1

Chapter 2
Business and its External Environment

Daw Aye Aye Win

Nature of Business Activity

• Business as an activity can be divided :

1. People demanding goods and services.
2. People involved in obtaining, arranging and
transforming, basic materials into finished products.
3. People who are not in the above categories are
involved in distributing products to customers.
Nature of Business Activity

• Classification by level of Activity

1. Primary
2. Secondary
3. Tertiary
• Classification by Sector
1. Private Sector
2. Public Sector
Nature of Business Activity

• Classification by Legal Structure

1. Unincorporated Associations
2. Registered Companies
3. Public Sector Organizations
1. Unincorporated Associations

• Sole Trader – a business owned and operated by one

person. The owner is responsible for all operations of
the business and assumes all the risk.
• Partnerships – a form of business organization in
which two or more people own and operate the
business together.
2. Registered Companies

• Chartered Companies – Charitable bodies and other

institutions that are incorporated by Royal Charter. E.g
The British Broadcasting Corporation (BBC), East India
Company
• Statutory Companies – Formed by a specific Act of
Parliament. E.g Canal and Railway Company
• Registered Companies – Set up by the simple
procedure of registration with the Registrar of
Companies. The most popular and are registered under
the Companies Act.
3. Public Sector Organizations

• Play a key role to accomplish quick

industrialization and rising standard of living of the
people through developing key and basic industries.
Private Vs Public Organizations
Private organizations
1. Organizational rationality is bounded, and
progress is often by trial and error.
2. Worker motivation is complex, extending
beyond economic incentives into social and
personal needs.
3. Organizations have a non-formal
organizational culture key to determining the
actual tasks and the sense of mission.
4. Organizations have the characteristics of
living, evolving systems.
5. There is a great variety of types of
organization, responding to different and
changing needs and environments.
6. The external “authorizing environment”
i.e. the external influences on what the
organization does and how it does it – is
important and complex.
Public organizations
Similar, but uncertainty may be less.
Similar: the people are no different.
Similar.
Much less so: they are born, allowed to
change and allowed to die much less easily.
There is a smaller variety. A ministerial
hierarchy with large, wholly public sub-
organizations is the dominant form.
Centralized control of resources and
regulation of personnel and procedures mean
considerably less managerial autonomy from
the external environment.
Economic Systems

• An economic system is the combination of the

various entities, state or nation allocates its
resources and distributes goods and services and
provide the economic structure that guides the social
community.
Economic Systems

• There are Four types of economic systems:

1. Traditional
2. Command
3. Market
4. Mixed
1. Traditional Economy

• Family or Community based Economic System that

relies on custom and ritual to make its choices.
• Economy is shaped largely by custom or religion.
• Customs and religion determine the WHO, WHAT,
and HOW.
2. Command Economy

• Centrally Controlled Economy where the Government

makes all decisions.
• All resources are government-owned.
• The government runs all businesses, controls all
employment, and decides WHAT and HOW goods and
services will be produced WHO receives the products
that are produced.
3. Market Economy
• NO government involvement Individual or Consumer
based Economic System (Market-based economic
system) that relies on the consumption choices of
consumers.
• Consumers decide WHAT should be produced.
• Businesses determine HOW the products will be
produced.
• WHO buys the products?
4. Mixed Economy

• Economic System that incorporates some

Governmental involvement into a Market Based
Economy.
• Most economies in the world today are mixed.
• Classification is based on how much government
intervention there is.
• In the U.S. the government accounts for about 1/3 of
all U.S. economic activity.
Share Capital

• There are three different kinds of share:

1. Ordinary Share
2. Preference Share
3. Deferred Share
1. Ordinary Share/ Equity Share

•The ordinary shares or equity are shares in which the

dividend is paid after the dividend on fixed rate has
been paid on preference shares.
•Characteristics:
1. These shares have voting rights.
2. It doesn’t offer a fixed rate of return.
3. They are not entitled to get capital on
winding up, before paying to preference
shareholders.
2. Preference Share

• Preference shares are those shares which carry with

them preferential rights for their holders, i.e.,
preferential right as to fixed rate of dividend & as to
repayment of capital at the time of winding up of the
Company.
• Characteristics :
1. It offers a fixed rate of dividend.
2. Right to get capital on winding up, before
anything is paid to equity shareholders.
Types of Preference Share

1.Cumulative
2.Non-Cumulative
3.Participating
4.Non-Participating
5.Redeemable
6.Irredeemable
7.Convertible
8.Non-Convertible
3. Deferred Share

• Deferred shares are those shares on which the

payment of dividend and capital is made after money is
paid in full on preference shares and equity shares.
Characteristics:
• Dividend is not fixed and depends on the availability
of profits.
• Dividend is paid after payment of dividend on equity
& preference shares.
Source of Finance Decide
which
assets to
buy

To decide Determine
sources to Decision what is total
tap the total investment
investment. making required for
buying assets.

How much
working
capital
required.
Classification of finance according to term

1. Short term finance (<1yr)

2. Medium term finance (1-5 yrs)
3. Long term finance (>5 yrs)
1. Short Term Finance

• Short term finance are required primarily to meet

working capital requirements.
• The focus is on maintaining liquidity at a reasonable
cost.
 Working
Capital
finance

Commercial Trade
Paper Credit
Short
Term
Finance

Inter-
Corporate
Factoring
Deposits
(ICD)
 Medium Term Finance
• Medium term finance is defined as money raised for a
period for 1 to 5 years.
• The medium term funds are required by a business
mostly for the repaired and modernizing of
machinery.
 Medium Term Finance

Commercial
Banks & External Euro &
Lease Hire
State Commercial Foreign
Financing Purchase
Financial Borrowings Bonds
Institutions
Long Term Finance

• Long term finance refer to those requirements of

funds which are for a period exceeding 5-10 years.
 Share

Securitization Debentures

Long
Venture
term New Debt
Capital
finance Instruments

Depository Retained
Schemes Earnings
Internal Sources of Finance

1. Retained Profits
2. Provision for Depreciation
3. Provision for Taxation
4. Reduction in Current Assets
Advantages:
• No interest payments have to be met
• No repayment is necessary
• No costs are involved
External Sources of Finance

1. Banks
2. Finance Houses
3. Discount Houses
4. Factoring Companies
5. Leasing Companies
6. Insurance Companies
7. Public Sector Agencies
8. Pension Funds
International Management

• The process of applying management

concepts and techniques in a multinational
environment and adapting management
practices to different economic, political, and
cultural environments.
Four Stages of Globalization

1. Domestic stage

2. International stage

3. Multinational stage

4. Global stage
 Strategies for Entering International Markets
Greenfield
Venture
Foreign Operations

Acquisition
Ownership of

Joint Venture

Franchising

Licensing

Exporting

Low Low Cost to Enter Foreign Operations

34
Different Modes of Entry

1. Exporting
2. Licensing
3. Franchising
4. Joint Venture
5. Merger and Acquisition
1. Exporting
• Form of Exporting

Direct Indirect
Exporting Exporting
Direct and Indirect Exporting

• Direct exporting means that the firm works

with foreign customers or markets with the
opportunity to develop a relationship.

• Indirect exporting means that the firm

participates in international business through an
intermediary and does not deal with foreign
customers or markets.
Exporting

Advantages Disadvantages

• Relatively low financial • Vulnerability to tariffs

exposure and NTBs (Non-tariff
• Permit gradual market barriers)
entry • Logistical complexities
• Acquire knowledge • Potential conflicts with
about local market distributors
• Avoid restrictions on
foreign investment
2. Licensing

•Licensing is when a firm,• The property licensed may

called the licensor, leases the include:
right to use its intellectual • Patents
property to another firm, • Trademarks
called the licensee, in return
• Copyrights
for a fee.
• Technology
• Technical know-how
• Specific business skills
Licensing

Advantages Disadvantages

• Low financial risks • Limited market

• Low-cost way to assess opportunities/profits
market potential • Dependence on
• Avoid tariffs, NTBs, licensee
restrictions on foreign • Potential conflicts with
investment licensee
• Licensee provides • Possibility of creating
knowledge of local future competitor
markets
3. Franchising

• Franchising is a form of Licensing but the Franchisor

can exercise more control over the Franchisee as
compared to that in Licensing.
Franchising
Advantages Disadvantages

• Low financial risks • Limited market

• Low-cost way to assess opportunities/profits
market potential • Dependence on
• Avoid tariffs, NTBs, franchisee
restrictions on foreign • Potential conflicts with
investment franchisee
• Maintain more control • Possibility of creating
than with licensing future competitor
• Franchisee provides
knowledge of local
market
4. Joint Venture
• A joint venture is an entity formed between two or
more parties to undertake economic activity together.
The parties agree to create a new entity by both
contributing equity, and then they share in the
revenues, expenses, and control of the enterprise.
Joint Venture
Advantages Disadvantages

• Benefit from local • Risk giving control of

partner’s knowledge technology to
• Shared costs or risks partner
with partner • May not realize
• Reduced political experience curve or
risk location economies
• Shared ownership
can lead to conflict
5. Merger and Acquisition
Merger : The combining of two or more companies,
generally by offering the stockholders of one company
securities in
the acquiring company in exchange for the surrender of
their stock.

Acquisition : When one company takes over another

and clearly established itself as the new owner, the
purchase is called an acquisition.
Merger and Acquisition

Advantages
• Obtains control over the acquired firm such as
factories and brand names
• Integrate the mgt of the firm into its overall
international strategy

Disadvantages
• Assumes all the liabilities such as financial and
managerial
Ethics
• Ethics
The moral obligation involving the
distinction between right and wrong.

• Business Ethics
The complex business practices and
behaviors that give rise to ethical issues in
organizations.
Corporate Social Responsibility

• Corporate Social Responsibility

The idea that business has social obligations above and
beyond making a profit.

Business has an obligation to constituent groups in

society other than stockholders and beyond that prescribed by
law.
A Continuum of Social Responsibility Strategies