sri Lanka
identified importance of liberalization early as in 1977, due to political direct intervention,
bureaucratic attitudes inherited from colonial reign and poor governance, the country as
a whole and specifically the industry has not grown as it was foreseen at the time of
liberalization. During the past decades, terrorist activities have remained constant as


Unstable macro economic environment and trade policy regime has a negative impact
on the industry. The fall of the exchange rate over the years happened on a gradual
Since the inception of liberalization policy it has undergone massive reforms in this
sector. However Sri Lanka lags dynamics incorporated by India to attract foreign direct
investments. The attitude towards foreign direct investments needs to be improved.

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Sri Lanka has better social conditions for example, literacy rate is high, infant mortality
rate is low and life expectancy is long. The country also has an educated and trainable
work force.
Nevertheless Sri Lankans inherit a bureaucratic attitude from the colonial administration
that results in inefficiencies and discrimination.


Sri Lanka depends on technology transfers from foreign direct investments. However
TRCSL encourages local research and development.
The country comparatively has not performed well enough to adapt technological
changes on a timely manner. For example the shift from analogue to digital and the
adoption of CDMA technology materialized in a slow pace.

Environmental factors

Environmental factors include the weather and climate change. Changes in weather can
impact on many industries. With major climate changes occurring due to global warming
and with the sunmi wave ttck in 2005 greater environmental awareness this external
factor is becoming a significant issue for firms to consider. The growing desire to protect
the environment is having an impact on many industries and the general move towards
more environmentally friendly products and processes is affecting demand patterns and
creating business opportunities.


TRCSL, the regulatory body takes up multidimensional roles. It ensures fair enforcement
of Government policy, hold operators accountable for performance, address consumer
issues, monitor changing industry needs, and provide feedback to the policy making
However TRCSL has been criticized over the years for information asymmetry,
inefficiency and discrimination.
e.g. competition law, health and safety, employment law

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organization respond to these forces

Organizational Trends

There are five key organizational trends that you should be aware of.


• Increasingly globalized sales, manufacturing, research, management

• Movement from direct exports to having sales offices in different countries to
having manufacturing to all functions spread across the globe
• Increasingly globalized labor market
• Due to:
o reduced cost and improved quality of international transportation and
o search for unsaturated markets
o exploit regional cost and expertise differences


• Workforce getting more heterogeneous sexually, racially, culturally, individually,

• Source of both innovation and conflict/communication problems
• Need to cope with different styles of interaction, dress, presentation, physical
• Due to:
o changing demographics
o globalization of the labor market


• Organizational systems and processes and people that can respond differently to
different situations
• Fewer detailed rules and procedures
• Greater autonomy, encouragement for initiative
• Customizable employment relationships: telecommuting, job sharing, mommy
tracks, pay for skills
• Lifetime employability, not lifetime employment
• Due to:
o differentiated customer needs -- filling them exactly is source of
competitive advantage
o increasing diversity in workplace
o increased pace of change in technology and markets

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• Fewer levels of management,

• Workers empowered to make decisions
• Fewer differences in responsibility across levels
• Due to:
o need for speed, which makes it helpful to empower employees to make
decisions, which means fewer managers are needed
o changes in information technology mean less need for the communication
and control functions of middle managers
o globalization means intensified competition, which increases the need to
cut costs


• Direct communication across unit & firm boundaries, ignoring chain of command
• Cross-unit team structures
• Outsourcing & downsizing
• Strategic alliances with competitors and others
o Now have firms that are your competitors, customers and collaborators all
at the same time
• Close coordination among firms and information sharing
• Across the board contact with customers, not just official boundary spanners
• Customization
• Decentralization
• Due to:
o new information technologies, especially groupware, client-server,
distributed computing
o fast changing customer needs and competitor offerings
o more complicated products require better integration of manufacturing,
design, and marketing functions

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3.3 Explain in detail the behavior and competitive

strategies employed by any organization
A competitive advantage is an advantage over competitors gained by offering
consumers greater value, either by means of lower prices or by providing greater
benefits and service that justifies higher prices.

Competitive Strategies

Following on from his work analysing the competitive forces in an industry, generic
business strategies that could be adopted in order to gain competitive advantage. The
four strategies relate to the extent to which the scope of a businesses activities are
narrow versus broad and the extent to which a business seeks to differentiate its

The four strategies are summarised in the figure below:

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The differentiation and cost leadership strategies seek competitive advantage in a

broad range of market or industry segments. By contrast, the differentiation focus and
cost focus strategies are adopted in a narrow market or industry.

Strategy - Differentiation

This strategy involves selecting one or more criteria used by buyers in a market - and
then positioning the business uniquely to meet those criteria. This strategy is usually
associated with charging a premium price for the product - often to reflect the higher
production costs and extra value-added features provided for the consumer.
Differentiation is about charging a premium price that more than covers the additional
production costs, and about giving customers clear reasons to prefer the product over
other, less differentiated products.

Strategy - Cost Leadership

With this strategy, the objective is to become the lowest-cost producer in the industry.
Many market segments in the industry are supplied with the emphasis placed minimising
costs. If the achieved selling price can at least equal the average for the market, then the
lowest-cost producer will enjoy the best profits. This strategy is usually associated with
large-scale businesses offering standard products with relatively little differentiation that
are perfectly acceptable to the majority of customers. Occasionally, a low-cost leader will
also discount its product to maximise sales, particularly if it has a significant cost
advantage over the competition and, in doing so, it can further increase its market share.

Strategy - Differentiation Focus

In the differentiation focus strategy, a business aims to differentiate within just one or a
small number of target market segments. The special customer needs of the segment
mean that there are opportunities to provide products that are clearly different from
competitors who may be targeting a broader group of customers. The important issue for
any business adopting this strategy is to ensure that customers really do have different
needs and wants - in other words that there is a valid basis for differentiation - and
that existing competitor products are not meeting those needs and wants.

Strategy - Cost Focus

Here a business seeks a lower-cost advantage in just on or a small number of market

segments. The product will be basic - perhaps a similar product to the higher-priced and
featured market leader, but acceptable to sufficient consumers.

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3.4 discuss the role of the competition commission and

regulatory bodies
The Competition Commission is an independent body responsible for investigating
mergers, market shares and conditions and the regulation of firms under United
Kingdom competition law. It is a non-departmental public body (NDPB) under the
Department of Trade and Industry.

The Commission has no authority to commence investigations on its own, an inquiry

commences following the referral of a particular case to the Commission, most often by
the Office of Fair Trading (OFT). Inquires May also result from referrals from the
Secretary of State for Trade and Industry (e.g. Morrison bid for Safeway supermarkets)
or independent regulators. For mergers the Commission will be asked to investigate if
the takeover target has a turnover above a certain threshold or if the resulting company
would have 25% or more of a market, i.e. a monopoly position.

Role of the Competition Commission

The Competition Commission (CC) is one of the independent public bodies which help
ensure healthy competition between companies in the UK for the benefit of companies,
customers and the economy. We investigate and address issues of concern in three

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 In mergers - when larger companies will gain more than 25% market share and
where a merger appears likely to lead to a substantial lessening of competition in
one or more markets in the UK.
 In markets - when it appears that competition may be being prevented, distorted or
restricted in a particular market.
 In regulated sectors where aspects of the regulatory system may not be operating
effectively or to address certain categories of dispute between regulators and
regulated companies.

Investigations are thorough and open. If investigations conclude that the situation
significantly damages or restricts competition in the UK, then we work to determine and
implement appropriate remedies. A wide range of remedies is available to the CC both in
merger and market investigations.

The decision making body for each inquiry is a group of at least three independent
experts, drawn from a wider panel of around 50 appointed members. Members are
supported by a specialist staff team on each inquiryMembers are appointed to the CC for
eight years, following open competition. They are selected and appointed by the
Government for their experience, ability and diversity of skills in competition economics,
law, finance and industry. All except the Chairman work part-time for the CC. Members
biographies are available.

The CC has around 150 staff, headed by Martin Stanley. These include economists,
business advisers, lawyers, administrators, accountants and support staff.. Two-thirds
are direct employees; the remainder are on temporary contract to help meet the CC’s
current workload, or on loan from government departments. Biographies of senior staff
are available.

Brief history
The CC replaced the Monopolies and Mergers Commission in 1999, following the
Competition Act 1998. The Enterprise Act 2002 introduced a new regime for the
assessment of mergers and markets in the UK. The CC’s legal role is now clearly
focused on competition issues, replacing a wider public interest test in the previous
regime. The Enterprise Act also gave the CC remedial powers to direct companies to
take certain actions to improve competition; in the previous regime its role was simply to
make recommendations to Government

Regulatory bodies in UK

1. Ofcom -

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The Office of Communications is the regulator for the media and communications
industries, having replaced from 29 December 2003 the Broadcasting Standards
Commission, the Independent Television Commission, Oftel, the Radio Authority and the
Radio Communications Agency. Its web site contains information and documents,
including policy guidelines, and selected material from the former sites of the five defunct
legacy regulators. Select Competition Bulletins on the home page to access current and
archived information on Ofcom's competition and other regulatory enforcement

2. Oft-

The Office of Fair Trading is an independent body which promotes and protects
consumer interests and ensures that businesses are fair and competitive. General
information, help and advice on the site is directed at both consumers and businesses.
This includes a series of quick guides to competition law aimed particularly at small and
medium sized businesses. Documents reproduced include press releases, reports,
consultation documents and recent annual reports.

3. Ofgem-

The Office of Gas and Electricity Markets regulates Great Britain's gas and electricity
markets. The legal content on its web site includes links to relevant legislation: to access
these first select About Us, followed by Enforcement and then Ofgem's Powers.

4. Ofwat-

it is the economic regulator of the water and sewerage industry in England and
Wales. It also plays a role under the Competition Act 1998 in promoting competition
within its sector. The extensive range of publications available on the site includes
guidance leaflets, codes of practice, consultation papers, and its annual reports to

5. Ofsted-

The Office for Standards in Education, Children's Services and Skills inspects
education and training for learners of all ages except those in higher education
institutes and universities. Since 1 April 2007 it has also been responsible for the
registration, regulation and inspection of children's social care in England. All of its
inspection reports are published on the site. Other sections provide news, forms and
guidance, consultations, statistics, and annual reports 1995-96 onwards.

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4.1 Discuss the importance of international trade,

economic integration and global markets to business

The importance of international trade: to the UK economy, businesses, balance of

payments, patterns and trends in international trade, UK trade with the EU, USA and
other countries, trading blocs throughout the world, UK membership of the EU,
enlargement of EU, direct/indirect exporting methods, trading opportunities, importance
of global markets, implications for businesses of emerging markets, cultural diversity and
clusters, TNCs, the economies of Europe EMU, EU budget import duties and levies,
agricultural levies, VAT, competitor policy, European Single Market Act, social policy,
The Social Chapter, tax harmonization, CAP, regional policy

Interpersonal, Interregional, and International Trade:

Consider trade among individuals, without trade, each person would have to be self-
sufficient; each would have to produce all the food, clothing, shelter, medical services,
entertainment, and luxuries that he or she consumed. A world of individual self-
sufficiency would be a world with extremely low living standards.
Trade among individuals allows people to specialize in those activities they can do well
and buy from others the goods and services they cannot easily produce. A good doctor
who is a bad carpenter can provide medical services not only for his or her own family,
but also for an excellent carpenter who lacks the training or the ability to practice
medicine. Thus, trade and specialization are intimately connected. Without trade,
everyone must be self-sufficient. With trade, everyone can specialize in what he or she
does well and satisfy other needs by trading.

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The same principles apply to regions. Without interregional trade, each region would be
forced to be self-sufficient.

The same principles also apply to nations. Nations, like regions or persons, can gain
from specialization. More of the goods in which production is specialized are produced
than residents wish to consume, while less domestic production of other goods that
residents desire is available.
International trade is necessary to achieve the gains that international
specialization makes possible.

This discussion suggests one important possible gain from trade.

With trade, each individual, region, or nation is able to concentrate on producing

those goods and services that it produces efficiently while trading to obtain goods
and services that it does not produce efficiently.

One feature of nearly every aspect of economic life is that individuals, businesses and
countries engage in specialization. Specialization is when we concentrate on a
particular product or task. Surplus products can then be exchanged and traded with the
potential for gains in welfare for all parties.

The potential benefits from specialization:

By concentrating on what people and business do best rather than relying on self-
 Higher output: - Total output of goods and services is raised and quality can be
improved. A higher output at lower costs means more wants and needs might be
satisfied with a given amount of scarce resources.
 Variety: - Consumers have improved access to a greater variety of higher
quality products. That is they have more and better choice both from their own
economy and from the production of other countries.
 A bigger market: - Specialization and international trade increase the size of
the market offering opportunities for economies of scale (a fall in long run costs
per unit of output).
 Competition and lower price: - Increased competition for domestic producers
acts as an incentive to minimize costs and innovate to remain competitive.
Competition helps to keep prices down and maintains low inflation

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4.2 Evaluate the impact of two policies of the European

Union on UK business organizations

History of the EU:

The origins of European integration date back to the end of World War II. The war had
left Europe in ruins and prompted the search for a lasting peace and, in particular, the
need to bring about lasting reconciliation between France and Germany.

One of the first initiatives was the European Coal and Steel Community (ECSC)
established by the Treaty of Paris in 1951. On 9 May 1950 Robert Schuman, the French
Foreign Minister, proposed that French and German coal and steel production should be
'pooled'. Belgium, Italy, Luxembourg and the Netherlands joined France and Germany in
setting up the ECSC and merging national interests in these industries.

In 1957 the six members of the ECSC formed the European Economic Community
(EEC) and began the process of developing a common market for goods and services.
The Treaties of Rome, signed in March 1957, created the EEC and the European Atomic
Energy Community. The Common Agricultural Policy to support farmers was

Since 1957, the EEC has seen five stages of enlargement, and now brings together 25
countries in what is known as the European Union (EU). Denmark, Ireland and the
United Kingdom joined in 1973; Greece in 1981; Portugal and Spain in 1986; Austria,
Finland and Sweden in 1995; Cyprus, the Czech Republic, Estonia, Hungary, Latvia,
Lithuania, Malta, Poland, Slovakia, Slovenia on May 1st, 2004.

The first direct elections to the European Parliament were held in 1979. Before that its
members were drawn from national parliaments.

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Another notable development took place in 1987 with the coming into force of the Single
European Act which set out the timetable for the creation of the Single Market by 1993.
This brought about the world's largest trading area and the free movement of goods,
capital, people and services.

The term "European Union" was introduced by the Maastricht Treaty in November 1993.
The Treaty established new areas of European co-operation in foreign and security
policy, and justice and home affairs. The new Treaty also set out a timetable for
economic and monetary union and the introduction of a single currency. Further changes
were introduced by the Treaty of Amsterdam in 1999. In particular, the powers of the
European Parliament were given a major boost and increased cooperation in foreign
policy and home affairs was established.
Further enlargement of the European Union is on the cards as more countries from
Eastern Europe and the Mediterranean have applied to join. In order to allow the EU to
function effectively with a much larger membership, member states agreed to a new EU
Treaty in Nice in December 2000.

A special Convention -the Convention on the Future of Europe- proposed a

constitutional Treaty setting out new arrangements to enable an enlarged EU to work.

In February 2002, the euro became the sole currency of 12 EU countries. Denmark,
Sweden and the UK remained outside the Euro zone. The 10 new countries will adopt
the euro only when they fulfill certain economic criteria, namely, a high degree of price
stability, a sound fiscal situation, stable exchange rates and converged long-term
interest rates. The European Central Bank contributes to the decision-making on future
euro are members.

The Single Market

The Single Market came into effect in January 1993 and works on the basis of four
freedoms - the free movement of goods, labour, services and capital throughout the EU.
This means, for example, that companies can buy and sell goods without them being
subject to barriers to trade, that people can work in any member state with their
qualifications recognised, that services such as banking may be used across member
states, and that capital and currencies can move freely. All Member States of the EU are
part of the Single Market, even if they have not joined the euro.


• A wider market is accessible for both producers and consumers - there are over
500 million consumers in the EU following enlargement in May 2004.
• There is greater competition, which has led to lower prices on certain goods, for
instance the liberalisation of air travel has contributed to the introduction of 'no
frills' airlines.

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• Consumer protection has increased as EU directives apply across the Single

Market, for example the Fourth Motor Insurance Directive makes it easier to
make a claim following an accident occurring in another EU country.
• Common standards on products means that they can be sold in other Member
States without retesting. This improves consumer and producer knowledge and
leads to greater competition which should, in turn, bring benefits to all.
• Workers are more mobile and can work with the same rights in other Member
States. In theory, this should lead to less disparity in wages across member
states and more opportunities for people within the EU to locate jobs.


• Some countries are still protectionist and not implementing in full new single
market rules. France and Italy are the worst offenders. For example, Italy has yet
to abolish a set of technical rules, which restrict how trailers may be attached to
tractors - this has blocked the opportunity for other European trailer
manufacturers to enter the market.
• There are fears of possible cultural differences. For example, if Muslim states
join would they be able to adjust their approach to women to meet the standards
set by the EU? Should they have to?
• The opportunities that exist for criminal elements to exploit the single market
could cause de-stabilising effects.
• The disparity between member states could lead to further social and
economic problems, particularly in countries that used to be part of the former
Soviet bloc where it is acknowledged that they are a long way behind the
economic development of existing members. The experience faced by Germany
when it united West Germany with the former 'communist' East Germany is a
good example of the potential problems that could arise.

The euro?

The euro is the common currency used by 12 of the 25 EU member states. The 3 'old'
member states not yet using the euro are Denmark, Sweden and the United Kingdom.
The euro was introduced in the 12 participating states on 1 January 2002, replacing their
old currencies such as the franc and lira . This was the third stage of Economic and
Monetary Union , which commenced in the early 1990's. Sweden and Denmark have
both held public referenda on whether or not to join the euro, and both have rejected it in
favour of keeping the krona and krone respectively.

The new member states which joined in May 2004 have not automatically joined the
euro. They will only do so when they have reached the level of economic convergence
required by the 'Maastricht' convergence criteria. This includes a high degree of price
stability, sustainable government finances, a stable exchange rate, and convergence in
long term interest rates. There is no timetable at present for the new member states to
join the euro.


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The EU has 25 Member States. These are Austria, Belgium, Denmark, Finland, France,
Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden,
the United Kingdom and the 'New Member States' which joined in May 2004.


The EU has 10 New Member States which became full members on 1st May 2004.
These are Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland,
Slovakia and Slovenia.


There are two countries that are currently negotiating to join the EU by 2007. These are
Bulgaria and Romania.

Turkey made an application for membership in 1987, but is not currently negotiating its

Croatia and Macedonia have also applied to join the EU.

Guide to EU Institutions

The three main political EU institutions are:

• The European Parliament is directly elected by citizens of the EU who are

represented by Members of the European Parliament (MEPs). There are 626
MEPs, 87 of whom are British. The Parliament makes decisions on legislation
and the budget of the EU.
• The Council of the European Union is the main decision making body.
Together with Parliament, it has the power to make decisions on legislation and
the budget of the EU. The Council is also known as the Council of Ministers as a
government Minister from each member state attends the Council. The Minister
attending varies according to the subject under discussion. For instance,
Margaret Beckett, currently Secretary of State for Environment, Food & Rural
Affairs, represents the UK at the Agriculture and Fisheries and Environment

• The European Commission proposes legislation to and implements the

decisions of the Council and Parliament. It is the civil service institution of the EU.
There are twenty Commissioners, two of whom are from the UK

The Council of the European Union is the EU's main decision-making body.

The two main financial institutions are:

• The European Central Bank manages the euro, the currency used by 12 of the
EU's 15 member states. The Bank sets interest rates for these 12 countries and

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conducts foreign exchange operations. It also maintains price stability in the euro
area by controlling the money supply and monitoring price trends.
• The European Investment Bank finances investment projects that promote the
objectives of the integration, balanced development and economic and social
cohesion of Member States. The Bank raises money on the financial markets,
rather than using EU funds.


The EU is funded from four sources of revenue. These sources were set out in what is
known as the 'Own Resources Decision', which ensured that the EU has automatic
sources of revenue. Each Member State must pay the following:

• Customs duties. These are derived from tariffs applied to imports from countries
outside the EU. Member states may retain 25% of customs duties to take into
account the costs of collection.
• Agricultural levies. These are charged on agricultural imports from countries
outside the EU. Member states may retain 25% of customs duties to take into
account the costs of collection.
• VAT-based contributions. These are levied at 0.75% in 2002 and 2003, then
0.5% thereafter.
• Contributions based on Gross National Product (GNP). This is set at 1.02%
for the 2003 budget.


The EU has committed itself to spending just under 100 billion euro in 2003. This budget
will be split as follows:

• 45% on the Common Agricultural Policy (CAP)

• 34% on Structural Operations (this redistributes wealth from the richer countries
to the poorer ones via the EU's regional policy)
• 9% on External Action (this includes overseas development aid and disaster
• 7% on Internal Policies (this includes research and development, energy,
transport networks and education and training)
• 5% on Administration

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The UK's net contribution for 2002-3 is forecast to be £2.2 billion, followed by £2.4 billion
in 2003-4. This figure takes into account revenues to be received from the EU from
sources such as the Agriculture Guidance Fund, the Social Fund, and the Regional
Development Fund.

European Union Countries:

1. Austria
2. Belgium
3. Bulgaria
4. Cyprus
5. Czech Republic
6. Denmark
7. Estonia
8. Finland
9. France
10. Germany
11. Greece
12. Hungary
13. Ireland
14. Italy
15. Latvia
16. Lithuania
17. Luxembourg
18. Malta
19. Netherlands
20. Poland
21. Portugal
22. Romania
23. Slovakia
24. Slovenia
25. Spain
26. Sweden
27. United Kingdom

Economic consequences of UK entry into European Union

Under this, we can mention lots of things. But especially I am going to mention about
European Monetary Union-particularly the single currency named Euro. Because of
the one reason that I choose this that Euro defeated the US dollar.
In this task, I compared UK with Euro zone.
Let’s check it briefly;

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The launch of the Euro as a new currency in circulation in January 2002 marked a
fundamental change in monetary arrangements for all members of the European Union.
No country is immune to some of the static and dynamic effects of the creation of a
single currency covering twelve of the fifteen member nations of the EU.

Joining the Euro – convergence criteria

Countries wishing to join the single currency must meet four convergence criteria.

 Stable prices: Inflation must not be more than 1.5 percentage points higher than
the average in the three member countries with best price stability, which is
lowest inflation.
 Stable exchange rate: The national currency must have been stable relative to
other EU currencies for a period of two years prior to entry into the monetary
union (ERMII entry).
 Sound government finances:
1. Gross government debt must not exceed 60 per cent of GDP.
2. The annual government budget deficit must not be greater than 3 per cent
of GDP.
 Low interest rates: The 5-year government bond rate must not be more than 2
percentage points higher than in the three member countries where inflation is

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4.3 Analyze the economic implications for any country

in UK of entry in to European Economic and Monetary
Economic and Monetary Union (EMU)

This is the process, which enabled the introduction of the single currency, the euro.
Economic and Monetary Union has developed in 3 stages:

• Stage 1 was from July 1990 to December 1993. This removed internal barriers to
the free movement of capital within the EU.
• Stage 2, beginning in January 1994 set up the European Central Bank it was
then This strengthened monetary policy co-ordination and prepared for the
establishment of the European System of Central Banks
• The final stage started in January 1999 with the irrevocable fixing of exchange
rates of the old currencies to the euro, the transfer of monetary policy to the
European Central Bank and the introduction of the euro. The use of euro notes
and coins in the countries who had agreed to become full members of the euro
came into operation on January 1st 2002. The single monetary policy is now
conducted by the Eurosystem

ADVANTAGES OF European monetary union

No need to change money into foreign currencies. This will save time and money. This is
good for businesses and tourists
It is easier to compare prices in different countries. This is because all figures are quoted
in Euro’s.
Reduced exchange rate uncertainty. International trade becomes easier because
exchange rates can’t effect prices
More foreign businesses may choose to set up in the UK if we are using the same
currency as the rest of europe

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The Treasury outlined five economic tests in 1997 that need to be met before the UK
can adopt the euro. These tests are:

• Convergence. Are UK business cycles and economic structures compatible with

euro interest rates on a permanent basis? This test looks at whether a single
interest rate will be suitable for all Member States using the euro over a
sustained period. It looks at what impact an economic disturbance or 'shock'
would have on each of the Member States, i.e. whether each economy would
react in the same way, and whether or not Members would be vulnerable to
country specific shocks. If the latter applies, the government would not consider
there to be sufficient convergence for the UK to join.
• Flexibility. Is there sufficient flexibility to deal with problems? This test looks at
the ability to respond to economic change efficiently and quickly, and at ensuring
that shocks do not have long-lasting effects.
• Investment. For firms wishing to invest long-term in the UK, would joining the
euro create more favourable conditions?
• Financial Services. What effect would joining the euro have on the competitive
position of the UK's financial services industry, particularly on the City of
London's wholesale markets?
• Growth, Stability and Employment. Will joining the euro promote higher
growth, stability and a long-term increase in jobs?

In June 2003, the government assessed whether the conditions of these tests had been
met. They concluded that the first two tests of Convergence and Flexibility had not been
met, but that the other three tests of Investment, Financial Services, and Growth,
Stability and Employment had been met. Therefore, the government decided that it was
not currently in the national interest to join the euro. They announced reforms including a
new inflation target, reforms to housing, planning to promote flexibility in the economy,
and consultation on a new fiscal regime in order to meet all five economic tests. The
Government will report on progress on the economic tests in the Budget of 2004. If the 5
tests are met at that time, it is proposed that the issue would then be put before the
British people in a referendum.

Should the UK join the euro?


• Reduction of opportunity cost, which may occur as a result of loss of

investment and trade from eurozone countries. Small and medium sized
businesses would be able to trade freely in the Single Market, perhaps for the
first time.
• Stability would increase as vulnerability to short term shocks would be
reduced, , as would changes in the exchange rate which affect the level of
• The UK may find it is increasingly sidelined in terms of political decisions within
the EU, particularly following enlargement, if it is not a full member in economic
• It would cut business costs by removing the need to convert from the pound to
the euro, and the associated changes in the exchange rate which may
unexpectedly cut profits.

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Business environment

• Businesses will be able to make longer term decisions as unpredictable

currency movements would be reduced.
• Competition would be stimulated, benefiting the consumer as prices throughout
Europe would be more 'transparent' - differences could not be masked by
changes in the exchange rate.


• In the present climate, it would be an unpopular decision, with the majority of

Britons not being in favour of joining. This may lead to a lack of confidence in the
economy. Many worry about the UK losing control over its own economy.
• The UK would not be able to set its own interest rate. Instead, it would be set by
the Central Bank for all eurozone countries. This reduces the government's ability
to react to shocks in the market. Any change in the interest rate will benefit the
eurozone countries as a whole, which may mean it benefits some countries more
than others.
• Mortgages in the UK are different to those in the rest of Europe. In the UK, there
is a high proportion of owner-occupiers with variable rate mortgages. In the rest
of Europe, however, there is a higher tendency for long term renting, and those
that do have mortgages are on long term fixed rates. Therefore, homeowners in
the UK are more likely to be affected by interest rate changes than their
counterparts in other EU states.
• Joining the euro may restrict the amount of long-term borrowing the UK is
able to carry out. Eurozone countries are subject to the Stability and Growth
Pact, which means that countries must not spend beyond their means. If the UK
wishes to borrow money for long-term
investment, this would be against the
• Some take the view that as the British
economy is doing well at the moment,
and outperforming the eurozone states,
why move over to the euro?

The rate at which the UK might join the euro is

important because this would determine
relative prices. If the UK joined at too high a
rate, it would mean that exporters would find
that their prices had effectively risen making
them less competitive whilst imports would
appear cheaper. The disruption to our
competitive position could have long-term
effects as businesses would have to find ways
of regaining the competitiveness that they had
lost. This could be difficult - especially in the
case of manufacturing industry - when margins
might be already very tight and there is not
much room for improving efficiency and productivity.

If we joined at too low a rate, the opposite position would arise - imports would
become more expensive, thus increasing business costs but exporters would see

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some benefits in terms of improved prices. The effects in both cases is not 'real' in
the sense that the prices received by both importers and exporters would not necessarily
reflect the resources used in the production of the goods and services concerned.

In 1992, the UK joined the Exchange Rate Mechanism at a rate of DM2.95 to the
pound. This was seen as being too high and that the pound was effectively overvalued -
not worth what you had to pay for it. The increased pressure on the pound to fall meant
the government had to maintain interest rates at very high levels, which in turn
exacerbated the downturn in the economy.

To further understand the problems, refer to the Purchasing Power Parity theory. This
states that relative exchange rates should reflect the cost of purchasing a similar basket
of goods in different countries. If £100 would buy a specified basket of goods in the UK
and an equivalent basket cost €200 in Europe, then the exchange rate should be £1 =


• Business studies in A/L book


Michael Halvorson, Step by Step,Asoka Ghosh, ,First Edition,(81-


Bill Evjen, Billy Hollis, Bill Sheldon , Kent Sharkey, Tim McCarthy,
3.0,Wiley Inmdia Pvt.Ltd., ,second edition,(10-81-265

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Bill GATES (Business masterminds, the gurus who transformed the

business world) - - - - - - - - - - - - - - - - - - - Author- Robert Heller

The Environment Dictionary - - - - - - - - - - - Author- David D. Kemp

Living thoughts of Karl Marx - - - - - - Author- Leon Trotsky

Positive Economics - - - - - - - - - - - - - - Authors- Lipsey, Chrystal

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