Perfect Competition: This model of PERFECT COMPETITION assumes businesses produce products, which are exactly the same. Consumers have perfect knowledge of the market. They are aware of what is being offered by all businesses. There are no barriers to prevent firms from setting up and there are a large number of firms in competition with one another.

Businesses in such markets are known as PRICE TAKERS. Each individual firm has no influence over the price, which it charges for its products. If a firm were to charge a higher price than others then no consumers would buy its products, since every product is exactly the same and they would know exactly where to go to buy an alternative. A firm that charged a price below that of others would be forced of business.

One example in UK could be agriculture. There are a large number of farmers providing farm produce for the market. One farmer cannot influence the market price. Information about this market is available in trade journals.

One advantage for businesses of operating in conditions of perfect competition is that they have a strong incentive to operate efficiently. Inefficient businesses are forced out of perfectly competitive markets.

However, there are certain problems.

Businesses only make what are known as normal profits. They are only just enough to prevent new businesses being attracted to the market and existing businesses from leaving the market. Businesses operating under normal competition making larger than normal profits would quickly see these profits eroded by the entrance of new businesses into the market forcing prices, in therefore profits, down.

Businesses operating under perfect competition are not able to control their prices. This is because of the competitiveness of the market in which they operate. Such businesses have little control over their own destinies. They are completely governed by market conditions. It is for the above reasons that businesses prefer to operate in conditions that are less competitive than perfect competition. Wherever possible, the majority of businesses attempt to exert some control over the markets in which they operate.

MONOPOLY occurs when one business has total control over a market and is the only seller of the product. This is known as pure monopoly but there is another monopoly, which is known legal monopoly, which occurs in the UK when a firm controls 25% or more market share.

Monopolists are likely to erect barriers to prevent others from entering their market. They also exert a strong influence on the price, which they charge for their product. But if they raise price a great deal demand will fall to some extent. Because of the influence monopolists have on their price, they are often called price takers.

Although there are many businesses in the UK which exert a great deal of power in the markets in which they operate, few, if any, however, certain businesses have come close to exerting pure monopoly power. Before competitors such as TRANSCO were able to supply gas to consumers, BRITISH GAS enjoyed monopoly power. But today BRITISH GAS no longer can exert control over the market for gas id due to the Government's open market policy to increase competition in the areas, which was previously dominated by monopolies. From business point of view monopoly has certain advantages and disadvantages.

Advantage: · Monopolies tend to make abnormal profits compared to competitive businesses.

Disadvantage: · There may be little or no incentive to innovate for a large business if it faces a lack of competition. It therefore may be less efficient and profitable than it is capable. This could lead to bureaucracy, inefficient management and lower dividends for shareholders.

This is market model where there is imperfect competition. This means that there is some restriction on competition.

It exists where a large number of relatively small firms compete in an industry. There are a few BARRIERS TO ENTRY, so that it is fairly easy for firms to set up and to leave these markets. Firms will also have perfect knowledge of the market.

Each a firm has a product that is differentiated from the others. This is achieved through branding, when a product is given an identity of its own. A business will face competition from a wide range of other firms competing in the same market with similar, but differentiated, products.

Firms operating under these conditions are not price takers, but they will only have a limited degree of control over the prices they charge. There are a few markets of this kind in the UK. Two examples include legal services and the manufacture of certain types of clothing.

When there are many firms, but only a few dominate the market, OLIOGOPOLY is said to exist. Examples include the markets for petrol, detergents, paint and sweet. The majority that businesses in the UK operate under this type of competition.

Under oligopoly, each firm will have a differentiated product, often with a strong brand identity. Several brands may be competing in the same market.

Brand loyalty amongst customers is encouraged by advertising and promotion. Firms in such markets are often said to compete in the form of non-price competition. Prices are often stable for long periods, disturbed only by short price wars.

Although brand loyalty does allow some price control, businesses often follow the price of a leader. This means that they tend to be interdependent. In extreme cases firms might even collude to 'fix' a price. Sometimes this is illegal and may be called a restrictive trade practice.

Barriers to entry exist. If it was easy for new firms to enter the industry, they would set up and take the market share of the few large producers. Examples of barriers to entry are:

· legal restrictions, such as patents, which prevent other businesses copying products for a period of time;

· high start up costs, such as the cost of steel manufacturing;

· the promotion or advertising required, for example, in the tobacco or soap powder industries;

·arrangements between businesses, for example in the 1990s newsagents could not stock ice creams by other producers in certain manufacturers' freezers;

· collusion between businesses in cartels, which act together to prevent new entrants.

1)PROFIT MAXIMISATION : It is often argued that the main aim of private sector businesses is to MAXIMISATION their profits. This is achieved where the difference between the total revenue earned by the business from selling its products and the total costs of those products is the greatest. The manufacturer would produce 3000 units, as this is the output where its profit is highest.

EXAMPLE:

It may be reasonable to assume that firms aim for as much profit as possible. In practice a business is more likely to have a satisfactory level of profit as an objective. This is known as SATISFICING.

2)OBJECTIVES OF SMALL FIRMS : Owners of small firms may not want to expand their output to a point where their profits are maximized. This may be because:

# it involves employing more workers, making more decisions and working longer hours;

# they may want to keep their turnover below the VAT threshold;

# they are happy with a satisfactory profit level and their current lifestyle.

3)INFORMATION : In practice it may be difficult to identify precisely the level of output that will maximize profits. The business needs to measure all its costs at every level of production and estimate accurately likely demand at various prices.

4)OTHER AIMS : A business might sacrifice short-term profit maximization for long-term profits. It explains why firms operate in the short term at a profit in expectation that future sales will pick up. Many firms lower their price to build a market share and then increase prices when competitors have left the market.

5)SALES MAXIMISATION : SALES REVENUE MAXIMISATION was put forward by William Baumol in the 1950s. He argued that an objective of firms may be to gain the highest possible sales revenue. This objective will be to gain the highest possible sales revenue. This objective will be favored by those employees whose salaries are linked to sales. Managers and sales staff are examples of staff paid according to the sales revenue, which they generate. Sales revenue maximization is not the same as profit maximisation. In the above example 1 the business maximised profits at an output of 3000 units. Producing 4000 units would have maximized sales revenue (£35000).

6)CUSTOMER SATISFACTION : Companies with household manes such as Heinz, Kellog's, Ford, Cadbury's would not wish the general public to think badly of them. Some companies have made serious efforts in recent years to improve their image. For example, Skoda, the car manufacturer has in the past had an image as a producer of 'budget', 'downmarket', or 'unfashionable' cars. It has tried to shake off this image by exploiting its new owner's name VW. Faced with competitors, firms are likely to lose sales if they do not take into account the needs of customers. Increasingly, firms are giving free after sales service, replacing unwanted goods without question and training their staff to deal with the public.

7)QUALITY ASSURANCE : Businesses are increasingly taking into account the needs of customers. QUALITY ASSURANMCE is a method of ensuring quality that takes into account customers' views. This can affect the business in a number of ways. For example, customers may be consulted about their views through marketing research before a product is manufactured or a service provided. They may also be part of a consultation group involved at the design and manufacturing stage.

8)RATIONALIZATION : Firms may find themselves with excess capacity if demand for their products slows down. Unless the reduction in demand is just a short-term glitch, a firm will seek to find ways to reduce its maximum capacity. This process is commonly called rationalizing. It means recognizing in order to boost efficiency (though cynics call 'rationalizing' a polite way of saying redundancies.

Example: The 1990s, proved a miserable decade for Kodak. The world's largest photographic company, with more than 100,000 employees, found itself under constant attack from Japan's Fuji and Germany's Agfa. In 1997 Kodak's difficulties came to the fore, when the strength of the dollar meant a reduction in the competitiveness of American goods against Japanese ones. Fuji took a rising share of the US market, just as international demand for Kodak products was flagging. The company decided to rationalize by making 16000 staff redundant. Some factories would close, especially those outside America. The cost of pay offs and factory closures were put at $1.5 billion. The intention was clear: to cut fixed costs, reducing the break-even point and therefore making it easier to compete with the Japanese.

9)DIVERSIFICATION : This means entering different markets in order to reduce dependence upon current products and customers. Diversification is a way of reducing the risk faced by a company. Selling a range of different products to different groups of customers will mean that if any one product fails, sales of the other products should keep the business healthy. The simplest to diversify is to merge with or take over another company. This saves time and money spent developing new products for markets in which the firm may have no expertise. Such as Cadbury's developing soft drinks (Schweppes and 7-up) to provide sales success in hot weather to counteract the fall in chocolate sales. In this way the long-term survival prospects of the business are improved. A firm may also diversify if it has a key product in the decline phase of the products life cycle; for example, cigarette manufacturers. Diversification will allow into 'growth' markets.

They are a statement of what an organization wants to achieve through its operation. Large firms may publicly state their general philosophy and values in a list of aims. For example for most PLCs profit is only one goal among others. Objectives provide specific criteria for decision making. They are intended to drive the organization - or parts of the organization - forwards in a chosen direction. Objectives are most effective when expressed in unambiguous, quantifiable terms, e.g. increase active customer (loyal) base this year by 25%.

Mission Statement : It is a document detailing the aims that should provide the sense of common purpose to direct and stimulate the organization. Advocates of mission statements believe that their focus on goals such as high quality and customer service are far easier for employees to relate to than profit. Critics suggest that statements are little more than public relations exercise. It identifies the organization's goals. This is a rather general and visionary statement. It may include:

# intention to have quality businesses

# maintaining leadership positions in long-term growth markets

#offering everyday low prices and superior value to the customer

# operating high levels of production, investment in people, customer service and the community at large

A mission statement should clearly contain the fundamental purpose of the organization, clear goals of the organization, guidance for decision making etc.

These are the long-term intentions that provide a focus for setting objectives. They are usually expressed qualitatively, sometimes in the form of a mission statement. A typical corporate aim might be 'to produce the finest chocolate in Europe'. From this starting point a firm can build a series of quantifiable targets, such as to increase its consumer quality rating from fifth in Europe to third within three years. Aims tend to be long-term; they are indefinite and indicate intentions rather than specific goals. On the other hand objectives are however, are more specific and generally can be measured. The best-known aim of private organizations is to maximize its profit. A Company will convert the aim of profitability into a more specific objective such as to obtain a 15% return on capital during twelve months' trading.

THE ADMINISTRATIVE PROCESS

Set Aims ==========>Decide Policy(Long-term plans) =============>Organize Tactical Action (Set short term departmental objectives)

Examples of other aims are: (1) Survival ; (2) Increasing the share of the market ; (3) Prestige - improving the company image ; (4) Cash flow.

The firm may pursue a single objective or multiple objectives. Objective setting is a complex matter for a firm.

Short term & long term Objectives: Objectives can be seen as more specific and quantifiable aims, designed to assist in the achievement of the goals identified by the firm.

Long-term Objectives relate to products, markets, finance and production. Some of the examples of long-term objectives are:

(a) To attain 3% market share within three years.

(b) To increase revenue 10% next year.

(c) To raise productivity by 10% next year.

According to Peter Drucker (The practice of Management 1968) corporate objectives should be set in the following eight areas:

(a) Market standing: Product market, its desired market share and the company's reputation.

(b) Innovation: The Company's strengths of developing new products.

(c) Productivity: Efficiency of target level productivity.

(d) Financial resources: Estimate of resources needed to attain the organization's goals.

(e) Managerial performance: Capability of existing managers.

(f) Worker performance and attitudes: Skills of workers.

(g) Public responsibility: Company's responsibility to customers and society.

(h) Profitability: Company's level of profit.

Short term Objectives: Tactical objectives are short-term objectives. They are also known as departmental performance targets. Examples: (1) To raise output by 5% within six months. It is essential to fulfill short-term objectives in order to pursue strategic objectives (long term) Operational objectives are set at much lower level for example to small groups and individuals. These objectives are aimed at a short time frame.Example: to sign up ten new dealers by the end of the month.It is essential to fulfill short-term objectives in order to pursue strategic objectives (long term).

Operational objectives are set at much lower level for example to small groups and individuals. These objectives are aimed at a short time frame. Example: to sign up ten new dealers by the end of the month.

Other stakeholders:

Directors: Growth, market share, profitability and security

Trade unions: The organization's willingness to negotiate

Creditors: Promptness of repayment, reliability

Competitors: Intensity and fairness of the competition

In the long run firms need to make a profit. Profitability is a major business aim although it is not the only one.

Profit maximization will entail calculating the output, which will achieve greatest total profit (i.e. the point Q on the quantity axis at which the difference between total revenue and total cost is greatest) .

If we simply measure profit in money terms then it would appear to be logical to consider that the rational business will in the long term seek to maximize the difference between its total revenue and total cost.

1. To an economist, profit is the reward for risk taking.

2. An accountant would define profit as the difference between revenue and expenditure. Recent research suggests that businesses do attempt to achieve maximum profits but their ability to do is limited by

(a) The funds the business has as its disposal. Achieving maximum profit may require further investment, which the business cannot afford.

(b) The quantity and quality of information open to management when making decisions.

(c) The complexity of the decisions to be made. It becomes extremely difficult to judge the outcome of large number of decisions on the business as a whole.

There is evidence to support that management places a very high level of importance on achieving long-term profit objectives.

Computers are now routinely used to collect data and this has led to the development of management information system (MIS), defined as systems in which specified data is collected, processed and communicated to assist those responsible for the management of resources. MIS are essential in providing information for control purposes as they facilitate the rapid collection and analysis of accurate, timely, concise and comprehensive data.

MISs can be defined as computer based systems for processing and organizing information so as to provide various levels of management with accurate and timely information. Data collected in a routine manner (such as sales and production figures, staff turnover and so on) is then processed and made available to management to:

· aid decision making

· track progress

· isolate and solve problem

An MIS is an efficient way of providing regular information, although it is less well equipped to deal with unpredictable, informal or unstructured information. For instance, whereas sales data can be analyzed to provide information on profit margins for particular products and markets, it is less able to deal with a sudden change in the external environment (such as the emergence of a new rival in the market).

The quality of MIS does depend on its design. It must provide managers with the information that they require, in the form they require and at the time they require it. This means that there needs to be close collaboration between the programmers (who produce the software) and the managers who need to access the information.

Information Technology (IT): IT is the collective term for various technologies involved in the collection, storage, processing and communication of information by electronic means. IT is braider than computing and includes telecommunications and microelectronics. Information used in business organization for planning, organizing, monitoring and controlling. For most of human history, information was processed in manual ways, but, in the twentieth century, electronic technologies took over many of these functions. The process will increase further because of the following advantages of IT:

· increased accuracy of information;

· increased speed of information processing;

· increase in the volume of information;

· easier access to information resulting in better decision making;

· increased productivity;

· it frees up the workforce to undertake work requiring skill and judgment;

· great consistency.

These far outweigh the disadvantages and problems of IT:

· the cost of installing and running the equipment;

· the cost of training staff;

· the problem of security, confidentiality and compliance with the Data Protection Act 1984;

· the problems resulting from break down;

· possible staff resistance.