Solusi University

Faculty of Business

M.B.A

BSAD 511 Business Environment

Course outline August, 2012

Lecturer: Mr. I Sigauke B.Com, M. Com, M.B.A, Grad C.E

Course description

This course is intended to give an in-depth understanding of the external business

environment. The course is intended to guide students through the major issues
in the business environment at regional, national, and international levels, setting
them in the context of globalization and the global economy. Key dimensions of
the business environment are explored at each of these levels while juxtaposing
concepts and theories with examples and insights.

Course objectives: This course is designed to achieve the following objectives:

1. Review the nature and role of the business environment to an organization.

2. To provide a platform for students to go beyond the uncritical presentation
and explanation of the course content

Grading:

1. Case studies 10%

2. Reading report 5%
3. Presentations 5%
4. Mid semester exam 20%
5. Final exam 60%
The grading scale will be as follows:

A 80 % and above B- 60 – 64 F 0 – 44%

A- 75 –79 C+ 55 - 59

B+ 70 – 74 C 50 - 54

B 65– 69 D 45 – 49

Course Content

1. Changing nature of the business environment

i. The environment as an eclectic concept
ii. business environment models
1. Baron 2006
2. Strydom 2008
3. Otter &Wetherly 2008
4. Britton & Worthington 2009
5. Capon 2009
iii. Private, Public and third sectors
iv. Alternative approaches to business environmental analysis
2. The globalization of business
a. Globalization as a process
b. Drivers of globalization
c. Globalization and the changing world order
d. Global governance and the need for international regulation
e. The economics of globalization
f. Alternative perspectives on globalization at local national and
international levels
g. Implications of globalization at local national and international levels
3. HOW ECONOMICS AFFECTS BUSINESS
a. Understanding economics
i. Basics of economics
ii. Microeconomics & Macroeconomics
iii. Economic theorists
 b. Free market capitalism
i. competition in free markets
c. Socialism & Communism
i. Socialism
ii. Communism
iii. The trend toward Mixed economies
d. Economic Indicators
i. Gross domestic product
ii. Unemployment
iii. Price indexes
iv. Fiscal & monetary policy
4. THE COMPETITION ENVIRONMENT
a. Introduction to the competitive environment
i. Market structure
b. Perfect competition
i. Demand
ii. Supply
iii. Price determination
iv. Elasticity of demand
v. Elasticity of supply
vi. Limitations of theory of perfect competition
c. Monopolistic markets
i. Effects on prices and output of monopoly
ii. Marketing implications of monopoly
d. Imperfect competition
i. The role of brands
ii. Imperfect competition and elasticity of demand
iii. Oligopoly
e. Competition policy
i. Common law approaches to improving market competiveness
ii. Statutory intervention to create competitive markets
iii. Different statutory instruments.
f. Regulatory agencies
 i. Anti-corruption commission
ii. Regulation of public utilities
iii. Control of government monopolies
5. THE NATIONAL ECONOMIC ENVIRONMENT
a. Macroeconomics
b. Structure of the economy
i. Measures of economic structure
ii. Towards a service economy
iii. International comparisons
iv. Consumer, producer and government sectors
c. The circular flow of income
i. The Philips machine model of the economy
ii. The multiplier effect
iii. The accelerator effect
iv. Inflation
v. Complex models of the economy
d. The business cycle
i. Measuring economic activity
ii. Tracking the business cycle
e. Macroeconomic policy
i. Policy objectives
ii. Government management of the economy
iii. Limitations of government management of the economy
iv. The central bank
6. The political environment
a. Defining the political environment
i. Central government
ii. Parliament
iii. The executive
iv. Political parties
v. The parliamentary life cycle
vi. The civil service
vii. The judiciary
 b. Local government
i. The changing relationship between central and local
government
ii. Local authorities and marketing
c. Quasi-governmental bodies
d. The European Union
i. Aims of the EU
ii. The structure of the EU
iii. The council of ministers
iv. The European Commission
v. The European Parliament
vi. The European Court of Justice
e. SADC
f. Supranational governmental organizations
g. Influences on government policy formation
i. Pressure groups
7. The Social & Cultural Environment
a. defined
b. Demographic trends
c. immigration & multiculturism
d. Class structure
e. Inequality
f. Looking ahead
8. Business ethics & Corporate responsibility
a. Ethics & business
b. Difficult issues in Business ethics
c. Concepts in business ethics
d. Personal ethics in business
e. Corporate social responsibility
f. Responsibility for the natural environment
g. Business ethics voluntarism & the law
9. The technological environment
a. Themes & introduction
 b. How technology fosters economic growth & development
c. Creating the conditions for economic growth
d. Competing perspectives about the role of technology – assessing the
evidence
e. Technology promotion within a business
f. The technology debate
Recommended texts:
Palmer, A. & Hartley, B., (1996) The Business and Marketing Environment, Second
Edition, London: McGraw Hill
Baron, D.P., (2006), The Business and its environment, Fifth Edition, New Jersey:
Pearson Prentice Hall
Capon, C., (2009), Understanding the Business Environment, Third Edition, and
Harlow: FT Prentice Hall Financial Times
Lawrence, A.T., & Weber, J., (2008), Business & Society – Stakeholders, Ethics,
Public policy,Boston: McGraw-Hill
Otter, D., Wetherly, P., ( 2008), The Business Environment Themes & Issues, 2nd
Edition, New York: Oxford University Press
Strydom, J., (2008), Principles of Business Management, Cape Town: Oxford
University Press
Britton, C., & Worthington, I., (2009), The Business Environment, Sixth Edition,
Harlow: FT Prentice Hall Financial Times
Harrow, A., (2010), Business Environment in a global context, New York: Oxford
University Press

Dias, L.P., Shah, A.J., (2009), Introduction to Business, Boston: McGraw-

Hill
The Business Environment as an eclectic concept (Harrison 2010)

Eclectic – (oxford advanced learners dictionary) : not following only , one style,
set of ideas, etc but choosing from or using a wide range

 Organization do not exist in a vacuum, rather their strategies and operations

are influenced by and must take into account of the external environment
 Organizations are considered to interact with as well as influence their
environments
 The term business environment applies to all sectors of the economy including
not for profit organizations
 The business environment is commonly described by its key aspects or
perspectives
 The models discussed below centre around the PEST factors, however other
aspects such as ethical and natural environments can be added.
 Hence the business environment is considered a complex adaptive system –
 a complex system is a structure made up of many elements that operate
independently and also interact with each other absorbing information from
their surrounding elements.
 Complex systems and their individual elements adapt or evolve over a period
of time.
Business Environment Models

Key perspectives on the business environment- eclectic concept (Harrison 2010)

(PESTLE)

Political

Economic

Social

The business environment

Legal

Technological

Ethical
THE NATURE OF THE BUSINESS ENVIRONMENT (Baron 2006)

The environment of business consists of market and nonmarket components. The

market environment includes those interactions between firms, suppliers, and
customers that are governed by markets and contracts. These interactions
typically involve voluntary economic transactions and the exchange of property.

The nonmarket environment is composed of social, political and legal

arrangements that structure interactions outside of, but in conjunction with
markets and contracts. The nonmarket encompasses those interactions between
the firm and individuals, interest groups, government entities, and the public are
intermediated not by markets but by private and public institutions. (Baron
2006:2)

The environment of Business

Market Environment Nonmarket Environment

Market Environment

Determines significance of non market

Market Issues to the firm Nonmarket

Strategy Strategy

Manager

Nonmarket environment shapes business

Opportunities in the market place

 Source: Baron, 2006:3

MARKETING ENVIRONMENTKotler 1994 in Palmer & Hartley

Kotler 1994 in Palmer &Hartley define a marketing environment as “….. the actors
and forces external to the marketing management function of the firm that
impinge on the marketing management’s ability to develop and maintain
successful transaction with its customers”

The Macroenvironment Economic

Political/legal forces

Forces
The Micro environment
forces

Suppliers
The Internal Environment
Customers

Production

Finance

Personnel

R&D

Other stake holders Competitors

Intermediaries
Social/cultural forces Technological forces
The organization’s marketing environment: source: Palmer & Hartley 1996:28

The Microenvironment

Comprises all those organizations and individuals who directly or indirectly affect
the activities of the organization. The following key groups can be highlighted:

Customers:

No customers no business. In an ideal world, an organization should know its

customers so well that it is able to predict what they will require next rather than
wait and then fall.

Suppliers:

These provide an organization with goods /raw materials and services that are
transformed by the organization into value added products for customers.

Intermediaries:

Provide a link between an organization and its customers

Other stakeholders:

Include the organization’s interest groups or publics such as – pressure groups,

government agencies, and the local community e.t.c.
The Microenvironment

Comprises general trends and forces that may not immediately affect the
relationships that a company has with its customers, suppliers, and
intermediaries, but, ultimately, changes in the macro environment will alter these
relationships. E.g. a change in the population structure of a country does not
immediately affect the way in which a company does business with its customers,
however, overtime, it may affect the number of old people or young people it will
be able to do business with.

The microenvironment is interdependent and complex and is usually divided into

the following areas: the economic environment, the political environment, the
social and cultural environment, the demographic environment, and the
technological environment.
Systems Approach

 1960’s - organizations seen as systems frameworks

 systems approach – set of interrelated & interdependent
parts arranged in a manner that produces a unified whole
 societies, computers, automobiles, humans, etc are egg’s of
systems:
o closed systems to not interact with their environments
o open system – one that dynamically interacts with its
environment
 The systems approach is based on the idea that
organizations are made up of interdependent parts that can
only be understood by looking at the whole any system
consists of three components, namely inputs, processes and
outputs
 The organization as a system:

INPUTS PROCESSES OUTPUTS

The environment

HR(labor)
The organization
Goods
Business functions:
Raw materials
Operations function
Capital
Logistics function
Entrepreneurship
Human resource management function
Services
Financial function

Marketing and public relations function

Management functions:

Planning

Organizing

Leading

Controlling
Services

Services

Source: Strydom (2008:21)

 organizations viewed as open systems today

THE FIVE PARTS OF THE BUSINESS ENVIRONMENT (Dias & Shah
2009)

 the business environment consists of the surrounding factors that

either help or hinder the development of business.
 these are illustrated in the diagram below:
The Economic & Legal Environment The Technological Environment

1. Freedom of ownership 1. Information technology

2. Contact laws  2. Databases
3. Elimination of corruption 3. Bar codes
4. Tradable currency 4. The internet
5. Minimum taxes and regulation

The Competitive
BUSINESS GROWTH
Environment
1. customer service AND JOBThe social Environment
2. Stakeholder recognition 1. Diversity
3. Employee service CREATION
2. Demographic changes
4. Concern for the environment 3. Family changes
 Business owners must keep abreast of changes in the environment –
reading the newspaper & various business publications, researches
 when they are informed they can adjust their businesses accordingly
 business owners also need to be aware of stakeholders in each of the
business environments

The Economic & Legal Environment

 businesses operate within a framework of laws and economic forces

 the risk of losing money should not be to big otherwise owners will
not open businesses
 governments have considerable control on the amount of risk in the
environment & hence to that extent have control on the amount of
investment
 for example a government can reduce taxes which will translate to
better profits for the businesses.
 business persons are looking for an acceptable return on
investment (ROI)
 Return on investment:
o is the money gained from taking a business venture risk.
o in addition to money, investment of time is also an important
consideration for business people.
o if taxes are high the ROI may be low hence it may not be
worth taking the risk
 What a Government can do to promote investment
o allow private ownership of businesses e.g. through
privatization – China & Russia
o minimize the interference with the free exchange of goods &
services
o reduce risks of entrepreneurship by passing laws that enable
business people to write contracts that are enforceable in the
courts
 e.g. the USA has a Uniform Commercial Code
 Uniform Commercial Code(UCC)
  a comprehensive set of commercial laws, adopted
by every state in the USA, that covers sales laws
& other commercial laws
 Companies Act, Private business Corporations Act,
Partnership Act etc. (Zimbabwe)
o establish a currency that is tradable in world markets i.e. you
can buy and sell goods anywhere in the world using that
currency e.g. US dollar
o minimize corruption in businesses and within their own ranks
 e.g. bribery
 according to transparency international (annual
corruption survey)– Haiti, Myanmar, Iraq, & Guinea were
the most corrupt countries in 2006
 the least corrupt countries included Finland, Iceland, and
New Zealand
 there can also be corruption in businesses. Give e.g.’s
o a capitalist system ( one in which the companies and
businesses are owned by the citizens instead of the
government) relies heavily on honesty, integrity, and high
ethical standards, and a failure to adhere to those
fundamental standards can weaken the whole system

The Technological Environment

 technological developments have affected, even transformed

businesses and society since prehistoric times
 the recent emergence of information technology (IT): computers,
modems, the internet, cell phones etc has had a dramatic,
comprehensive, and lasting impact on business
 technology – everything from phones and computers, to medical
imaging devices, personal digital assistants, and the various software
programs that make business processes more effective, efficient, and
productive
 effectiveness – producing the desired results
 efficiency – the ability to produce using the least amount of resources
 resource – something used in the production of goods
 productivity – the amount of output you generate given the amount of
input (e.g. hours worked)
 tools & technology greatly improve productivity
 the more you can produce in a given period of time the more you are
worth to companies
 computer aided design, computer aided manufacturing, and artificial
intelligence (AI) are used to automate tasks that would normally take
people much longer to accomplish
o e.g. AI can be used to schedule work at a manufacturing plant
or even be used to answer customer service questions
submitted on line
 sometimes increased productivity results in job shifts or job loses
 as machines are invented that improve processes, fewer human
beings are needed to do the job
 the growth of e-commerce ( buying & selling of goods over the
internet) is one of the most important recent environmental changes
of interest to business people
 e-commerce –business conducted electronically over the internet
o there are two main types of e-commerce transactions
 business to consumer (B2C) – a business that
produces products directly to sell to the consumer
 business to business (B 2 B) – a business that

produces products to sell to another business

 Responsiveness to customers – can enhances a business chances

of success

o traditional retailers – can respond to the internet revolution by

using technology to reach customers e.g. businesses use

Uniform Product Codes or UPCs (barcodes) – a series of

 lines and numbers that you can see on most consumer packed

goods. The UPC identifies the type of product. A scanner at the

checkout counter can read the information and put it into a

database.

o a database – is an electronic storage file where information is

stored

The Competitive Environment

 Even though competition has always existed it is greater today.

 some companies are focusing on quality as the source of their

competitive advantage. Some are aiming for zero defects - Toyota

in Japan & Motorola in the USA are examples.

 however simply making a quality product is not enough in today’s

environment.

 Companies have to offer both high quality products and

outstanding service at competitive prices – i.e. customer value.

 value – the relative worth, merit, or importance.

o the concept of value implies that a company knows what it’s

competitors are doing, and is continuously improving itself to

meet customer expectations

 o hence the business acutely aware of its competitors and

customers is more likely to be successful.

 customer driven organization – are customer centred on offering

both high quality & high value products or services.

 How competition has changed business

Traditional Business World Class Business

Customer satisfaction Delighting the customer

Customer orientation Customer & stakeholder

orientation

Profit orientation Profit & social orientation

Reactive ethics Proactive ethics

Product orientation Quality & service orientation

Managerial focus Customer focus

 small and large businesses alike can succeed by providing

outstanding customer service

 big and small businesses depend on their returning customers,

and as a result, should go out of their way to make customers feel

as if they were number one

 employee empowerment – giving frontline line workers(office

clerks, front-desk people at hotels, sales people etc.) the

responsibility, authority, freedom, training, and equipment they

need to respond quickly to customer requests and to make other

decisions essential to producing quality goods and providing

service

 to implement a policy of empowerment, managers must train

frontline people to make decisions without the need to consult

managers

 the new role of supervisors, then, is to support frontline people

with the training & technology to do their jobs well, including

handling customer complaints quickly and satisfactorily

 The concept works well with idea of self-managedcross

functional teams – a group of people with different expertise

working together to achieve a common goal.

  because they have less management supervision they need more

education, and in addition empowered employees need to be

treated as partners in the firm

 Hence the manager’s job is to train, support, coach, and motivate

lower level employees.

 it may take time to come with a working structure that will

empower employees.

The Social Environment

 diversity – broad differences between people(ethnicity, gender,

colour, sexual orientation, body size, age)

 management of diversity is an important concern for business

people

 increased diversity in national populations

 businesses are concerned about diverse populations for two

reasons:

o enables them to better serve customers

o brings about new, fresh ideas & perspectives

 a diverse workforce is better overall for all companies

  having an understanding of diversity now will result in a greater

ability to work with others later on.

 boomers – born 1946 to 1964

 generation Xers – born 1965 to 1980

 generation Y – born after 1981

 the management of diverse groups whether they are different

because of race, sex, age, sexual orientation, country of origin,

religion, or some other classification can be difficult

 aging consumers

 dual incomes

 single parents

 marriage

The Global Environment

 International competition and free trade are two important

environmental changes

 free trade – is the reduction of barriers to trade such as

elimination of tariffs (or taxes) on goods brought into another

country.
 today manufacturers in countries like China, India, South Korea,

and Mexico can produce high quality goods at low prices

 better technology, machinery, tools, education and training enable

each worker to be more productive

 US companies such as Disney, FedEx, Intel, & Microsoft, as well

as many smaller companies, are as good as or better than

competing organizations anywhere in the world.

 However some business have gone beyond simply competing with

organizations in other countries by learning to cooperate with

international firms

 co-operation among businesses has the potential to create rapidly

growing markets that can generate prosperity beyond most

people’s expectations.e.g. Hewlett-Packard has an alliance with

Hitachi & Samsung.

HOW ECONOMICS AFFECTS BUSINESS (Dias & Shah 2009)

 Economics –

o is the study of how society chooses to employ resources(land,

labour, capital, entrepreneurship & knowledge) to produce

goods and services and distribute them for consumption among

various competing groups and individuals

o the allocation of scarce resources.

 There are two basic types of economic study, macro and micro.

 macroeconomics – the study of the operation of a nation’s economy

as a whole.

o how many jobs exist in the whole economy

 micro economics – the study of the behaviour of people and

organizations in particular markets

 how many people will be hired in a particular industry or

certain region of the country

 Resource development – is the study of how to increase resources

and to create the conditions that will make better use of those

resources
 the government and the private sector may both contribute to the

development of resources

 the private sector may contribute to an economic system by inventing

products that greatly increase available resources

o e.g. businesses may discover new energy sources, new ways

of growing food, & new ways of creating needed goods and

services e.g. development of GMO’s

 Economic Theorists

o Thomas Malthus(English 1700s & early 1800s) – soon there

would be too many people and other resources to support them

o Neo Malthusians – there are still too many people in the world

– hence the solution to poverty is birth control – China

o the challenge for macroeconomists is to determine what

makes some countries relatively wealthy and other countries

relatively poor and then implement policies and programs that

lead to increased prosperity for everyone in all countries.

o Adam Smith( Scottish economist 1776) – tried to address

this challenge:

 a system for creating wealth and improving the lives of

everyone
 instead of believing that fixed resources had to be divided

among competing groups and individuals, Smith

envisioned creating more resources so that everyone

could become wealthier

 1776 – Adam Smiths book – An Inquiry into the Nature

and Causes of the Wealth of nations often called

simply The Wealth of Nations

 argued that: the desire for improving one’s own condition

in life is the basis for economic theory

 According to Smith, as long as farmers, labourers, and

businesspeople (entrepreneurs) can see economic

rewards for their efforts (receiving enough money in the

form of profits to support their families, for instance) they

will work long and hard to achieve those rewards. As a

result the economy as a whole will prosper – with plenty

of food and all kinds of products available to everyone.

 Under the theory businesspeople don’t necessarily

deliberately set out to help others. They work primarily for

their own prosperity & growth.

 Yet as people try to improve their own situation in life,

Smith said, their efforts serve as a guiding “invisible

hand” that helps the larger economy grow and prosper

through production of all kinds of needed goods, services,

and ideas.

 Invisible hand – a theory developed by Adam Smith that

says that a self-directed gain turns into social and

economic benefits for all. i.e. by individuals simply trying

to benefit themselves, communities and other people end

up benefiting as well

 However some people end up with so much wealth, they

would not be able to spend it all within a lifetime. As a

result many wealthy individuals help others

 Of course businesses must meet the needs of customers

when producing products or wealth would not spread

throughout the community.

 The concepts of demand and supply help to explain in

part how the wealth is distributed in the community.

SOCIALISM & CAPITALISM

SOCIALISM

 Socialism – is an economic system based on the premise that some,

if not most basic businesses – such as steel mills, coal mines, and

utilities – should be owned by the government so that profits can be

evenly distributed among the people. Basic businesses are owned by

the government.

o such distribution of profits among everyone may come through

health benefits and retirement benefits

o however private individuals are taxed steeply in order to pay for

such programs

o High taxation on the other hand can discourage

entrepreneurship in a country.

o acknowledges wealth creation is the major benefit of capitalism

but argues that wealth should be more evenly distributed than

occurs in free market capitalism

o government is thus the agency which carries out the distribution

thereby owning most of the factors of production

 o government provides education, health care, retirement

benefits, unemployment benefits , & other social services

o e.g. –Denmark, Netherlands, Belgium, Sweden, Finland.

France – moving away.

 benefits of socialism

o social equity

o free education

o free health care

o free child care

o longer vacations for workers

o fewer work hours per week

 limitations of socialism

o takes away the incentive for business persons to start work

early & leave work late

o can remove the incentive to start new businesses

o brain drain e.g. to lower tax countries

o removes the incentive to work hard- workers – discourages the

best from working as hard as they can

o may result in less innovation, inventions

COMMUNISM

 communism – an economic and political system in which the

state (the government) makes almost all economic decisions and

owns almost all major factors of production

o propounded by 19th century German political philosopher

Karl Marx

o noted the wealth created by capitalism vs. the poor living

conditions of labourers in his time

o Therefore decided that workers should take over ownership

of businesses and share in the wealth.

o In 1848 he wrote the communist manifesto outlining the

take-over process.

 limitations

o intrusion into people’s lives

o government has no way of knowing what to produce since

prices do not reflect demand & supply like in free markets

o thus may result in shortages – even of basics

o does not inspire entrepreneurship

 o failed communist models – DPRK, USSR, Vietnam, China

Key terms:

 Free market economies – exist when the market largely

determines what goods and services get produced, who gets

them, and how the economy grows. Capitalism is the popular term

used to describe this economic system. USA, UK.

 Command economies – exist when the government largely

decides what goods and services get produced, who gets them,

and how the economy grows. Socialism and communism are

popular terms used to describe variations of this economic system.

Cuba & China. Capitalist ------------- Mixed <--------------Command

i.e. the scale.

 Mixed economies – economies where some allocation of

resources is made by the market and some by the government

ECONOMIC INDICATORS

 hint to the government how well the economy is doing

 there are three major indicators of economic conditions:
o the gross domestic product GDP
o the unemployment rate
o the price indexes
 Gross domestic product (GDP)
o is the total value of final goods and services produced in a
country in a given year within a country.
 either a domestic company or a foreign owned company
may produce the goods & services included in the GDP
as long as the companies are included within the
country’s borders
 if GDP slows or declines there are many negative effects
on business
 a major influence on the growth of GDP is the productivity
of the work force (input output relationships)
 almost every discussion on GDP is based on GDP
 however the level of economic activity in a country is
higher than that of the GDP figure because the figure
does not include informal activities and illegal activities
like smuggling
 another way to measure GDP is per capita.

 GDP per capita/person – a measurement derived by dividing the

GDP figure by the population.

 Gross national product (GNP) – similar to GDP but refers to the

value of goods and services produced by a country’s nationals
onlydespite where ever they are.

 Unemployment– refers to the number of civilians at least 16 years

old who are unemployed and who have tried to find a job within the
prior four weeks
o cyclical unemployment – means there are not enough jobs for
people who want to work and is usually a result of political or
economic forces
o seasonal unemployment – might occur in some construction
jobs, where workers are laid off during winter months, also
 tourism jobs, where hotel workers may be laid off during the off
season
o frictional unemployment – occurs when people are between
jobs e.g. if you quit your job and are planning on starting a new
job as soon as you take two weeks’ vacation.
o structural unemployment – means that something within
industries has changed that results in unemployment e.g. when
the manufacturing of clothing in the United States started to
move to China, this resulted in structural unemployment.

 Price Indexes – indexes of the changes in goods and prices of

goods and services based on the same goods and services from a
previous period
o price indexes track the price of goods over time thereby
allowing us to see if we have inflation, deflation or stagflation
o e.g. include: Consumer Price Index. (CPI), and the Producer
Price Index. (PPI)
o CPI – consists of monthly statistics that measure the pace of
inflation or deflation. It tracks the prices of 400 goods.
 measures the prices of goods from month to month so
economists can measure inflation
 CPI measures price changes from the purchasers
perspective
o PPI – similar to the CPI but measures prices at the wholesale
level.
 the PPI measures prices changes from the wholesalers
perspective

o Household income – the government measures average

household income to see how wage increases compare to
increases the previous year.
o Home sales - is the number of homes that sold during a given
time period. Times of high home sales figures can mean
economic prosperity
 o Consumption – retail sales and other statistics relating to how
much we buy are tracked so the government can see how
much we are spending
 Inflation – a general rise in the prices of goods and services over
time
o some amount of inflation is perfectly normal – e.g. 2% - it may
mean that goods are getting slightly more expensive to produce
due to wages and other manufacturing costs increasing

 hyperinflation – is a phenomenon where the cost of goods is rising

so quickly (second to second or minute to minute) that it renders a
currency virtually worthless
o there is no set definition of where hyperinflation begins, many
experts believe that inflation of over 50% is hyperinflation

 stagflation – occurs when both inflation and unemployment are high

and occurring at the same time
o is caused by misguided fiscal and monetary policy
o it is harmful because it means that prices are rising while
people are losing their jobs or do not have jobs

 deflation - means that prices are actually declining

o it occurs when countries produce so many goods that people
cannot afford to buy them all
o too few dollars are chasing too many goods, which is obviously
a negative indicator, because it means that demand and supply
are out of balance

FISCAL AND MONETARY POLICY

 Fiscal policy- refers to government efforts to keep the economy

stable by increasing or decreasing taxes or government spending
o the first tool of fiscal policy is taxation
 theoretically high taxes tend to slow the economy
because they draw money away from the private
sector and put it into the government – high taxes
reduce profits
 hence low taxes would tend to boost the economy –
theoretically
 taxes
 income tax
 social security
 medical care
 corporate tax
 excise taxes
 duty etc

o the second tool of fiscal policy is government spendin g

 the government spends money on:
 human resources
 national defence
 interest
 physical resources
 the national deficit is the amount of money that
government spends over and above the amount it
gathers in taxes for a specific period of time (namely a
fiscal year) - the difference between government
receipts and spending in a single year
 overtime such deficits increase the national debt
 national debt – the sum of government deficits over
time
 is the debt owed by a central government

 Governments usually borrow by issuing

securities, government bonds and bills. Less
creditworthy countries sometimes borrow directly
 from a supranational organization (e.g. the World
Bank) or international financial institutions.
 As the government draws its income from much
of the population, government debt is an indirect
debt of the taxpayers. Government debt can be
categorized as internal debt (owed to lenders
within the country) and external debt (owed to
foreign lenders). Sovereign debt usually refers
to government debt that has been issued in a
foreign currency. Another common division of
government debt is by duration until repayment is
due. Short term debt is generally considered to
be for one year or less, long term is for more
than ten years. Medium term debt falls between
these two boundaries. A broader definition of
government debt may consider all government
liabilities, including future pension payments and
payments for goods and services the
government has contracted but not yet paid.
(Wikipedia)
 one way to lessen the annual deficits is to cut
government spending
 some believe that spending by the government helps
the economy to grow, while others believe that the
money the government spends comes out of the
pockets of consumers and business people and thus
slows growth.

 Recession – occurs when the GDP falls for two consecutive

quarters
o occurs when two or more quarters show declines in the GDP
o prices fall
o people purchase fewer products
o businesses fail

 Depression – is a severe recession, when the GDP falls for

several quarters, and recovery is a long time off
 o a depression usually occurs during times of deflation and
unemployment is extremely serious.
o
 Recovery – occurs when the economy stabilizes and starts to
grow again
o an improvement in the economy , marking the end of a
recession or decline

MONETARY POLICY

 Monetary policyis the management of the money supply and

interest rates
o this helps control the growth or slowing of the economy
 monetary policy is controlled by government, central bank, or a
monetary authority
o when the economy is booming the central bank may raise
interest rates which makes money more expensive to
borrow
 businesses thus borrow less, and the economy slows
as business people spend less money on everything
they need to grow, including labour and machinery
 the opposite is true when the central bank lowers
interest rates
o hence the raising and lowering of interest rates should help
the rapid ups and downs of the economy
o the central bank also controls the money supply
 all things being equal the more money that the central
banks makes available to business people and others,
the faster the economy grows
 hence to slow the economy the central bank lowers the
money supply
 the government/ central bank needs to consider the
inflationary effects of increasing the supply of money
and balance it with economic goals.
 THE COMPETETIVE ENVIRONNMENT ( Palmer& Hartley 1996)

a. The Market Structure:

The market condition facing suppliers of goods and services vary

considerably.

According to Palmer( 1996:104) , a market structure ,”is the differences in

characteristics of buyers and sellers.”

-it describes:

 number of buyers and sellers in a market.

 the extent to which the market is concentrated in the hands of
the small number of buyers and sellers.
 competition between the buyers and sellers.

b. Perfect Competition:

The Law Of Demand:

Demand –refers to the quantities of specific goods or services that

individuals, taken singly or as a group, will purchase at various possible
prices, other things being constant.

When the price of a good goes up, people buy less of it, other things being
equal.

When the price the good the goes down, people buy of it, other things
being equal.

The law of demand tells us that the quantity demanded of any commodity is
inversely related to its price, other things being equal.

In an inverse relationship, one variable moves up in value when the other

moves down.

The law of demand states that a change in price causes a change in

quantity demanded in the opposite direction.
Law of demand means that there is a negative, or inverse, relationship
between the price of any good or service and quantity demanded, holding
other factors constant.

For example, people will buy fewer DVD players, if their price goes up, we
are holding constant the price other goods in the economy as well the
people’s incomes.
The demand curve schedule:

Combination price /cod quantity of

CD/year
A 5 10
B 4 20
C 3 30
D 2 40
E 1 50

The demand curve:

The schedule expressing relationships between two variables can be

represented in a graphical form.

It is a downward sloping (from left to right) to indicate the inverse

relationship between the price of CDs and the quantity demanded per year.

Shifts in demand:

Demand schedule:

Price /CD total quantity

5 2
4 4
3 6
2 8
1 10
Demand curve:

Assume that SolusiUniversity gives every student a rewritable CDdrive (cd-

rw) to use with personal computers.

The demand curve represented above would no longer be an accurate

representation of the total market demand for re writable CDs.

What we have to do is to shift the demand curve outward, or to the right, to

represent the rise in demand that would result from this program.

There will be an increase in the number of rewritable CDs at each and

every possible price.

Diagram 3

PRICE /CD
 D2

D1

D3

The demand curve will shift from d1 to d2.take away price, say, 4 per
rewritable CDs. Originally, before the university give away of cd-rw drives,
however, the new amount demanded at 4 price is 8 million RWCDs per
year. This is a shift in the demand for RWCDs.

Under different circumstance, the shift can also go in the opposite direction.
What if the university prohibited the use of personal computers by any of
the students at Solusi University? Such a regulation would cause in the
inward –to the left – of the demand curve for CDs. Thus the demand curve
would shift to d3; the quantity demanded would be less at each and every
possible price.

The other determinants of demand:

Income:

For most goods, an increase in income will lead to an increase in demand.

Goods for which the demand rises when the income rises are called normal
goods. Examples –shoes computers DVDs.

For some goods, however, demand falls as income rises. These are called
inferior goods. Examples beans, chunks etc. As the house gets richer, they
tend to purchase fewer and fewer beans or chunks and purchase more and
more meat.

Tastes and preferences:

A change in consumer taste in favor of a good can shift demand curve

outward to the right. When viscose shirts become top of the fashion range,
the demand curve for them shifted outward to the right; when other
products came into market the demand curve shifted inward to left.

Supply:

The supply of any good or service is the amount that firms will produce and
offer for sale under certain conditions during a specified time period. At
higher prices, a larger quantity will generally be supplied than at lower
price, all other things held constant. At lower prices, a smaller quantity will
generally be supplied than at higher prices, all other things held constant.
There is generally a direct relationship between price and quantity supplied.

For supply, as the price rises, the quantity supplied rises; as price falls, the
quantity supplied also falls.
Example:

At $5 per 2L Mazoe orange crush, suppliers would almost certainly be

willing to supply a larger quantity than at $1 per bottle, assuming that no
other prices in the economy had changed.

Supply schedule:

Combination price/bottle quantity

5 A 5 55
B 4 40
C 3 35
D 2 25
E 1 20
4

3Supply curve:

1
10 20 30 40 50
60

The supply curve denotes that, at higher prices, a hypothetical supplier will
be willing to provide a greater quantity of Mazoe.

Shifts in supply:

When we looked at demand, we found out that any change in anything

relevant beside the price of the good or services caused the demand curve
to shift inward or outward. The same is true for the supply curve.

If something besides price changes and alters the willingness of the

suppliers to produce a good or service, we will see the entire supply curve
shifting.
Supply curve: s3 s1

S2

10 20 30 40 50 60

A shift in the supply curve:

If the cost of producing rewritable CDs was to fall dramatically, the supply
curve would shift right ward from s1 to s2 such that at all price, a larger
quantity would be forthcoming from suppliers. Conversely, if the cost of
production rose, the supply curve would shift leftward to s3.

Other determinants of supply:

1. Cost of inputs used to produce the product

If one or more input price fall the, the supply curve will shift outward to the
right; that is, more will be supplied at each and every price. The opposite
will be true if one or more inputs become more expensive. Example when
we draw the supply curve of the blue jeans, we are holding the cost of
cotton fabric fixed.

2 .Technology and productivity:

When the available production techniques change, the supply curve will
shift. Example: better production techniques forCDs become available; the
supply curve will shift to the right.

3 .Taxes and subsidies:

Certain cost such as the per unit tax, are effectively an addition to
production costs and therefore reduce the supply.

4 .Price expectations.

5. Number of firms.

iii The price system:

otherwise known as a market system, relative prices are constantly

changing to reflect changes in supply and demand for different
commodities.

A B

S S

P2 E2 P1 E1

P1 E1 E3

D2 P3 D1

D1

D3

Q1 Q2 Q3 1

In panel (A) the supply curve is unchanged at S. The demand curve shifts
outward from D1 to D. The equilibrium price and quantity rise from P1 Q 1
to P2, Q2, respectively.
In panel (B), again the supply curve is unchanged at S .The demand curve
shifts inward to the left, showing a decrease in demand from D1 to D3.
Both equilibrium quantity fall.
C S1 D

S2 S3

E E S1

P1 E P3

P2 E

P1

Q1 Q2 Q3 Q1

In panel (C), the demand curve now remains unchanged at D .The supply
curve shifts from S1 S2. The equilibrium quantity increases,however, from
Q1 to Q2. In panel (D), The demand curve is unchanged at D. Supply
decreases as shown by a leftward shift of the supply curve from S1 to S3.
The market clearing price increase from P1 to P3.The equilibrium quantity
falls from Q1 to Q3.

The policy of the government –imposed price controls:

Price floors, price ceiling and black markets.

Price controls often involve setting a price ceiling.

Price ceiling: is the maximum price that may be allowed in an exchange-

thingslike, rents, wages and interests rates.

Price floor: a minimum price below which a good or service may not be sold.

PE

P1

S s1 Shortage D

Quantity

QS QE QD

The demand curve is d. The supply curve is

pe.thegovernment ,however ,steps in and imposes a minimum price ,the
quantity demanded will be qd but the quantity supplied will be only qs.

There is a shortage. The implicit price (including time costs) tends to rise to
p2.if black market arise ,as they general will ,the equilibrium black market
price will end up somewhere between qs and qe.

Price floors in the labor market:

The minimum wage is the lowest hourly wage rate that firms may legally
pay their workers.
wage rate /unit Reduction in quantity of labor demanded S

wm A B C

Excess quantity

we Supplied at wage

atWm

Increase in quantity of labor supplied

Qd Qe Qs Quantity of /time period

The effect of minimum wages:

The market clearing wage rate is (We).

The market clearing quantity of employment is (Qe), determinedby the

intersection of supply demand at point (E).

A minimum wage equal to Wm is established. The quantity of labour

demanded is reduced to Qd.

The reduction in employment from Qe to Qd is equal to the distance

between B and A.

The distance is smaller than the excess quantity of labour supplied wage

rate Wm.
The distance between B and C is the increase in quantity of labor supplied

that results from the minimum wage rate.

iv) Price elasticity of demand:

It the ratio of the percentage change in quantity demanded to the % change

in price.

Statedmathematically:

PE of demand =%change in quantity demanded /% change in price

Types of elasticity: graphs

a) Perfectly inelastic demand b) perfectly elastic demand

O o

Quantity of insulin demand quantity of crude oil demanded

Figure (a) show a perfectly in elastic demand curve for insulin. Price
elasticity of demand is zero. Quantity demanded is fixed; it does not
change at all when price changes.

Figure (b) shows a perfectly elastic demand curve for crude oil. A tiny price
increase drives the quantity demand to zero.
In essence, perfectly elastic demand curve implies that individual producers
can sell all they want at the going market price but charge a higher price.

Inelastic demand: demand that responds, but not a great deal to changes
in price.

In elastic demand always has a numerical value between zero and -1.

Unitary elasticity:

A demand relationship in which the percentage change in price in absolute

value (a demand elasticity is -1)

Cross elasticity of demand =% change in quantity of y demanded

/%change in price of x

Income elasticity of demand:

Measures the responsiveness of demand to change in income.

V) Elasticity of supply: a measure of the response of quantity of a good

supplied to a change in price of that good. Likely to be positive in output
markets.

Elasticity of supply =% change in quantity supplied /%change in price

If suppliers are relatively unresponsive to an increase in the price of a

product, the product is described as being inelasticwith respect to price.

If producers increase production substantially as price rise, the product is

said to be elastic.

V I) Limitation of the theory of perfect competition:

Perfect competition only applies where production techniques are simple

and opportunities for economies of scale are few.

Markets are often dominated by large buyers who influence the floor of
supply and demand.

It can be always assumed that high prices and profits in a sector will attract
new entrants, while losses will cause the least efficient to leave. In
practice,there may be a whole range of barriers to entry which could cover
the need to obtain licenses for production, theavailability of trained staff and
access to distribution outlets.

The are sometimes barriers to exit where firms are locked into long term
supply contracts or where it would be excessively expensive to lay off
resource such as labor, a presumption that buyers and sellers have
complete information about market conditions.

C .Monopolistic Market:

Monopolistic competition:

A common form of industry (market) structure which is characterized by a

large number of firms, none of which can influence market price by virtue of
size alone.

Some degree of market power is achieved by firms producing differentiated

products.

New firms can exit such an industry with ease.

Monopolistically competitive industry has the following characteristics:

A large number of firms;

No barriers to entry

Product differentiation.

In the short run, monopolistically competitive firm will produce up to the

point MR =MC.

At Qo = 2000 in panel (a), the firm is earning short-run profit equal to Po

ABC =$2000.

In panel (B), as new firms enter monopolistically competitive industry in

search of profits, the demand curves of profit making existing firms begin to
shift to the left, pushing marginal revenue with them as consumer switch to
the new close substitutes.

This process continues until profits are eliminated, which occurs for a firm
when its demand curve is just tangent to its average cost curve.

I) Effects on price and output of monopoly:

The industry is made up of a large number of firms, each small relative to

the size of the total market.

No one firm can affect market price by virtue of its size alone.

Firms do differentiate their products, however, by doing so they gain some

control over price.

A) Product differentiation and demand elasticity:

Purely competitive firms face a perfectly elastic demand for their product:

All firms in a perfectly competitive industry produce exactly the same

product.

If firm A tries to raise price, buyers would go elsewhere and firm A would
sell nothing.

A monopoly is an industry with a single firm that produces a good for which
there are no close substitutes.

A monopolistically competitive firm is like a monopoly in that it is the only

producer of the unique product e.g. coca cola.

ii) marketing implication of monopoly:

In a pure monopoly, a firm’s output decisions would be influenced by the

elasticity of demand for its products.

When the demand is still elastic it could continue raising prices and thereby
its total revenue.

While a firm may have monopoly power over some of its users, it may face
competition if wishes to attract new segments of users.
It may therefore resort to differential pricing when targeting the two groups.

Example, NRZ has considerable monopoly power over commuters who

need to use its trains to arrive at work by 9.00 a.m. on week days. For such
commuters, the alternative of travelling to town by bus or car is very
unattractive. However, leisure travelers wishing to go shopping in Harare at
off-peak fares may be much more price sensitive.

Their journey is optional to begin with and their flexibility with respect to
their time of travel is greater.

Marketing managers who think strategically will be reluctant to fully exploit

monopoly power.

d) Imperfect Competition:

1) The role of brands:

Doyle (1989) described brand build as the only way for a firm to build a
stable, long –term demand at profitable margins.

Branding is the effort of the organization to remove itself from fierce

competition between generic products – (general in nature)

Branding simplifies the decision –making process by providing buyers with

a sense of security and consistency which distinguishes a brand from a
generic commodity.

Examples of brands on clothing are: Nike, Puma,and Reebok etc.

Cars:Toyota, Benz Mazda etc

ii) Imperfect competition and elasticity of demand:

An individual firm cannot increase profits by stimulating demand through

lower prices, nor would it gain any benefit by seeking to raise its prices.

This changes in an imperfectly competitive market where a firm acquires a

degree of monopoly power over its customers.
Each firm now has a demand curve for its own unique product.

Firm face a downward slopping demand curve for their products, indicating
that as prices fall ,demand increase and vice versa

An oligopoly market is dominated by small number sellers who provide

large share of the total market output. The crucial point about oligopoly
markets is that all suppliers in the market are interdependent.

One company cannot take price or output decisions without considering the
specific possible responses of other companies.

Examples, oil companies, pharmaceuticals, car manufacturing and

detergents.

MARKET STRUCTURES

 Monopoly – one supplier and price setters

 Oligopoly – few big suppliers. Cartel egeconet, telecel and
netone
 Monopolistic – many suppliers and no one doniminant one.
Offer differentiated products
 Perfect competition – many – perfect knowledge, identical
product or services

Oligopolies have often been accused of collusion and creating barriers to

entry for new owners such as signing exclusive distribution rights with key
retailers.

e) Competition Policy:

The presence of large firms that are able to exert undue influence over
participants the market, for example through scale economies.

Collusion between sellers (and sometimes buyers) which has the effect of
restricting price competition and the availability of products.
Barriers to market entry and restraints on trade which may prevent a
company moving into a market (e.g. manufacturer may prevent a retailer
from selling competing manufacturers’ products.)

Rigidity in resource input markets which prevent supply moving to markets

of strong demand (e.g. labor inflexibility may prevent a company from
exploiting markets that have high levels of profitability.)

i) Common law approaches to market competitiveness:

The legal environment impinges or touches the marketing activities of a

business organization at various levels.

The nature of the relationship between the organization and its

customers is influenced by the prevailing law.

The law also influences the relationship that it has with other members
of the general public.

The law may, for example, prevent a firm having access to certain
sectors of the market, as where children are prohibited by law from
buying cigarettes or drinking in public houses.

The legal environment influences the relationship between business

enterprises themselves, not only in terms of contracts for transactions
between them, but also in the way they relate to each other in a competitive
environment.

Companies need to develop new products, yet the rewards of undertaking

new product development are influenced by the law.

ii) Statutory intervention to create competitive markets:

These are laws passed by the government as an act of policy to

supplement the common law.

The most significant pieces of legislation that have affected the

competitiveness of markets are:

-The competition act 1980

-The resale price act 1964

-Articles 85 and 86 of the treaty of Rome.

THE COMPETITION ACT 1980:

This supplements the common law and builds upon the restrictive trade
practices act of 1976 section 2 of the competition act 1980 defines anti
competitive practice as a course of conduct which restricts, distorts or
prevents competition in the production or acquisition of goods or service in
the UK.

THE RESALE PRICES ACT 1976:

This legislation consolidate earlier legislation relating to the resale price

maintenance Act 1964.

Manufacture of goods often like to be able to control the price of their

products as they pass through value chain but this can have the effect of
restricting competition between distributors.

Resale price maintenance is only allowed where it can be shown to be in

the public interest. The best example is where this has been true is the
book industry where until September 1995, publisher were able to insist
that books at the publishers’ recommended retail price (through the net
book agreement)

Articles 85 and 86 of the treaty of Rome:

Domestic legislation is used to control anticompetitive practices where their

effects are confined within national boundaries.

85 prohibits agreements between organizations that affect trade between

organizations that affect trade between member states of E U in general
prohibits anti competitiveness practices, such as price fixing ,market
sharing and limitations on production.

86 prohibits the abuse of dominant market position within E U, but

monopoly itself is not prohibited.
I) Anti-corruption commission:

The monopolies and mergers commission the MMC has no power to

indicate its own investigation, instead, it responds to referrals which can be
made by the following bodies:

-The secretary of state for trade

---The director general of fair trading.

-The public utility regulators

The independence television commission.

ii) Regulation of public utilities:

This is whereby the country privatize its public utilities like gas, water,
telephones and electricity.

It was successful in the UK and many countries followed.

iii) Control of government monopolies

In the UK-

There are still many services that can not be sensibly private or
deregulated. It is difficult , for example to privatize roads or to expose
them to serious competition.

-It is impossible to deregulate social service or the police forces

-Where ,it is impractical to privatize publicly provided service ,

government will take a number of measures to try and protect
consumers from exploitation.

1) Arms length organizations:

Provided services,

Such as QUANGOs These are linked to government and

management are given clearly defined targets which are intended to
reflect the interests of the users of the service, rather than just the
narrower interests of government.
2) Market testing:

Sometimes, local and central government tests the market to see

whether part of the work of department can be sub contracted to an
outside organization.

-Specialized service such as accounting architectural and legal

services have been put out to market tender
THE NATIONAL ECONOMIC ENVIRONMENT (Palmer & Hartley 1996)

a. Macro- Economics and Business

Introduction

Business does not operate in an economic vacuum.

Relationship between business and its environment is one of the mutuality.

What is Macro Economics?

(Miller 1997) defines it as the study of the behaviour of the company as a

whole. It deals with economic wide phenomena such as changes in
unemployment, the general price level and national income’’.

Gordon (1987) says it is the study of the major economic totals or

aggregates that influence the economic performance of firms and the
economic well-being of individuals and households.

N.B Definitions show that broader economic environment impacts upon

business performance through the constraints, threats or opportunities it
imposes.

State of the economy affects:

(a)Willingness
(b)Ability of customers to buy organization’s products or services.
(c) Price and
(d)Availability of inputs.

Business people cannot ignore the state of the economy. They often
attribute success or failure of the business to the state of the economy.
N.B National economies are not isolated: they are part of a larger
international economy (global village).

National economy is a complex system whose operation is influenced by

wide range of planned and unplanned forces/ factors.

(i) Planned factors

(1)Fiscal policy – concentrates on stimulating the economy through
changes in government income and expenditure.
(2)Monetary policy – influences the circular flow of income by
changes in the supply of money and interest rates.
 Two major objectives – reduce inflation (stability objective)
 Boost economic growth (growth objective)
 Can use flow instruments
(i) Bank rates
(ii) Open market operations
(iii) Moral suasion
(iv) Reserve requirements
(v) Selective credit controls.
(ii) Unplanned factors
 Turbulence in the world economic systems
 Natural disasters e.t.c.

The structure of the national economy

1. Productive sector
2. Consumption sector
3. Government sector
 1. Productive sector of primary sector
(a)Primary sector
(b)Secondary sector
(c) Tertiary sector
 Create wealth
 Provide goods and services to other businesses to enable
them to produce something else of economic benefit.

N.B. In general, these three sectors add progressively higher levels of

value to a product.

2. Consumption sector

Consumes wealth, goods and services provided for individuals are used for
their enjoyment or benefit.

 Central issues:
(a)To what extent should government intervene in economy- taxes,
interest, rates, prices and exchange rate?
(b)Government subsidies.
(c) Wage or salary determination.
(d)Government’s participation as a producer- state owned
enterprises.
(e)Indigenization.
 Proportion of GDP accounted by Public Sector shifting .
 1980’s U.K. government so public sector as a burden on the
fiscus and sought to limit its involvement in the economy by
privatizing many state owned enterprises.
  The advent of Economic Structural Adjustment Program me
(ESAP) in Zimbabwe in the 1990’s saw a marked
commercialization and privatization of state enterprises.
 Traditionally economies of Western Europe have been
dominated by central planning government being the principal
determinant of income and expenditure in the economy.
However many are making extensive reforms limiting state
involvement partly because its economically sensible to do so
and also to get financial support from IMF and the World Bank.

N.B marketers need to keep the eyes on political developments which shift
the balance of resources between private and public sector e.g.
nationalization of industries and indigenization

b. Structure of the economy

Measures of economic structure

In the developed economies the relative importance of primary, secondary

and tertiary has been changing in relation to the following:

(a)The share of the GDP that each sector accounts for.

(b)Proportion of the labor force in the sector.

Contribution of the sector to a nation’s balance of payments.

Trend in most developed economies is decline in importance of primary

and secondary sectors and growth in tertiary.

Reasons for contracting of Primary Sector

 (a)Many basic agricultural and extractive processes have been
mechanized; therefore, fewer people employed and reduced
consumption of G.D.P.
(b)Supplies to primary industries have been unable to compete with low-
cost producers in countries where labor is cheaper (e.g. developing
countries, China, India.
(c) Rising levels of affluence have led consumers to demand increasingly
refined products, for example processed food, which involve greater
inputs from the secondary sectors and tertiary sector.

Reasons for secondary sector contribution decline

(a)Efficiency gain by the sector, requiring fewer resources to be used.

(b)Competition from newly industrialized nations with good
manufacturing infrastructure and low labor costs e.g. China, India,
Brazil, Malaysia e.t.c.
(c) Rigidities in the labor market.
(d)Falling Research and Development budgets relative to overseas
competitors.

Service / tertiary sector has witnessed continuous growth in its share of

GDP, from 53% in 1969 to 66.4% in 1993 in U.K. this has been in service
sectors like banking, finance, insurance, business services, leasing and
communications.

Towards a service economy

 With the notable growth of the tertiary sector, the question being
asked is “should countries (both developed and developing) move
towards a service economy?”
  Many developed economies have had imports exceeding exports in
manufacturing sector. However they have compensated for this with
a surplus in “invisible” service exports.
 Some countries have argued that the service sector is an antidote to
their ailing economies, since they no longer have a competitive
advantage in manufacturing sector but in tertiary where they should
now concentrate.

NB. However, the above arguments have been criticized on the grounds
that secondary and tertiary sectors are mutually supportive rather than
replacements of one another.

 A budget manufacturing sector stimulates growth of a vibrant tertiary

sector to support it, which also in turn encourages growth of a
manufacturing sector.
 It is also prudent not to over depend on services sectors alone. A
diverse economic base allows a national economy to be resilient to
change in world trading conditions.

International comparisons

 Highly developed economies have a high percentage of workers

employed in service sector, less developed economies in Europe
have proportionately few workers employed and developing
economies have lowest levels of services employment.

Examples

(1)Highly Developed
US – 75%, Canada 75, 2%, UK 70, 6%
(2)Less Developed in Europe
Spain 59, 7%, Portugal 53, 2%, Greece 49, 9%.
(3)Developing Economies
Mexico – 29, 9
Bangladesh 28, 3%
Ethiopia 9, 7%

c. THE CIRCULAR FLOW OF INCOME

 In an economy, households, firms and government are highly

interdependent.
 Level of wealth created in an economy is influenced by the interaction
between and amongst above elements.
1. Simplified Model of a Closed national economy
 Model to help understand workings of a national economy

Domestic
households

Goods and services Income from employment

Expenditure on Labor
Goods and services

Domestic firms
Assumptions of the Model

(a)Households earn all their income from supplying their labor to firms.
(b)Firms earn all their income from supplying goods and services to
households (not to other organizations, no investments e.t.c.
(c) No external trade.
(d)All income earned is spent by households – no retention or savings.

N.B. Such a model does not obtain in practice.

 Instability to the model brought by two main factors:

1. Injection of additional money into the circular flow which increases
volume and circulation of money within the flow.
2. Withdrawal of money from circular flow – which decreases volume
and circulation of money within.

Forms injections can take

1. Firms earning income by selling goods and services to overseas

buyers – more income availed and passed to households.
2. Purchase by firms of capital equipment, which is an investment as
opposed to current expenditure.
3. Government expenditure on goods and services.

Forms withdrawals can take

1. Savings by households.
2. Government taxation on both households and firms.
 3. Spending on imported goods and services by both households and
firms.

The Phillips Machine Model of the Economy

 Model that attempts to show the workings of the economy by

drawing on the principles of fluids dynamics.
 Its basic principle is that water circulates around the machine’s
tubes in a similar way to money circulating around in the
economy (see diagram)
 Starting point is to view the holding tank which holds the total
amount of money available for transactions.
 The fuller the tank the greater is the amount of money that
flows into the neighboring chamber as incomes. Tank not full
means little money flows into neighboring chambers as
incomes.
 Incomes pumped to top of machine from where they cascade
down through its central chambers.

Directions of flow of income

1. Some income taken out of law as taxation.

2. Additional money re-enters the flow as government expenditure.
3. Savings by households.
4. Savings flow into tank holding household’s surplus balances.
5. Some savings used to finance spending on investments, which re-
enters the main flow later.
 6. Consumer spending- some of which goes to imports, thereby building
up foreign owned balances and thus lowering the value of local
currency.
7. The fuller the tank, and therefore the lower the exchange rate, the
greater the flow of the pipe at the bottom which comprises exports.
8. The main flow which represents the total national income into the
bottom tank from which it started, thus topping up balances available
for transactions.

NB. Income flow throughout the system can be modified by putting partial
blockages (e.g. tax rates, government spending, exchange rates) at
strategic points.

The multiplier effect

 Injecting money into the circular flow has a ripple effect.

 Its impact is felt more pronouncedly by households and business
directly affected by the injection.
 Other households and firms throughout the economy also affected
though not so profoundly.

Example – the massive capital injection by Essar, a multinational Iron and

Steel giant into Zimbabwe Iron and Steel Company (ZISCO) will greatly
impact upon households and firms in Redcliff and Kwekwe towns that have
been adversely affected by its ailing status over the years.

 Major capital investment by private sector and government can create

employment and business opportunities for supplies and downstream
 industries – e.g. supplies of raw materials, machinery, services,
users, and consumes of products, banking etc. resulting in total
increase in household incomes being greater than original
expenditure.

NB. Multiplier effect of initial expenditure is influenced by; inter alia, the
extent to which recipients of this investment re-circulate it back into the
national economy. If greater part of it is saved by households or used to
import goods, there will be a reduced multiplier effect to an economy.

 Multiplier effect can also be used to explain the impact of withdrawals

from the circular flow on the economy.
 If money is withdrawn, firms will spend less on wages resulting in
household’s income decline. Household income decline results in
reduced spending on firms’ goods and services and a downward
spiral ensues.
 Government can invest in some areas/regions to stimulate economic
growth, and development in areas with severe unemployment.
However, whether the national economy is helped will depend upon
how much subsequent expenditure is retained within the area.
 Multiplier analysis can also be used to evaluate the impact of
economic activity in one business sector upon other sectors – e.g.
developing transport infrastructure such as roads, rail etc.
 Can also be used to show ripple effect on other sectors of the
economy of improvements in productivity or efficiency in some
sectors e.g. distribution or transport – i.e. what impact will
improvements in distribution or transport sector efficiency have no
supplies, markets etc.
 The Accelerator effect

It is a phenomenon whereby changes in demand for consumer goods

can lead, through an accelerator effect, to a more pronounced change in
the demand for capital goods.

 Small increase in consumer demand can lead to a sudden large

increase in demand for plant and machinery with which to satisfy
that demand.
 When consumer demand falls by a small margin demand for plant
and machinery falls by a correspondingly large amount.

Inflation

Capital injection into circular flow of income can lead to Demand – pull
inflation- more money chasing few goods and services available resulting in
an increase in their market price level. Demand pull inflation can result
from:

 Increase in availability of credit.

 Excessive spending by government ( In Zimbabwe, Minister of
Finance has repeatedly refused to review civil servants salaries,
among other reasons, to curtail demand- pull inflation.
 Tax reductions- more disposable income.

Cost push inflation

High cost of producing a product or providing a service makes the product/

service dear.

 Increase in production or service costs caused by:

 1. High wage costs.
2. Rising raw material cost.
3. Higher overheads.
4. Additional cost of health and safety legislation.
 Government interested in intervening to prevent inflationary
processes building upon an economy because markets are seldom
perfectly competitive to adjust for inflation.

Complex Models of the Economy

 Imperative for governments to have a reasonable accurate model of

how the economy works so that predictions can be made about the
effect of government policy on the economy.
 A sound model should be able to address the following questions:
a) What will happen to unemployment if government expenditure is
increased by say 5%?
b) What will happen to inflation if income tax is cut by 6%?
c) What will be net effect on government’s revenue if it grants tax
concessions to firms investing in new capital expenditure?

NB. Marketers also have a keen interest in models of the economy which
should provide answers to the following questions:

a) What effect will a cut in income tax have on demand for a given
product by a specific target market?
b) Will the annual budget create a feeling of confidence by consumers
which is sufficiently strong for them to make major household
purchases?
a. THE BUSINESS CYCLE
From the previous discussion, it should become quite apparent that
national economies are seldom in a stable state. The situation where
injections exactly equal withdrawals can be described as a special case
with the normal state of affairs being for one of these to exceed the other.

An excess of injections will result in economic activity increasing, while the

opposite will happen if withdrawals exceed injections. This leads to the
concept of the business cycle, which describes the fluctuating level of
activity in an economy.

Most developed economies go through cycles that have been described as:

 Recession – prosperity.
 Expansion – contraction.
 Stop – go.
 “Boom and bust”.
(i) Measuring economic activity
The following are some of the more commonly used indicators of
the business cycle:
Gross Domestic Product (GDP)
This index measures the total value of goods and services
produced within the economy and can be used to:
(a)Compare economic performance over time.
(b)Compare performance between countries.
For example in a typical year, Western Europe economies will
expand by2-3 percent.
 Developing countries of the East have in the recent past often
sustained growth rates of GDP in the order of 5-8 percent per
annum.

Unemployment rates

High levels of unemployment have profound social and economic

implications hence governments normally monitor changes in
unemployment levels closely.

Employment tends to rise as the economy enters a general economic

recession and falls as it enters a period of recovery.

Unemployment occurs where firms are unable to sell their output and seek
to scale back their workforce, either by laying off existing workers or not
recruiting new ones. This results in less spending by the growing number of
unemployed people, thereby exacerbating firms’ sales activities.

Output levels

The output of firms is an important indicator of the business cycle, and is

closely watched because of its effects on employment and the multiplier of
firms spending less with their suppliers.

In the United Kingdom, the government’s Business Monitor publishes

regular indicators of the outputs for different sectors.

In addition to the formalized methods of measuring output, a number of ad

hoc approaches have been used, which it is claimed give early indicators of
an economic recovery or down turn.
For example Sales of first class tickets by airlines – an early indication of
firms cutting back expenditure ahead of major cuts in output.

 The number of heavy duty machinery crossing into a country, e.g.

mining equipment in Zambia.
 Sales of transport vans – associated with revival in fortunes by the
small business sector.

Average earnings

Unemployment figures record the extreme case of workers who have no

employment. Under- employment can affect the national economy just as
importantly as unemployment as workers are pit on short –time working or
lose opportunities for overtime working.

Conversely, average earnings may rise significantly during the early years
of a boom as firms increase overtime working and bid up wage rates in an
attempt to take on staff with key skills.

Disposable income

Average disposable income refers to the income that individuals have

available to spend after taxation. It follows that as taxes rise, disposable
income falls.

A further indicator of household wealth is discretional income, which is the

measure of disposable income less expenditure on the necessities of life,
such as mortgage payments, travel costs, etc, which form a large
component of household budgets.

Savings ratios
The savings ratio refers to the proportion of individual’s income that is
saved rather than spent.

Savings / borrowing levels are influenced by a number of factors, including

the distribution of income in society (poor people tend to save less,
therefore any redistribution of income to this group would have the effect of
reducing net savings) and consumers’ level of confidence about the future.

During periods of higher consumer confidence, savings ratios tend to fall as

consumer borrowing rises. Businesses look to a fall in savings ratios as
early indicators of increasing consumer confidence.

Confidence levels

Private individuals and business may have a high level of income and
savings, but there is no guarantee that they will send that money or take on
new debt in making purchases on expensive items. They may only be
happy about making major spending decisions if they feel confident about
the effect. Higher confidence may result, for example, from consumers
feeling that they are not going to be made unemployed, and their pay is
going to keep up with inflation and that the value of the assets is not going
to fall.

Inflation rate

Inflation refers to the rate at which prices of goods and services in an

economy are rising. It affects different groups of consumers with different
effects e.g. during a period of falling interest rates and fuel prices, a hoe-
owning, car using, leaving it with greater discretionary income. At the same
time, the cost of public transport and rented housing may be increasing
leaving groups dependent on public transport and count accommodation
facing a high level of inflation, thereby leaving less discretionary income.

Interest rates

Interest rates represent the price that borrowers have to pay to a lender for
the privilege of using their money for a specified period of time. Interest
rates tend to follow a cyclical pattern which is partly a reflection of the level
of activity in the economy.

During the period of recession the supply of funds typically exceeds

demand for them (caused for example by consumers reluctant to spend,
thereby building up their savings. In this circumstance interest rates
typically fall. During a period of economic prosperity, the opposite hold true
and interest rates have a tendency to rise.

Note: in reality, the determination of interest rates is affected by more than

the market supply and demand for money. Rates are also influenced by
government intervention as government uses them as a tool of economic
management.

Overseas trade figures

The monthly overseas trade figures indicate the difference between a

country’s imports and exports. A lot of attention is given to the ‘current
account’ which measures overseas transactions in goods and services but
not capital. In general, a current account surplus is considered good for the
economy, suggesting that an economy’s production sector is internationally
competitive.
At the height of a boom cycle, imports of manufactured goods may rise
much faster than corresponding exports, possibly suggesting unsustainable
levels of household consumption.

Exchange rate

The exchange rate is the price of one currency in terms of another e.g. 81 –
ZMK 5000 means that 81 costs ZMK 5000.

A number of factors influence the level of a country’s exchange rate, but as

an economic indicator the rate is often seen as an indication of the
willingness of overseas traders and investors to hold that country’s
currency. Falling rates of exchange against other currencies may be
interpreted as investors losing their confidence in an economy or its
government leading to them to sell their currency holdings and thereby
depressing its price.

(ii) Tracking the business cycle

Businesses are interested in predicting the cyclical pattern in the
immediate and medium future.
If the economy is at the bottom of an economic recession, that is
the ideal time for firms to begin investing in new productive
capacity. In this case, accurate timing of new investment can have
two important benefits:
a) Firms will be able to cope with demand as soon as the
economy picks up.
b) At the bottom of the business cycle, resources inputs tend to be
relatively cheap.
Analyzing turning points in the business cycle is therefore crucial to
marketers. To miss an upturn at the bottom of the recession can result in a
firm missing out on opportunities when the recovery comes to fruition. On
the other hand, reacting to a false signal can leave a firm with expensive
excess stocks and capacity on its hands. A similar problem of excess
capacity can result when a firm fails to spot the down turn at the top of the
business cycle.

Instead of placing all their hopes in accurate forecasts of the economy,

companies can place greater emphasis on ensuring that they are able to
respond to economic change very rapidly when it occurs.

At the bottom of cycle, this can be facilitated by developing flexible

production methods, for example by retaining a list of trained part-time staff
that can be called on at short notice: or having facilities to acquire excess
capacity from collaborating firms overseas at very short notice. At the top of
the cycle, the use of short- term contracts of employment can help a
company to downsize rapidly at minimum cost.

b. MACROECONOMIC POLICY

The national economy has been presented as a complex system of

interrelated component parts. To free market purists, the system should be
self-correcting and need not intervention from governments. In reality,
national economies are not closed entities and equilibrium in the circular
flow can be put off balance for reasons such as:

 Increasing levels of competition in the domestic market from

overseas firms who have gained a cost advantage.
  Changes in a country’s ration of workers to non workers (e.g. the
young and the elderly).
 Investment in new technology which may replace firm’s expenditure
on domestic wages with payments for capital and interest to overseas
companies.

Most western governments have accepted that the social consequences of

free market solutions to economic management are unacceptable and they
therefore intervene to manage the economy to a greater or lesser extent.

(i) Policy Objectives

Maintaining Employment
Unemployment represents a waste of resources in an economy.
Workers services are highly perishable in that unlike stocks of
goods: they cannot be accumulated for use as when the economy
picks up.

Time spent by workers unemployed is an economic resource that is lost

forever. Unemployment has also been associated with widespread social
problems, including crime, alcoholism and drug abuse. High levels of
unemployment can create a divided society; in employment perceive many
unemployed as being lazy or unwilling to work. In general, governments of
all political persuasions seek to keep unemployment levels low, in order to
avoid the social and economic problems described above.

In their attempts to reduce unemployment governments must recognize

three different types of unemployment which each require different
solutions:
 a) Structural unemployment – occurs where jobs are lost by firms whose
goods or services are no longer in demand e.g. coal mining in U.K.
b) Cyclical unemployment is associated with the business and is caused
by a general fall in demand, which may itself be a consequence of
lower spending levels by firms (e.g. building and construction).
c) Technological unemployment occurs where jobs are replaced by
machines e.g. car manufacture, banking and agriculture.

Stable prices

Rapidly rising or falling prices can be economically, socially and politically

damaging to governments. Rapidly rising prices (inflation) can cause the
following problems:

 For business, it becomes difficult to plan ahead when the selling

prices and the cost of inputs in the future are not known.
 Governments find budgeting difficult during periods of high inflation.
Although many government revenues rise with inflation, e.g. VAT, this
may still leave an overall shortfall caused by higher cost of employing
government workers and higher contract costs for new capital
projects.
 High levels of inflation can put exporters at a competitive
disadvantage. If the inflation level of country A is higher than
competing nations, country A firms’ goods will become more
expensive to export, while the goods from a low inflation country will
be much more attractive to buyers in country A, all other things being
equal.
High levels of inflation can create uncertainty in the business environment,
making firms reluctant to enter into long term commitments. Failure to
invest or reinvest can be ultimately damaging for the individual firms as well
as the economy as a whole.

Deflation (the opposite of inflation), can too result in social, economic and
political problems:

 Individuals and firms who own assets whose value is depreciating

perceive that they have become poorer and adjust their spending
patterns accordingly.
 Individuals and firms will be reluctant to invest in major items of
capital expenditure if they feel that, by waiting a little longer, they will
have obtained those assets at a lower price.
 Deflation can become just as socially divisive as inflation.

Economic growth

Growth is a goal shared by business and governments alike. Governments

generally pursue growth in gross domestic product for many reasons:

 A growing economy allows for steadily rising standards of living,

when measured by conventional economic indicators. This is
indicated by increased spending on goods and services that are
considered luxuries. Without under laying growth in GDP increase in
consumer spending will be short lived.
 For government growth results in higher levels of income through
taxes on income, sales and profits. This income allows government to
 pursue specially and politically deliverable infrastructure spending, as
the construction of new hospitals or road improvements.
 A growing economy creates a ‘feel good’ factor in which individuals
feel confident about being able to obtain employment and
subsequently feel confident about making major purchases.

Economic growth in itself may not necessarily leave a society feeling better
off as economic well being does not necessarily correspond to quality of
life.

Consequences of economic growth: increased levels of pollution, traffic

congestion etc.

Distribution of wealth

Governments generally have objectives relating to the distribution of

economic wealth among different groups in society e.g. increasing taxes on
the rich, tilting the distribution of wealth in favor of poorer groups.

Stable exchange rate

A stable exchange rate s useful to business who are thereby able to

accurately predict the future art of raw materials. Stable exchange rates
can also help consumers, for example, in budgeting for overseas holidays.

An important contributor to maintaining a stable rate is the maintenance of

the balance of payments.

Government borrowing

Government borrowing represents the difference between what it receives

in any given year from taxation and trading sources and what it needs in
order to finance its expenditure programmes. Government borrowing tends
to rise during periods of economic recession and fall during periods of
boom.

(ii) Government management of the economy

From government policy objectives come strategies by which
these policy objectives can be achieved.
Too commonly used approaches to economic management can be
classified under the heading of:
(a)Fiscal policy and
(b)Monetary policy
 THE POLITICAL ENVIRONMENT

Political environment is one of the organization`s marketing

environment. Political decisions inevitably affect the economic
environment.A harsh political environment can impact on the
willingness of the investor to invest. If the political environment
is stable there is also stability on the economic front. Here in
Zimbabwe the political crisis of 2008 affected business on
number of ways for example
The Importanceof Monitoring the Political Environment
The marketer needs to monitor the changing political environment
because it impinges on the marketing function of business in a
number of ways;
-At national level government passes legislation that directly affects
the relationship between the firm and its customers and between itself
and other firm. Legislation has a direct effect on marketers for example
a law giving consumers rights against the seller of faulty goods.
-The government is additionally responsible for protecting the public
interest at large, imposing further constraints on the activities of firms
e.g. where government lays down design standards for cars to
protect the public against pollution etc
-Economic environment is directly affected by the actions of
government. Government is responsible for formulating policies that
can influence the rate of growth in the economy and hence the total
amount of spending. it is also a political decision as to how this
spending power should be distributed between different groups of
consumers and between the public and private sectors.
-Government at both a central and local level is itself a major
consumer of goods and services of a country
Central Government
To understand the nature of the political environment more fully and
its impact on marketing, it is necessary to examine the different
aspects of governments
Government system of most countries can be divided into four
separate functions: The Parliament,executive,civil service and judiciary.
The Parliament
The Parliament comprises a collection of elected of
representatives .New legislation starts life as a bill and passes
through parliament processes to the point where it becomes an Act of
Parliament.
The Executive
The executive plays a very important role in the formulating policies
which Parliament then debates and in Britain the executive comprise
the cabinet and ministers of state.
The Cabinet
The main executive element of central government is made up of the
Prime Minister and cabinet, who determine policy and who are
responsible for the consequences of their policies. The cabinet is
headed by the Prime Minister who has many powers including the
appointment and dismissal of ministers and determine the
membership of cabinet committees.
-chairing the cabinet and setting its agenda
-Summarizing the discussions of the cabinet and sending directives to
ministers
-He is responsible for a variety of government and non-governmental
appointments
-Can determine the timing of elections.
The ideological background of the Prime minister and the composition
may give some indication of the direction of government policy. On
government attitudes towards aspects of the political environment such
as competition policy and personal taxation, marketers could study the
composition of the government to try and predict future policy.
Political Parties
The main function of political parties is to advance the cause of their
members.
 -Views of the political parties cross a range of policy issues
thereby representing a diverse range of issues for example in
Britain, Labor Party, stood for state intervention where market
failure has occurred whilst the liberal Democrats party appealed
to people who believe in open democratic government in a market
economy with government intervention where market
mechanisms have produced inequalities .The conservative party
has been seen as the party of business as it favor free market
enterprise and the labor party as the party of organized labor
The Parliamentary Life Cycle
Political parties promises in their election time manifesto and may
enact legislation when elected. They may start readdressing economic
measures in the short term with a forecast of improved economic
performance in a few years time. The life election cycle for Parliament
is five years and marketers may gear up for boom in sales just ahead
of genera l election.
The Civil Service
The civil service is the secretariat responsible for implementing
government policy. Civil servants are paid officials who do not change
when the government change, done to add a degree of continuity to
government.
-Each department is generally headed by a permanent secretary, who
gives advice to his or her minister, a political appointee who lacks
expertise in the work of the parliament.
-The marketer seeking to influence government policy must recognize
the power that civil servants have in advising their Minister especially
on the details of proposed legislation.
-A close dialogue between the business community and civil servants
can increase the chances of civil servants policy recommendations
being based on a sound understanding of business needs rather
ignorance.
Judiciary
Most democratic governments provide a number of checks and
balances against the abuse of executive power. The judiciary is
independent of government .
Local Government
Local authorities are responsible for a wide range of services from
services from social services and education to refuse collection and
street cleaning.
The Changing Relationship between Central and Local
Government
Evidence of erosion of local autonomy is seen in Britain for where
over half of local government income now comes in the form of
grants from the department of the environment..
-Central government has the power to set a maximum permitted
total expenditure for a local authority and to set a maximum amount
for its council tax due from householders.
Local authorities have had increasing members o f functions removed
from their responsibility and placed with QUANGOs which are no
longer answerable to the local authority.
-The local government Act 1988 specified a number of activities such
as refuse collection and school catering, where local authorities are
required to put the provision of services out to competitive lender.
Local Authoritiesand Marketing
-Many would argue that government policy towards local authorities
has been guided by a perception that they have been too production
oriented and consumers have been unable to exercise sufficient
sovereignty over the services that they provide.
-Local government Act 1988 requires local authorities to submit the
provision of an ever changing range of services to competitive tender
even through the services themselves may still be provided by the
authority in a centrally planned manner often at no cost to users
-Marketing is increasingly being used as a tool to achieve such
objectives.
-Local management of schools led to school using a variety of
marketing techniques to attract pupils
Quasi-Governmental Bodies
-The 1990s has seen significant development in the delegation of
powers from government organization to arms length executive
agencies often referred to as quasi-autonomous governmental bodies
because direct involvement by a government department in a
particular area of activity is considered to be inefficient.
The Quasi – government body represents a compromise between the
constitutional needs of government control and the organizational
needs of independence and flexibility associated with private sector
organizations.
-Many aspects of government have been devolved to QUANGOs in
Britain like National Health service Trusts, Higher education
corporations
-QUANGOs enjoy autonomy from their parent department and the
Minister has no direct control over the activities of the body
-The main advantage of delegating to QUANGOs is that action can
be taken much more quickly than may have been the case with a
government department
-Being relatively free of day - to - day political interference QUANGOs
are in a political better position to maintain a long term free of
short-term diversions which may be the result of direct control by a
Minister who is subject to the need for short-term political popularity
The European Union
-The European Union is formerly known as the European Community.
Its origin is from European coal and steel community.
-The Treaty of Rome 1957 signed by the original six members namely
France, West Germany, Italy, Belgium ,Netherlands and Luxembourg.
However , other countries later joined like Britain, Denmark etc
Aims ofthe European Union
-The Treaty of Rome 1957 created a custom union and a common
market. This involved introduction of a common external tariff on
trade with the rest of the world and abolition of tariffs between
member states.
-The main aim was the creation of a common market in which states
as if it was one country.
-It also aimed at free movement of trade, labor and capital between
member states.
-Aimed at a common pricing and support payments between all
countries and free movement of produce between member states.
The Structureofthe European Union
-The Treaty of Rome developed a structure of government. The
executive is provided by the council of ministers.
-The structureo r civil service is provided by the European Commission.
Legislative is provided by the European Parliament Court of Justice,
which is able to rule that an action is not in accordance with the
Treaty for example Article 85 and 86 defined the define the basic
approach to be adopted in dealing with cartels and monopoly power.
-Funding of activities of EU comes from income received on goods
entering the EU from on-members
The Council of Ministers
-It represents the government of member states and can be seen as
the principal lawmaker of EU although it only act on proposals
submitted by the commission
-Council of ministers has powers to adopt legislation ,ratify treaties
after consultation with the European Parliament
-Ask the commission to undertake studies and to submit legislation
-Delegate executive and legislative powers to the commission
Each member state sends one Minister to the European Council of
Ministers .The presidency of the council of ministers rotates between
countries in alphabetical order with each period of presidency lasting
six months
-The council of minister adopts new legislation by voting. The Council
of Ministers can pass laws even if the European Parliament disagree
with them.
-The European Parliament also has power to approve or reject the
EU budget.
The committee of permanent representatives complements the work
of the council of ministers have responsibility to their own national
governments as well as the EU.
The European Commission
-Each member state send one commissioner to the commission, each
appointed by the member government for a renewable term of four
years.
-They are supported in their work by a staff of about 14 000 civil
servants. The commission`s Headquarters is in Brussels. The
Commission is headed by a president.
Each commissioner is given responsibility for a portfolio which could
be for a policy area like transport, administration
-All members of the commission are supported to act primarily for
the benefit of the union as a whole, rather than country they
represent this is spelt out in Article 157 of the Treaty of Rome
Roles of the commission include:
-Initiator
-I t is the task of the commission to draft proposals for legislation
which the Council of Ministers has to consider. If the council does not
accept a proposal, it can only alter the draft by a unanimous vote, if
not achieved the proposal has to go back to the commission for it
to draft a revised proposal which will be acceptable to the council of
ministers
b) Mediator
-The commission can intervene in disputes between member states to
try and join a solution through e.g.in trade disputes between
members.
-Implementer
-The commission undertake the day to day administration of the EC.
This involves the activities of member states to ensure that they do
not conflict with community policy like regional development fund and
common agricultural policy.
The European Parliament
-It is primarily consultative
-It`s day to day is to monitor the activities of other institutions.
-It can give an opinion on commission proposal but only has power
to amend, adopt or reject legislation e.g. EU Budget
-It also has the theoretical power to dismiss the entire commission, for
which a censure motion must be passed by a 2/3 majority of
members.
-The Parliament has no control over the selection of new
commissioners to replace those who have been dismissed.
-Members of the European Parliament are now directly elected by
the constituents of each country.
-Parliament has 626 members and European Parliament generally
meets in Strasbourg but Parliamentary committee meetings are held in
Brussels and in Luxembourg, where the secretariat is mainly based.
The European Court of Justice
-The supreme legislative body of the EU is provided by the Court of
Justice article 164 of the Treaty of Rome gave the court of ensuring
that the law is observed in the interpretation and implementation of
the treaty.
-It is the final arbiter all matters of interpreting community treaties
and rules, between member states and the commission and between
commission and business organizations , EU officials
-The European Court of Justice can investigate complaints that the
commission has acted beyond its powers and can annual decisions
of the commission.
-European Court of Justice has 15 judges , assisted by 9 advocates-
general .Each being appointed by common agreement between the 15
member states on the basis of their qualifications and for a
renewable six year term of office.
-Members of the court must put European interests before national
interest
SADC
The Southern African Development Community (SADC) started as
Frontline States whose objective was political liberation of Southern Africa.
SADC was preceded by the Southern African Development Coordination
Conference (SADCC), which was formed in Lusaka, Zambia on April 01,
1980 with the adoption of the Lusaka Declaration (Southern Africa:
Towards Economic Liberation).

The formation of SADCC was the culmination of a long process of

consultations by the leaders of the then only majority ruled countries of
Southern Africa, thus Angola, Botswana, Lesotho, Mozambique,
Swaziland, United Republic of Tanzania and Zambia, working together as
Frontline States. In May 1979 consultations were held between Ministers of
Foreign Affairs and Ministers responsible for Economic Development in
Gaborone, Botswana. Subsequently a meeting was held in Arusha,
Tanzania in July 1979 which led to the establishment of SADCC.

On August 17, 1992, at their Summit held in Windhoek, Namibia, the

Heads of State and Government signed the SADC Treaty and Declaration
that effectively transformed the Southern African Development
Coordination Conference (SADCC) into the Southern African Development
Community (SADC). The objective also shifted to include economic
integration following the independence of the rest of the Southern African
countries.

Currently SADC has a membership of 15 Member States, namely; Angola,

Botswana, Democratic Republic of Congo (DRC), Lesotho, Madagascar,
Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa,
Swaziland, United Republic of Tanzania, Zambia and Zimbabwe.
Population size : 257, 726,000 (257.7 Million inhabitants)
Gross Domestic Product (GDP) : 471,118 US$ billion (471.1 US$ billion)

SADC's Vision is that of a common future, a future within a regional

community that will ensure economic well-being, improvement of the
standards of living and quality of life, freedom and social justice and peace
and security for the people of Southern Africa. This shared vision is
anchored on the common values and principles and the historical and
cultural affinities that exist between the people of Southern Africa.

The SADC Mission is to promote sustainable and equitable economic

growth and socio-economic development through efficient productive
systems, deeper co-operation and integration, good governance, and
durable peace and security, so that the region emerges as a competitive
and effective player in international relations and the world economy.

The Regional Indicative Strategic Development Plan (RISDP) and the

Strategic Indicative Plan for the Organ (SIPO) remain the frameworks for
SADC Regional integration that provide SADC Member States with a
consistent and comprehensive programme of long-term economic and
social policies, and at the same time, it provides the SADC Secretariat and
other SADC Institutions insights of SADC approved economic and social
policies and priorities.

The RISDP reaffirms the commitment of SADC Member States to good

political, economic and corporate governance entrenched in a culture of
democracy, full participation by civil society, transparency and respect for
the rule of law. In this context, the African Union’s New Partnership for
Africa's Development (NEPAD) is embraced as a credible and relevant
Continental framework, and the RISDP as SADC’s Regional expression
and vehicle for achieving the ideals contained therein. The RISDP
emphasizes that good political, economic and corporate governance are
prerequisites for sustainable socio-economic development, and that
SADC’s quest for poverty eradication and deeper integration levels will not
be realized in the absence of good governance.

The Organ on Politics, Defense and Security Cooperation plays a vanguard

role as part of the institutional mechanisms for promoting and maintaining
peace and stability in the region and the SIPO provides the institutional
framework for the daily implementation of the Organ’s Objectives.

The SIPO, alongside the SADC Mutual Defense Pact of 2004 guides the
implementation of the Protocol on Politics, Defense and Security
Cooperation. The SIPO is divided into four main sectors of Political;
Defense; State Security; and Public Security.

SADC comprises eight (8) Institutions, namely, the Summit of Heads of

State & Government, SADC Tribunal, Council of Ministers, Organ on
Politics, Defense& Security Cooperation, Sectoral/Cluster Ministerial
Committees, SADC Secretariat, Standing Committee of Senior Officials,
and SADC National Committees.

With its chairpersonship held on a rotational basis, SADC applies the

Troika system from Summit, the Organ, Council and the Ministerial
Committee of the Organ (MCO) as well as the Senior Officials level.

The SADC Troika System vests authority in the incumbent Chairperson,

Incoming Chairperson who is the Deputy Chairperson at the time and the
immediate Previous Chairperson to take quick decisions on behalf of SADC
that are ordinarily taken at policy meetings scheduled at intervals stipulated
by the Articles 10, 11 and 13 of the Treaty. This also applies to the Troika
of the Organ on Politics, Defense and Security Cooperation and when
combined, the two are referred to as the Double Troika.
At multilateral level, SADC continues to enjoy mutually beneficial
cooperation at Continental and international level. In this regard, at the April
2006 Consultative Conference, SADC and its International Cooperating
Partners (ICPs) adopted the Windhoek Declaration, which is a Framework
for a New Partnership between SADC and its ICPs.

This Declaration encompasses the establishment of Thematic Groups as a

platform to give attention to specific priority by SADC and ICPs interested
in particular areas an opportunity for pooling resources for implementing
specific programmes in areas of common interest.
SADC Member States
Angola
Botswana
DRC
 Lesotho
Madagascar
Malawi
Mauritius
Mozambique
Namibia
Seychelles
South Africa
Swaziland
Tanzania
Zambia
Zimbabwe

Supranational Governmental Organizations

-National government`s freedom of action is further constrained by
international agreements and membership of international organization
-Treaties of Rome impose duties on British government which it is
obliged to follow membership of other supranational organizations is
voluntary and does not have binding authority on the British
government.
-The most important organization which affects the British government
policy is the United Nations
-Its General and Security Councils are designed as fora in which
difference between countries can be resolved through the United
Nations Conference on Trade and Development.
Influences Non- Government Policy Formation
-Political parties are organizations that people belong to in order to
influence government policy over a range of issues
Political parties aim to work within the political system e.g.by having
members elected as MPs or Councils
Pressure Groups
-The seek to change policy in accordance with members interest
generally advancing a relatively narrow cause.
-Members of pressure groups generally work outside the political part
of the political establishment.
-Pressure groups can be divided into a number of categories
-Those who are permanent fighting for a general cause and those
who are set to achieve a specific objective and are dissolved when
this objective is met or there no longer seems any prospect of
changing the situation
-Sectional groups exist to promote the common interests of their
members over a wide range of issues e.g. Trade Unions. They
represent their members views to government on diverse issues
e.g.proposed import controls and legal representatives for individuals
members
-Promotional groups are established to fight specific cause e.g.nuclear
disarmament
-Business also frequently join pressure groups as a means of
influencing government legislative proposals that will affect their
industry.
THE SOCIAL AND DEMOGRAPHIC ENVIRONMENT

Social Influence on behavior: people’s behavior has move to do with their

unique physical and psychological make-up and life experience lessons

People learn norms of behavior from such sources as:

1. Dominant cultural values of the society they live in
2. Social class they belong to
3. Reference groups especially families and friends

Cultural Environmentis made up of such manifestation of culture as:

1. Share attitudes in society

2. Symbols and rituals which can be seen in cultures e.g. support for
football, traditional regalia in cultural events e.g. umhlanga in SD.
3. Material manifestations, style of decorations used in houses, art of
culture.

Types Of Culture

Core Cultural Values: ending overtime culture e.g. polygamy in

Swaziland and Monarch

Secondary Values: are more susceptible to change over time of

traditional regalia which has been modernized nowadays such that
snickers and sandals are now worn.

i. SUBCULTURES; are ‘baby’ cultures or cultures within a culture

which may be further necessitated by individuals, religions,
ethnic and other differences e.g. I am a loyal Swazi who
believes in Swazi culture but not a polygamist

Effects of Culture On Marketing

1. Understanding processes of buyer behavior

2. Some products may be unacceptable in a culture and must be
adapted to be culturally accepted e.g. in Islamic world nudity is
offence to their culture and that is why a British singer’s tour was
concealed one year.
3. Symbols associated with product may be un acceptable in a culture
e.g. color of packaging
4. Distribution channel decision are partly a reflection of cultural
attitudes not just economic and land use
5. Advertising do not translate easily between different cultures
6. Methods of procuring sales vary between cultures

Social Class

Helps to identify groups of individuals who share common attitudes

and behavior patterns and access to resources, translated to
spending patterns e.g. many goods and services are usually bought
by ‘working class’ during month-ends while ‘upper classes’ are
usually with expensive and lavish lifestyle, top of the range/state of
the art wheels and huge investments

Measuring Classes

1. Self Measurement – how you see your self you will probably
choose products and lifestyles which suits your class
2. Objective Approaches – using measurable indicators e.g.
occupation, education, spending habits, income/salary scale for
class determinants
3. Asking Third Parties – combines objective with subjective
assessment of one’s behavior and attitude.
a. Life Styles
an analysis which seeks to direct or categorize population into
groups based on distinctive patterns of behavior.

(1)Conformers: Comprises of a huge population who stay in sub

burn houses.
(2)Aspirers: a small group with ambitions, innovations and keen to
surround themselves with trappings of success.
 (3)Controllers: think they have made it in life and do not feel the
need to flaunt their success.
(4)Performers: have a vision of how life would be made brighter for
everybody.

Other Informal Lifestyle Groups

(1)Yuppies: young upwardly mobile professionals

(2)Diukys: dual income no kids yet
(3)Bobos: Burn out but opulent
(4)Atms: Assistant To Madams

Family

Is a crucial in giving individuals

distinctive personality as different attitudes and behavior
between individuals can be attributed to values instilled in them
by their families from childhood
i. many goods and services are typically brought by family units
ii. they act as transmitters of cultural values and norms and can
exercise strong influence on individual behavior

Reference Groups

learning and mimic values of families and close relatives.

Primary: when you have direct face to face contact with the
members of the group

Secondary: where there is no relationship but you are influenced by

its values nonetheless.

Importance Of Demographic Analysis

(1)demographic helps to predict the size of the market that a product

is likely to face which marketers as basis for predicting
(2)Study of demography indicates the human resource the
organization can expect to have in future.
 (3)Study of demography has implication for public services which are
becoming marketing oriented e.g. changing population structures
influence community facilities
(4)It also influences the nature of family life, communities ultimately
affect social and economic system in which the organization
operate.

Stage 1.Early stage of population development or grown population (high

stationary stage). It is characterized by high birth rates and high death rates
as result population is small and heavily stationary it’s totals e.g. traditional
societies especially in the early centuries.

Stage 2.Early expansive stage with high birth rates and declining death
rates. This results in rapidly growing population. Most developing countries
are this stage in terms of population growth e.g. Zambia has HBR and
declining DR though the rates are likely to increase due to HIV/AIDS.

Stage 3.Another expanding stage with low death rate and declining birth
rate resulting in gradual reduction with population growth. Developing
countries, some of them are in this stage.

Stage 4.Low death rate and birth rate resulting in reduction of population
growth. It’s a low stationary with developed and industrialized countries like
Sweden/Denmark as they are usually characterized by an aged population.

Age Structure

Age structure is an expression of the number of people in a total population

found in each age group. Three age groups are normally recognized i.e.
Children (under 15), Adults (15 – 64) and the aged (65+)

The aged structure population pyramid shows on vertical scale commonly

graduated 5yr intervals youngest at base and the 1% of the males and
females in each of the age groups on the horizontal scales. Males lying
traditionally on the left and females on the right, % increase to the left for
males and right for the females
(i) Age structure are a valuable in showing the different number of males
and females at different ages (sex rations) as well as the whole
composition of the population
(ii) They may also indicate short term/long term effects of migration,
population policies, life expectancies and fertility ratio which may be
needed before foreign direct investments. Is undertaken.

Geographic Distribution Of Population

The most striking fact about population is it’s great unevenness e.g. in
some places people live so crowded together that we are inclined to
wonder how they can be comfortable, while others are so widely scattered
that the isolation might appear depressive.

The differences in the mode of living between two people living in a ……..
Places affect the social practices, economic activities and the whole
outlook upon life of these individuals.

Advantages Of Densely Populated Areas

1. Every one can find like minded people in a large city, what ever
his/her interest/idea is
2. Aggregate wealth that promotes educational medical and social
facilities.
3. Modern utilities such as electricity, gas ……. Steam plants etc are
facilitated by the close spacing of the housing units.
4. Freed from some of the physical chores of existence, city dwellers
have time for cultural activities.
5. Employment opportunities, business academic.

Disadvantages

1. Small housing space, air pollution, crime, easy spread/contacts of

contagious diseases, expensive standard of living
2. Too many people mean exploitation of natural resources leading to
environmental degradation.
Advantages And Disadvantages Of Space Population

1. Availability of abundant sunshine, clean air, space and freedom to

exercise
2. Farms provide abundance of food at reasonable costs, more roomy
….. having qualities
3. Feeling close to nature is indefinable satisfaction of living where
sunrise, sunset, woods and streams can be seen in all their beauty,
etc.

Disadvantages

1. People who live isolated lives can readily be expected to develop the
art of eloquence, they are likely to be quiet and somewhat reticent in
conversation
2. No doctors, hospitals, police stations readily available due to long
distances
3. It is expensive and often prohibitive of providing some of the wooden
necessary utilities
4. Less, no jobs opportunities in standard of living
5. Slow improvement in standard of living
CORPORATE SOCIAL RESPONSIBILITY (CSR)

promotes a vision of business accountability to a wide range of

stakeholders, besides shareholders and investors. Key areas of concern
are environmental protection and the wellbeing of employees, the
community and civil society in general, both now and in the future.

The concept of CSR is underpinned by the idea that corporations can no

longer act as isolated economic entities operating in detachment from
broader society. Traditional views about competitiveness, survival and
profitability are being swept away. Some of the drivers pushing business
towards CSR include:

The shrinking role of government

In the past, governments have relied on legislation and regulation to deliver

social and environmental objectives in the business sector. Shrinking
government resources, coupled with a distrust of regulations, has led to the
exploration of voluntary and non-regulatory initiatives instead.

Demands for greater disclosure from stakeholders

There is a growing demand for corporate disclosure from stakeholders,

including customers, suppliers, employees, communities, investors, and
activist organizations. Society as a whole can be affected by can be
affected by the actions of a business. Business organizations have a moral
responsibility to take account of the interests of its stakeholders.

Growing investor pressure

Investors are changing the way they assess companies' performance, and
are making decisions based on criteria that include ethical concerns. The
Social Investment Forum reports that in the US in 1999, there was more
than $2 trillion worth of assets invested in portfolios that used screens
linked to the environment and social responsibility. A separate survey by
Environics International revealed that more than a quarter of share-owning
Americans took into account ethical considerations when buying and selling
stocks. Pressure groups promote cause to environmentalism, e.g. friends
of the earth, and green peace. They campaign for general or specific
issues e.g. for or against a road building scheme. The 'Working with NGOs'
section offers some insights into the way businesses and lobby groups are
working together to mutual benefit.

Competitive labor markets

Employees are increasingly looking beyond paychecks and benefits, and

seeking out employers whose philosophies and operating practices match
their own principles. In order to hire and retain skilled employees,
companies are being forced to improve working conditions.

Supplier relations

As stakeholders are becoming increasingly interested in business affairs,

many companies are taking steps to ensure that their partners conduct
themselves in a socially responsible manner. Some are introducing codes
of conduct for their suppliers, to ensure that other companies' policies or
practices do not tarnish their reputation.

Stakeholders-these include: the government, customers, suppliers,

intermediaries, creditors, local community and the employees. All these
have an influence on the business.

Some of the positive outcomes that can arise when businesses adopt a
policy of social responsibility include:

Company benefits: (internal)

 Improved financial performance;

 Lower operating costs;
 Enhanced brand image and reputation;
 Increased sales and customer loyalty;
 Greater productivity and quality;
 More ability to attract and retain employees;
  Reduced regulatory oversight;
 Access to capital;
 Workforce diversity;
 Product safety and decreased liability.

Benefits to the community and the general public: (external)

 Charitable contributions;
 Employee volunteer programmes;
 Corporate involvement in community education, employment and
homelessness programmes;
 Product safety and quality.

Environmental benefits: of being green

 Greater material recyclability;

 Better product durability and functionality;
 Greater use of renewable resources;
 Integration of environmental management tools into business plans,
including life-cycle assessment and costing, environmental
management standards, and eco-labeling.

Nevertheless, many companies continue to overlook CSR in the supply

chain - for example by importing and retailing timber that has been illegally
harvested. While governments can impose embargos and penalties on
offending companies, the organizations themselves can make a
commitment to sustainability by being more discerning in their choice of
suppliers.

A key challenge facing business is the need for more reliable indicators of
progress in the field of CSR, along with the dissemination of CSR
strategies. Transparency and dialogue can help to make a business appear
more trustworthy, and push up the standards of other organizations at the
same time.
The Global Reporting Initiative is an international, multi-stakeholder effort to
create a common framework for voluntary reporting of the economic,
environmental, and social impact of organization-level activity. Its mission is
to improve the comparability and credibility of sustainability reporting
worldwide.

There is increasing recognition of the importance of public-private

partnerships in CSR. Private enterprise is beginning to reach out to other
members of civil society such as non-governmental organizations, the
United Nations, and national and regional governments.

An example of such a partnership is the 'Global Compact'. Launched in

1999 by the United Nations, the Global Compact is a coalition of large
businesses, trade unions and environmental and human rights groups,
brought together to share a dialogue on corporate social responsibility.

The Ecological Environment

Business organizations operate in a physical environment which provides

them with raw materials, inputs and space to dispose their waste materials.
There is growing pressure on natural resources as evidenced by the
extinction of species of animals and agriculture land to housing and
industrial development.

The Media And Environmental Issues

The media often acts as a change agent on business practices. It spreads

awareness of social issues and also influences business policy and
decision making by setting political agenda and influencing public opinion.
E.g. (a) campaign against open cast mining which creates noise and dust
pollution for local residents. (b) Press and TV programs against excessive
dumping of waste and threats to rain forests in tropical areas. Pressure
groups appreciate the role of the Media To Influence Public Opinion
Through Propaganda And High Profile Campaigns.

Good Corporate Governance

The concept of corporate social responsibility is now firmly rooted on the
global business agenda. But in order to move from theory to concrete
action, many obstacles need to be overcome. Companies’ need to be
answerable to more stakeholders than just their shareholders has led to
corporate governance being raised to a moral level. Poor corporate
governance is where highly paid directors have undertaken financial
transactions of dubious value to their shareholders, and this has
strengthened the need for a code of ethics by which directors run a
business. E.g. internal controls should be put in place, structuring the board
of directors with non executive directors from outside, negotiate
remuneration of directors and employees.