Business Economics

Neil Harris

• Publisher: Routledge
• Year: 2007
• Topic: Economics
• eBook ISBN:
  9781136423765
• Subtopic: Business General
• Index: Economics

'Business Economics: Theory and Application' is an undaunting and accessible text that focuses on the real world of business and how this relates to economics. The links to business are far more intrinsic that in other business economics textbooks where a business "flavour" is simply added to traditional economics theory. It provides an in-depth jargon-free analysis, particularly relevant for one semester courses. A variety of case studies and questions are used throughout the text both to illustrate key points and for seminar and assignment work. Diagrams are included to aid the explanation of complex issues, and review and discussion questions are incorporated to consolidate and expand on the learning. A lecturer's supplement accompanies the text.

Chapter 1

What is Business Economics? An Overview

After completing this chapter the reader will be able to:

understand what business economics is and why it is needed;

gain a broad overview of the main topics developed in the book;

utilise a framework, acquired through case studies, for studying business economics.

1.1 What Business Economics is and Why it is Needed – How it Differs from Economics

The Fall of the House of Yardley

Synopsis

This case study explores the decline of the perfume manufacturer, Yardley. It identifies a number of key characteristics if a business is to grow. These are:

1 to make profits to survive;

2 to continually update its products, targeting growth sectors of the market, and to support this with effective marketing campaigns;

3 to acquire other businesses, or merge with them, to boost potential profits.

Yardley, the toiletries and perfume manufacturer, has a long and distinguished history dating back to 1770 when King Charles I granted the company a concession to manufacture lavender soap in London. At the beginning of the twentieth century the Yardley family gained control of the business and in 1921 Yardley was granted its first royal warrant, with others following subsequently. These related to Yardley’s famous soaps and eau-de-colognes, including English Fine Cologne, Sandalwood, Lily of the Valley and Yardley English Lavender. They enabled Yardley to declare on its product packaging, advertising and letters ‘by appointment to. . . .’ followed by the name of a particular member of the royal family. In 1996 it was the Prince of Wales.

In the 1960s the company launched the Yardley Y range of toiletries for men but was then taken over by British American Tobacco (BAT). They launched new products such as White Satin, Yardley Lace for women and Yardley Gold and Blazer for men. They also sponsored the McLaren Formula One racing team. In 1981, the pharmaceuticals company, Beecham, bought Yardley from BAT, but after merging with SmithKline to form SmithKline Beecham, sold Yardley in 1990 for £110 million to Old Bond Street, the American based business. This was 88 per cent owned by Wasserstein Perells, the American fund management company.

In spite of previous advertising campaigns, featuring actress Helena Bonham Carter, between 1993 and 1996 and, from 1996, top model Linda Evangelista, to promote its products such as the perfumes Panache, Satin and Tweed, in August 1998 Yardley was threatened with liquidation and the loss of 300 jobs, unless the receivers KPMG could find another buyer. The company found itself with secured debts of £126 million, in spite of annual sales of £60 million; unsecured debtors were told that there were no funds to repay them.

So why did such a well established business run into such problems? A number of reasons can be identified, all within the broad sphere of business economics. Most importantly, insufficient money was invested in the company to permit the development of new products and new production methods, in part a reflection of the regular changes of ownership. This resulted in the company acquiring an image of being old-fashioned and with older consumers, although this had created a loyal customer base. Although there is nothing wrong with targeting the over-50s, as the holiday company Saga has demonstrated, for perfumes, cosmetics and clothes it is the end of the market with younger consumers that is the most profitable in terms of growth and expenditure. In contrast, Yardley’s competitors such as Chanel, Dior and Estée Lauder, all high quality existing brand names offering strong competition, have invested more and developed new brands. Additionally, products must be priced competitively if they are to sell, something which Yardley needed to reflect on.

In late 1998, Yardley’s Bath Luxuries division, which accounted for 25 per cent of Yardley’s sales, was sold to Cosmopolitan Cosmetics, a subsidiary of Wella, the German hair care and cosmetics group, to be run by a newly established subsidiary of Cosmopolitan Cosmetics, called Yardley of London. The remainder of Yardley’s business, relating to perfumes such as Tweed and Panache, proved less popular, but in April 1999 was sold by the receivers to IWP International.

What does this Case Study Say about Business Economics?

The above illustrates a number of issues fundamental to business economics, namely:

• A business must use its resources as efficiently as possible since they are limited in supply and there are costs in acquiring and using them. These include employees (known as labour), machinery and buildings (known as capital), and the land on which the buildings stand. Businesses also have the expertise of their top managers (known as entrepreneurs) who put the labour, capital and land together to produce the finished products most efficiently. Their purpose, amongst other things, is to ensure the business is profitable and grows; if losses are made over time the business will close. Hence, entrepreneurs must think about what and how the business produces, and its long term direction.
• Investing money (known as working capital) in new capital, products and ways to produce them is important if a business is to make maximum profits and grow. Clearly, insufficient was invested in Yardley to enable it to keep up with its competitors.
• Products must be priced competitively, be of good quality, imaginatively designed, marketed effectively and distributed as efficiently and cheaply as possible if customers are to demand them.
• A business must have long term plans to achieve its objectives. With Yardley, the objectives might be to remain as competitive as possible by investing more in the business, and launching new products which target younger consumers who spend more, helping it shed its older person image. Maximising profits will also be a long term objective.
• To promote the business’ objectives and respond to challenges from competitors and from the business environment in which they operate. Cosmopolitan Cosmetics will have developed such strategies to gain a greater market share for the products it acquired from Yardley’s Bath Luxuries division.
• Although it is less obvious in the above case study, developments in the economy will impact significantly on a business’s operations. In 1997 and 1998, increasing uncertainly, caused in part by the Asian economic crisis, caused consumers to cut back on spending, including toiletries and perfume. This reduced expenditure was reinforced by a high interest rate policy pursued by the Bank of England, from May 1997 until late 1998, after it was given autonomy to set the base rate. All other interest rates, such as credit card, overdraft and personal loan rates are based on this base rate, hence its name. These high interest rates discouraged consumer borrowing and spending. Consumers seeking to economise will buy cheaper cosmetics and bath products in the local supermarket rather than more expensive Yardley products. Other perfume manufacturers, in a stronger position economically, were not so affected by this.
• Business is increasingly global in its nature and larger organisations look across national boundaries to secure economic advantage. This was shown by the last two owners of Yardley, the company with products having a quintessentially English image, being American and German.

Basic Economics Concepts

Figure 1.1 shows, in simplified form, the relationship between the three main parties in an economy: businesses, households and the government. Businesses produce goods and services; they sell these to the government (e.g. warships) and to households (e.g. perfumes). Businesses and households pay taxes to the government and, in return, businesses may receive subsidies whilst households receive benefits such as unemployment benefits, state pensions etc. Households provide factors of production, such as labour, to businesses and in return are paid wages etc. They use this money to buy goods and services from businesses.

Figure 1.1 A diagram of business economics.

Of course this diagram does not show the full complexities of the economy. Later in this book we shall explore issues such as inflation, unemployment and economic growth, which affect businesses and households, and the government’s use of economic policies to influence these issues. Neither does Figure 1.1 show external forces such as foreign businesses which compete with domestic producers to sell goods to British households, which are imports from the UK’s viewpoint. In turn, British businesses sell goods abroad to foreign businesses and households, i.e. the UK’s exports. Additionally, the European Union has a significant impact on the British economy, as does the influence of the increasingly global economy whose behaviour affects the value of Sterling, share prices in the London Stock Exchange, economic growth and so on. 7

Defining Economics

Economics is, therefore, the study of how the resources land, labour, capital and enterprise are used or allocated by a country to meet its demands for goods, services and ideas, now and in the future. The resources are employed by businesses or firms and are also known as inputs to the production process, or factors of production.

Business Outputs

Goods

Businesses, also known as producers, manufacture goods and services. Goods are classified by economists under two main headings, consumer goods and producer goods. Examples of consumer goods include cars, chocolate bars, Levis, compact discs, a video or disk of the latest movie, and personal computers if used at home for personal or leisure use. The people who buy them are consumers, or customers and they live in house-holds.

In contrast, producer goods, as their name suggests, are used to produce other goods. Examples of producer goods include robots used on assembly lines to manufacture cars, personal computers used in offices for work purposes, cement mixers on building sites, jet engines for airliners and prefabricated factories which can be easily assembled. Many businesses are, therefore, the customers of other businesses which buy their output.

Some goods are also used in the act of consumption – food, drink or disposable products such as toilet paper or nappies for example – but other goods, known as consumer durables, clearly are not. It would be horribly expensive, for example, if we had to buy a new television set every time we turned it off at night.

Services

Services consist of the provision of non-physical items. The list is endless and includes using a cash dispenser at your local bank (although the cash dispenser is a producer good), attending a home game of your local football team, listening to a live band, working out at your local gym, staying in a hotel, watching a video of the latest movie (as opposed to the video as a physical object), making a plane journey, and so on. In each ca...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright
• Contents
• List of figures
• List of tables
• List of abbreviations
• Acknowledgements
• Introduction
• Chapter 1. What is business economics? An overview
• Chapter 2. How businesses produce
• Chapter 3. Producing for profit
• Chapter 4. Marketing the product
• Chapter 5. Market forces
• Chapter 6. Markets in the real world
• Chapter 7. Competition and competitive strategy
• Chapter 8. Regulating market power
• Chapter 9. The macroeconomy and its impact on business: I
• Chapter 10. The macroeconomy and its impact on business: II
• Chapter 11. International trade and finance
• Index