Introduction to Business Environment
British Airways in terms of fleet size is the second largest airline in the UK. This report is prepared on business environment in order to help readers in understanding the impact of change in business environment. In this report, stakeholders and their importance from company point of view is discussed in detail. Along with this, strategies are also mentioned in the report that can be adopted in order to maintain good relations with the stakeholders. Further, fiscal and monetary policy and their impact on organization are also discussed in detail. At the end of report, significance of international trade on the UK aviation industry in respect to British Airways is
1.1 Purpose of different type of organizations
There are three kinds of organizations like public, private and nonprofit organizations. Purpose of these organizations is given below.
Sole Trader:- These are mainly small sized business that have limited resources. Their main aim to increase their profitability. Due to this reason their main purpose is to control cost as much as possible.
Partnership:- In this mode of business multiple people as an owner of business operate a firm. Their main purpose is to increase profitability of the firm by taking mutual agreeable decision.
Public Organizations:- The main purpose of such kind of organizations is to create employment opportunities. Welfare of existing labor force is another important objective of these public sector organizations. Due to this reason these firms mostly run in loss or they are not able to generate sufficient amount of profits.
Private Organization:- British Airways is a private firm and profit maximization is its primary objective which is divided into various sub objectives. The organization is able to achieve its long-term objectives through achievement of short-term targets or benchmarks. These firms strictly follow the business policy. However in order to earn more amount of profit, the employees’ welfare is ignored sometimes.
Non-Profit Organizations:- These are those organizations which are not established to earn profit. Mainly, these organizations operate for welfare activities in order to help needy people. These needy people may be crippled or uneducated people.
1.2 Extent to which organization meet objectives of stakeholders
There are many stakeholders of the firm like employees, shareholders, government and creditors etc. Firms must meet stakeholders’ expectations in a proper manner in order to grow business at fast pace. These stakeholders are explained below in detail.
Employees:- Employees are considered to be one of the important sources of British Airways. Moreover, growth of firm entirely depends on the way in which its employees treat customers. Therefore, British Airways must make sure that its employees are satisfied and no discrimination is done among the employees at the workplace. In order to meet employees’ career growth needs, firm time to time conducts the training programs. Through these programs, employees develop their skills. Hence, chances of career growth increased for employees. In this way, British Airways satisfy the needs of employees.
Shareholders:- These are important stakeholders of the firm because they provide capital to the firm by using which company can expand its business. British Airways must try to give good performance in order to maintain confidence among investors regarding safety of their investment value. Firm brings transparency in its operations and it discloses each and everything in its annual report. Hence, British Airways is satisfying the needs of shareholders.
Creditors:- These are those who give credit to the British Airways. In business, it is seen that firms require working capital in order to perform their day-to-day business activity. Due to lack of cash, organizations approach their friends or banks for meeting their working capital requirements. This is a part of routine business and due to this reason it is important for the British Airways to make payments to its creditors on time. British Airways make payment of amount to creditors on time by strictly following cash management strategy. In this way, British Airways is meeting the needs of its stakeholders.
1.3 Responsibilities of an organization and strategies employed to meet needs of stakeholders
Stakeholders are the entities that act as the growth drivers for an organization and they play supportive in helping an organization to sustain its business.
Shareholders:- It is the responsibility of an organization to give maximum possible return to its shareholders. British Airways are operating in highly competitive business environment. It is through adoption of cost control and curtailment measures that the firm is able to maintain adequate profitability. It is also a major responsibility of an organization to make sure that correct information is made available to the shareholders. In this way, company can create a positive image among shareholders.
Creditors:- It is responsibility of the firm to pay its creditors on time. In order to ensure timely payment, the organization should avail short-term credit facility. On the other hand, British Airways must abstain from taking too much credit from creditors. By strictly following this strategy British Airways can reduce its debt burden and make payment to creditors on time.
Employees/Social:- It is the responsibility of firm that discrimination is not done among employees on the basis of caste, creed, religion and gender. In order to ensure these, British Airways can develop a corporate culture under which strict actions must be taken against those officers that are involved in discrimination practices at the workplace. It is an ethical responsibility of an organization to provide good working environment to the employees. It is the legal responsibility of organization to pay fair salary and wages to the employees at the workplace. Hence, company must fulfill its entire responsibility towards employees.
Government:- Government is an important stakeholder of British Airways and it needs to comply with all rules and regulations that are formed by the government regarding aviation industry and taxation. Breach of rules may invite penalty from regulatory authorities. It is an ethical responsibility of government to work for the welfare of society. It is also its social responsibility to follow all rules and regulations in a proper manner. By performing these duties in a proper manner, government can perform its responsibilities.
- Public is an important stakeholder of company because revenue comes from general public. Hence, it is the responsibility of firm to control emission of pollutants from its planes.
- All these mentioned responsibilities come under corporate responsibilities of British Airways and it is accountable to perform all these responsibilities on time to respective stakeholders.
2.1 Economic System and Allocation of Resources
Free Market Economy:- It is an economy in which government does not control market by imposing rules and regulations. In this kind of market economy, allocation of resources depends on businesses. In other words, it can be said that the organizations make purchase of resources according of their requirements and purchasing-power.
Socialist Economy:- It is an economic system in which government make rules and regulations regarding every industry. Organizations have to follow these rules in order to operate efficiently in respective industry. In such kind of economies allocation of resources is done by government by following pre-determined rules and regulations. Hence, it can be said that the organizations get equal access to the natural resources of the domestic nation to some extent.
Mixed Economy:- In UK there is a mixed economy system in which government maintains control on the firms by forming and implementing rules and regulations. British Airways are operating in a mixed economy. In mixed economy there are both public and private companies. However, numbers of private firms are relatively more than public ones. In mixed economy, government keeps tight control on some of strategically important sectors like atomic energy, etc. In UK, operations of British Airways are looked after by UK civil aviation authority and it issues guidelines time to time that mentioned firm needs to follow. Due to mixed economic nature, everything is not in the hands of British Airways. For example, it cannot purchase majority of slots on primary airport. Here, resources are controlled by the government. This is the best example of government control on resource allocation. It can be said that although governments give more liberality to firms but they keep control on allocation of resources.
2.2 Impact of monetary and fiscal policy on organizations
Monetary policy is a policy whose main components are CRR, SLR and open market operations. The central bank is able to control liquidity in the country through adoption of effective monetary policy. On the other hand, fiscal policy is a policy whose main objective is to revise taxation and public expenditure in the country.
Monetary Policy:- It is a fact that excessive and lack of liquidity in an economy creates problems. Moreover, it is through changes in CRR and open market operations that the central bank attempts to control money supply in domestic economy. If CRR get increased and through open market operations central bank purchase securities or instruments in the financial market then money supply in economy get reduced. Due to increase in CRR banks have to keep more money with central bank which is a part of reserves they actually have with them. Reserves refer to deposits and loan amount payable by customers to the bank. Hence, bank’s ability to give loan gets reduced and due to this reason, British Airways face problems in getting required amount of loan from a single bank. Inverse impact is seen in loan-allocation ability of banks if CRR gets reduced and central bank sells securities through open market operations. Changes in monetary policy affect interest rates. Suppose central bank hikes the interest rate, then British Airways will get loan at a higher rate. If company takes a loan before hike in interest rates then it would get loan at cheaper rates. Hence, monetary policy affects the finance cost of British Airways.
Fiscal Policy:- Fiscal policy brings changes in taxation policy and with revision of this policy firms get many new relaxations from the government in terms of tax rates. This saves million of amounts for British Airways. Hence, fiscal policy is also considered to affect business of British Airways to a large extent. British Airways also provide consignment service under which it transports the goods. If government of UK boosts economic development activities then there will be heavy need of raw material. Some of the raw material can be purchased from other countries. In such a case, government can contact British Airways for service. If this would happen, then revenue of British Airways will be increased. Hence, fiscal policy affects British Airways.
2.3 Impact of competition policy on British Airways
In UK several laws are formulated in order to prevent firms from adopting unethical practices in order to compete with rival firms. British Airways have to follow these rules and regulations very strictly. Failure to comply with these rules and regulations may invite penalty from regulatory authorities like EASA or CSA. Civil aviation authority is a body that controls and implements rule and regulations related to aviation industry of the UK. Some of the aspects of UK aviation industry are managed by CSA and some of the aspects are looked after by EASA. In the UK, EASA perform its operations through CAA office. As per rule, British Airways can also participate in EASA meetings and can give useful recommendations that may help it in growing its business. There are many other rules that prohibit British Airways from forming a cartel in order to order to serve its own interests. Thus, competition policies of UK are very tight and British Airways has to strictly comply with these policies. Breach of this policy may lead to strict action from regulatory authorities and this action will tarnish image of British Airways among the local people.
In UK, an attempt is made to liberalize aviation industry. As a result, many new changes have come in competition policy. Now companies operating in UK aviation industry can decide fares at their own discretion. They can start flights on new routes and they can increase their passenger carrying capacity. Hence, it can be said that firms are getting a free hand to compete with competitors. Liberalized policy of Euro zone is positively affecting British Airways because now firm can easily start its flights on new routes without waiting for the approval from any authority. It can also enhance its passenger carrying capacity with taking approval from any authority. Hence, due to this policy, firm is in position to take fast decisions without any hindrance. Thus, it can be said that this policy is positively affecting British Airways.
3.1 Role of market structure in pricing and output decisions
Market structure to large extent affects pricing and output decisions of the firm. Market structure simply reflects number of buyers and sellers and nature of their product similarities and differences. On the basis of these two factors every firm in the business world take its product pricing and output decisions.
Perfect Market Competition:- This is a market structure in which there are numerous buyers and sellers and there are lot of similarities in products produced by group of organizations. Another main characteristic of this market structure is that consumers have good product knowledge. Thus, British Airways do not fall in this market structure. Pricing and output decisions are taken on the basis of competition in industry under this market structure. By looking at competitors, companies determine price for their product. Output decisions are taken on the basis of demand for product in the market. Company’s sales trend is also considered while taking output decisions. Hence, in this way, price and output decisions are taken in the perfect competition market.
Monopoly:- It is a market structure in which there is a single company and it sells unique product to the customers. There is a single firm in the industry and due to this reason firm freely takes price and output decisions in respect to product. Hence, British Airways do not come in this category of market structure. In this market structure, price and output decisions are taken by company at its own level. There is no other company in the industry and due to this reason, competitor factor do not need to be considered while taking decisions. Output decisions are taken on the basis of demand for the product in market and price is decided by the firm at its own discretion.
Monopolistic:- In monopolistic market structure, there are number of buyers and sellers. Moreover, their products are different from each other in terms of quality and price. British Airways and its rival companies provide similar services at various price levels. Therefore, British Airways fall in this category. In this structure, limited firms are operating and due to this reason, pricing decisions are taken by looking at the competitor pricing strategy. Whereas, output decisions are taken by identifying demand for company’s product and expectation about percentage change in sales in the upcoming months. In this way, price and output decisions are taken in this market structure.
Oligopoly:- It is the market structure in which there are few firms and one firm dominates a market. In such a structure, companies try to sell their product at low price in order to increase their market share in the industry. Hence, pricing decisions are taken by reviewing competitor’s pricing strategy. On the other hand, output decisions are taken by estimating the future demand for company’s product.
3.2 Impact of market forces to shape organization response
Market forces refer to factors that largely influence firm’s decisions. These factors change industry to industry. However, some of the factors remain same like consumer behavior of the people. Some of the market forces that shape British Airways response are given below.
Demand and Supply:- British Airways revenue comes from travelers that may travel from one location to other for business, education and tourism purpose. Hence, business and economic conditions of people affect their demand for travel from airlines. Hence, demand to a large extent affects British Airways response to change in business environment. In past few years UK tourism industry grows and due to this reason UK aviation industry also grows in size. This is evidence from the fact that private airlines are commencing their airplanes on many new routes in UK on continue basis.
Customer Perception:- People perceptions also affect their demand for a choice of airlines. In UK many airlines are operating like Easy jet, Ryan air etc. These airlines provide services at very cheaper price in UK and in other European nations. Hence, people positive perceptions about these cheaper airlines may create problems for British Airways. As per the fact of geographic breakdown, EasyJet and Ryanair are nearby to British Airways. It means that both low fare airlines grow at a rapid pace. British Airways come in existence before so many years and even though these two firms are giving nearby performance to British Airways. This happens because both the firms are providing their service at a cheaper price. Hence, people have very positive performance towards both airlines. Due to these reasons, British Airways is receiving stiff competition from EasyJet and Ryanair. Hence, positive customer perception towards EasyJet and Ryanair affects British Airways in terms of intensity of competition.
Technology:- Technology also acts as a market factor that affects organization’s response to business environment. As mentioned above, British airway is operating in an industry in which there is a fierce competition. Due to this reason British Airways consistently needs to involve into R&D activities in order to upgrade its technology. If British Airways legged behind its rival firms in up gradation of technology then it may lose its grip on market. Over the past few years, British Airways upgrade its technology and due to this reason, it enjoys commendable position in the industry.
3.3 Impact of business and culture environment on the British Airways
Culture environment is one of the components of business environment. Business environment affects decision making of British Airways because it is a set of conditions in which the firm is operating its business. Hence, British Airways need to formulate strategy in order to counter problems that come in existence due to negative changes in business environment.
Economic Environment:- It refers to economic conditions of UK in terms of GDP and inflation rate. If economic conditions of the UK deteriorate then it will affect people income level, unemployment opportunity and their saving rate. Negative change in these factors will affect British Airways profitability (Yu and Ramanathan, 2012). In such kind of environment British Airways need to make changes in its business strategy in order to keep its business stable.
Social Environment:- It refers to people attitude and belief on certain issue. Currently, people in UK are facing lot of economic problems in terms of income level and unemployment of large number of people. In such a scenario people will have a positive attitude towards low fare airlines like Easyjet, Ryanair etc. In such a scenario offering services at premium price may create problems for British Airways.
Political Environment:- It refers to political parties’ attitude and their business policies. UK government is fully committed towards providing support to the UK aviation industry and tourism sector. Hence, from these angle British Airways is not facing any problem.
Legal Environment:- It refers to rules and regulations that govern UK aviation industry. Violation of these laws may tarnish image of British Airways and may invite penalty of huge amount from regulatory authorities.
Technological Environment:- It is mentioned above that British Airways need to update its technology in order remain in the top position of UK aviation industry. Ignorance of this factor may reduce the grip of British Airways on domestic aviation industry.
4.1 Significance of international trade to UK business organizations
The international trade between nations leads to traveling of people of different countries to foreign land. As a result, every year, thousand of business tourists inbound and outbound take place in UK. With increase in global economic condition, this segment of tourism will certainly get increased. Hence, enhancement in international trade creates an opportunity for British Airways. Today, many of the UK firms are operating in developed and developing nations like India. From India, every year, numerous IT professionals visit UK for providing support to the mentioned nation in respect to implementation and completion of business projects. Same happens in case of other nations with whom UK have good business tie ups. Hence, this segment of inbound tourism creates ample of opportunities for British Airways. In this way, international trade has a lot of significance to the UK aviation industry.
4.2 Impact of global business factors on business organizations
British Airways operates several flights in UK and other nations of the world. Therefore, large impact of global factors is observed on the business performance of the British Airways. Currently, all continents of the world are facing economic problems in handling the problems that comes in existence due to global financial crisis. This affects the economic condition all over the world.
- Most of the European nations are facing numerous problems in their economies in terms of unemployment rate, low GDP, etc. Hence, companies are not performing well in their respective industry and they are competing on the basis of price of their product. Due to high unemployment rate, UK travel and tourism industry growth rate is very slow which has about 10% of share in country’s GDP. This directly put a large impact on the revenue of British Airways every year.
- British Airways operate a large number of flights across several countries of the world. Therefore, it needs to pay heavy amount of bill on Jet fuel every year. Currently, currency fluctuations are observed which has an impact on business operations. Moreover, the same trend is observed in case of crude oil prices in recognized commodity exchanges. Therefore, its top management is using derivative contracts like forward, future and options in order to hedge itself from fluctuation in these underlying assets.
In other words, it can be said that firm is using these contracts in order to protect itself from fluctuations in currency and crude oil. So, it is clear from the above discussion that global factors to a large extent affect the performance of British Airways.
4.3 Impact of policies of European Union on UK business organizations
European Union brings its liberalization policy under which European nations are expected to open the gates for other airlines to start their business in their homeland. Under this policy, airline that belongs to any European nation will be able to serve its services to all the members of European nations. As a result, competition will become stiff in respective industry of Europe. However, people residing in Europe certainly benefits from this policy. This is because now lots of alternative options are available to them in terms of low fare airlines like Ryanair and Easyjet. As a result, costlier airlines may face loss in their business. On the other hand, liberalization of aviation industry creates numerous opportunities for low fare airlines. Now, they will be able to start new flights in those geographical areas in which they were not present. So, there are both positive and negative factors of this policy for firms like British Airways. Company is performing well on several performance measurement parameters like number of passengers. Along with this turnover of British Airways also increased in last four years. So, this policy positively affects the performance of the British Airways.
European Union prepares an external aviation policy under which rules are prepared. The essence of this policy was that after formulation, same member states of Europe cannot enter in any international air service agreement individually. Such kind of agreement as a proposal will be brought towards EU and after discussion with member states, representatives agreement will be linked by EU. In this policy, power is distributed among EU and member states in the field of regulation of intentional air services. Such a policy positively affects UK business organizations because by listening each other’s concern, mutual decisions are taken in EU. Hence, each member state gets an equal opportunity to grow.
On the basis of this report, it is concluded that companies must evaluate their business environment on quarterly basis. If needed then they must make changes in their business strategy. By ignoring small changes in the business environment firms can create big problems for themselves. Stakeholders are the important entities that play key role in making organization successful in the relevant industry. Thus, firms must try to satisfy needs and desires of their stakeholders. Monetary and fiscal policy indicates the direction in which country is presently going and it also reveals the country’s economic condition. Firms by considering these factors and change in industry scenario must craft their business strategy.
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