Transcript BER,Ppt6

Media and Journalism Module
Business and Economics For Reporters
6. How Business Works
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This week’s lesson
• General look at how business works and
where it fits into the economic models that
we have already discussed.
• Different industry segments:
• Primary segment (the primary production sector)
• Secondary segment (the manufacturing sector)
• Tertiary segment (retail and service sector)
• ‘Big Ticket’ items that affect businesses:
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Banking
Taxation
Labour and industrial relations
Competitive forces
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Industry Segments
• Week 2 - how an economy works and concepts of
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Households
Businesses
Government
Foreign sector
• The business sector can be divided into various
segments to define the proportion of the population
engaged in the activity.
• For example:
• type of activity conducted (e.g. manufacturing or primary
production)
• products produced (e.g. footwear segment – regardless of
whether these are manufactured, imported, etc).
• Traditional geographical model - distance from the
natural environment to allocate segments
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Primary segment
• The primary segment of the economy
extracts or harvests products from the earth,
and usually includes production of raw
material and basic foods.
• Activities include:
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Agriculture (both subsistence and commercial)
Mining and quarrying
Forestry
Farming
Grazing
Hunting and gathering
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Fishing
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Primary segment
• The packaging and processing of the raw material is
considered to be part of this segment.
• A fishing operation that takes fresh fish and cleans and
packages it, is considered a primary industry.
• In developed countries, a decreasing proportion of
workers are involved in the primary segment.
• In the United States of America only three per cent
of the labour force is employed in this segment.
• In Samoa two-thirds of the labour force are found in
agriculture and are responsible for 90% of exports coconut cream, coconut oil, and copra.
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Secondary Segment
• The secondary segment of the economy
manufactures finished goods.
• All manufacturing, processing, and construction lies
within the secondary segment - activities include:
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Metal working and smelting
Car and vehicle production
Textile production
Chemical and engineering industries
Aerospace manufacturing
Energy utilities
Engineering
Breweries and bottlers
Construction
Shipbuilding
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Tertiary Segment
• The tertiary segment of the economy is the service industry.
• This segment provides services to the general population and
to businesses - activities include:
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retail and wholesale sales
transportation and distribution
entertainment (movies, television, radio, music, theatre, cinema)
restaurants
clerical services
media
tourism
insurance
banking
healthcare
law.
• In most developed countries, a growing proportion of workers
are devoted to the tertiary segment.
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http://www.vanuatutourism.com/vanuatu/cms/en/operators/evergreen_tours.html
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The role of banking
• A key industries in the tertiary segment is the
banking industry - huge impact on business.
• Banks are privately-owned institutions that accept
deposits and make loans.
• Deposits are money people leave in an institution
with the understanding that they can get it back at
any time or at an agreed future time.
• A loan is money lent out to a borrower which is
generally paid back with interest.
• Most people and businesses pay their bills with bank
accounts.
• Banks are the major source of consumer loans
• loans for cars, houses, education
• main lenders to businesses, especially small businesses.
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The role of banking and reserves
• Banks can't lend out all the deposits they collect, or
they wouldn't have funds to pay out to depositors.
• Keep reserves
• the level of the reserve is usually specified by legislation
• ensures customer’s money is secure
• Reserves can include:
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cash
deposits due from other banks
the reserves required by legislation
secondary reserves such as securities bought by banks,
such as government bonds
• Any money a bank has after it meets its legislated
reserve requirement is its excess reserves.
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Taxes
• In week 2 - the role of various sectors within
an economy and how funds flow through the
economy.
• An important flow is related to taxation
payments - a huge impact on business.
• Tax is any sort of forced or coerced
payments to government
• Unavoidable cost of doing business
• Main reason the government sector collected
taxes is to get the revenue needed to
finance public goods and pay administrative
expenses.
www.icbs.ca/taxes.shtml
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Taxes
• However, as journalists we should also recognise
that taxes have other effects, including:
• redirecting resources from one good to another
• altering the total amount of production in the economy
• Taxes have been used to:
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correct market failures
equalise income distribution
achieve efficiency
stabilise business cycles
promote economic growth
• Many different type of taxes
• The affect on business cannot be over-estimated
• Many businesses will make production and
distribution decisions based on the favourable or
unfavourable tax structure
of a particular location.11
BER,Ppt6.ppt
www.suzannesutton.com/6-8.htm
Tools for journalists
• A valuable source of information is the World Bank’s
country by country analysis of the cost of doing
business.
• A common list of business costs and prepares
comparison data.
• For the taxation component the World Bank
estimates the tax that a medium-size company
must pay or withhold in a given year, as well as
measures of the administrative burden in paying
taxes:
• the number of payments an entrepreneur must make
• the number of hours spent preparing, filing, and paying
• the percentage of their profits they must pay in taxes.
www.suzannesutton.com/6-8.htm
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Common taxes
• The most common taxes you will find in
business reporting include:
• Customs duty, or import tax, - collected
specifically to raise revenue for a country, but can
also be used as an import trade barrier
• Sales tax –although sales tax is paid by
consumers it will ultimately impact on business
as the cost influences the overall price of a
product, and thus the willingness of consumers to
purchase a product
• Payroll-related taxes - most legislation employers
are liable for payroll tax when their total wages
exceed a certain level called the ‘exemption
threshold’. Exemption thresholds vary between based on the total wages
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Common taxes
• Value-Added Taxes (VAT) – a tax assessed on the
increase in the value of goods from each stage of
production. VAT tax can also be called Goods and
Services Tax (GST). Paying VAT/GST requires
businesses to maintain detailed records and
account keeping procedures, so the cost of doing
business increases to ensure compliance with the
tax. It is interesting to note that not all countries
have adopted this tax, and countries such as Niue
use the absence of this tax to attract businesses.
• Income tax – businesses pay income tax based
on corporate annual income minus allowable
business deductions and tax credits
• Tax structures in the host country may be a
reason why businesses consider operations in
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another country
http://www.nevtron.si/borderline/busines.gif
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Tax havens
• Tax haven - a country where little or no tax is paid
• attractive to many companies
• Famous examples:
• Switzerland
• Bahamas
• Recent years countries such as Vanuatu, the Cook Islands
and Samoa have established favourable tax structures for
business and are being increasingly seen as providing tax
havens.
• The downside:
• country can attract illegal and harmful activities, such as
money laundering.
• 2000 the OECD cited the Pacific countries of Vanuatu, the
Cook Islands and Samoa for operating “harmful tax havens”
• these countries are nowBER,Ppt6.ppt
changing their taxation systems.16
Minimum wages and labour conditions
• Costs in running a businesses - labour and
minimum wages
• Important issue to the business journalist:
• companies seeking to lower production costs can take
illegal or unethical shortcuts
• use cheap labour.
• Two major international businesses, Nike and Gap, for
example, suffered enormously damaging publicity when it
was revealed by a BBC documentary that child labour was
used by the organisation which supplied the companies.
Nike and Gap were forced to seriously review the contracts
with the company employing the child labour, as pressure
about unacceptable working practices was so severe it
substantially threatened their sales.
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Minimum wages and labour conditions
• Developed countries have legislation that determines the
minimum wages and the conditions under which employees
can work.
• Labour laws usually cover:
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Minimum wage levels
Employment discrimination issues
Working hours
Sickness, maternity benefits
Conditions of employment and termination requirements
Management-labour issues
Worker health and safety
• Some countries do not have these structures and a business
must consider the issue carefully before determining how to
structure worker payment in such countries.
• Where written labour laws and workplace laws exist there are
fewer conflicts between management and the workforce.
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Competitive forces
• Concept of competition and competitive forces
• Terms often used incorrectly and interchangeably.
• Competition defined as the action of two or more
rivals who are both pursuing the same objective
• come across this term when looking at businesses which
are competing against each other
• Either selling goods to buyers or
• buying goods from sellers.
• Competition comes in two varieties:
• competition among the few - which is when there is a
market with a small number of sellers (or buyers), so that
each seller (or buyer) has some degree of market control
• competition among the many - which is when there is a
market with so many buyers and sellers that none is able to
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influence the market price
or quantity exchanged.
Michael Porter
• Famous Harvard economist, Michael
Porter
• “Competitive Strategy - Techniques
for Analysing Industries and
Competitors” (1980) contains major
analysis that can be used to explain
the term competitive factors.
• Five competitive forces that
determine industry attractiveness
and long-run industry profitability:
• Threat of entry of new competitors
(new entrants)
• Threat of substitutes
• Bargaining power of buyers
• Bargaining power of suppliers
• Degree of rivalry between existing
competitors.
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Threat of new entrants
• New entrants can raise the level of competition, and make it less
profitable for those already running a business in that industry.
• For example, one entrepreneur sets up an eco-resort on a remote Pacific
Island – tourists flock because it is a unique and exciting concept.
Suddenly, other tourist operators decide that eco-tourism is a great idea
and want to setup a rival operation, which will take customers from the
first resort.
• Barriers to entry - what may prevent others entering:
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Economies of scale
Capital / investment needed to start
Customer switching costs and regulations
Access to industry distribution channels
The likelihood of retaliation from existing industry players.
• Extremely high entry barriers exist in some industries
• shipbuilding requires huge capital investment
• organic farming requires a lengthy period of operation before it can be
certified as organic
• Other industries are very easy to enter (e.g. estate agency, mailorder business).
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Threat of substitutes
• Some companies make a totally unique product that cannot be
replicated
• Most cases possible for a rival firm to produce a product that
can compete with an existing product
• If there are substitute products profitability can be lowered
• Product substitution depends on:
• Buyers’ willingness to substitute
• The relative price and performance of substitutes
• The costs of switching to substitutes.
• Substitutes can be used if:
• Major cost changes or trends that affect buyer loyalty to a
particular product
• Health concerns have prompted many consumers to switch from
sugar products to artificial sweeteners - impacted the sugar
industry
• Environmental concerns over aerosol products has seen many
consumers move to products that don’t use spray can technology
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Bargaining power of suppliers
• Every business requires inputs:
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labour,
parts,
raw materials, and
services.
• The cost of items can have a significant impact on
profitability.
• Where suppliers dominate buyers the industry can
be less profitable:
• Many buyers and few dominant suppliers (if there’s only one
engine manufacturer supplying all boat builders, the supplier has
substantial power)
• There are undifferentiated, highly valued products
• Suppliers threaten to integrate forward into the industry
(e.g. a supplier could set up their own retail outlets)
• The industry is not a key
customer group to the suppliers23
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Bargaining power of buyers
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Customers may make decisions based on
knowledge of a full range of prices and products
available.
The bargaining power of buyers is greatest when:
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Few dominant buyers and many sellers in the industry
Products are standardised
The industry is not a key supplying group for buyers.
The intensity of rivalry in an industry depends on:
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The structure of competition
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rivalry more intense where many small or equally sized
competitors – Coles and Woolworths in Australia
rivalry is less when an industry has a clear market leader –
Morris Hedstroms and New World supermarkets in the Pacific
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Bargaining power of buyers
• The structure of industry costs
• industries with high fixed costs encourage competitors to fill
unused capacity by price cutting
• The Australian airline industry exemplifies this. It is very
expensive to fly a plane below capacity so when Virgin Blue or
Qantas announce a sale, the other immediately matches the
offer.
• Degree of differentiation
• industries where products are commodities (e.g. steel, coal)
have greater rivalry - Fiji Gas and Blue Gas
• industries where competitors can differentiate their products
have less rivalry- mobile phones
• Switching costs
• rivalry reduced where buyers have high switching costs – i.e.
there is a significant cost associated with the decision to buy a
product from an alternative supplier e.g. buying equipment
from a new supplier may make the existing spare parts
redundant. There would also be a switching cost associated
with training staff on usage and maintenance.
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Bargaining power of buyers
• Strategic objectives
• when competitors pursue aggressive growth
strategies, rivalry is more intense
• when competitors are ‘milking’ profits in a
mature industry, the degree of rivalry is less
• Exit barriers
• when barriers to leaving an industry are high
(e.g. the cost of closing down factories) then
competitors tend to have greater rivalry.
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Summary
• Understanding of business and it’s role in an
economy continued
• Different industry segments and determined
a way to categorise them based on the
activity performed:
• Primary segment (the primary production sector)
• Secondary segment (the manufacturing sector)
• Tertiary segment (retail and service sector)
• Major impacts on business - the big issues
facing all businesses, including:
• Taxation
• Labour and industrial relations.
• Competitive forces BER,Ppt6.ppt
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Coming up!
• Internal operations of companies
• understand what might be happening in a
particular company.
• We are going to consider:
• The basic concepts of companies, including
discussion of various forms of management,
private vs. public, incorporates sole proprietors,
partnerships, etc
• What company structure and strategic planning
mean and how they are used in contemporary
companies
• SWOT analysis – what is it and how companies
use it and how you can apply the tactics for
analysing performance and understanding
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motivations behind BER,Ppt6.ppt
company actions.
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