The first section of this assignment presents the different types of business organizations that are present and their purposes. Then, by taking Shell company as the organization to discuss the rest of the tasks, it is analyzed how Shell meets the objectives of different stakeholders.
The third section includes in general about the responsibilities of an organization and more specifically, the strategies used by Shell to meet those responsibilities are discussed further. The next part of the report presents in general about how economic systems attempt to allocate resources effectively.
Subsequently the impact of fiscal and monetary policy on Shell and their activities are presented in this report. The body of this report ends by the impact of competition policy and other regulatory mechanisms on the activities of Shell.
Different types of organizations and their purposes
There are different types of business organizations. A business can have one owner or many owners. So a business have different types of ownership depending on the aims and objectives of the owners. The main objective of any business is usually to obtain a profit. Although in some businesses even if their main objective was not obtaining profits, they still have to make profits in the long run in order to survive. The main types of organizations are Sole Trader, Partnership, Public Limited Companies, Private Limited Companies, Cooperatives, Franchises and Public Sector. (NGOs). The purposes, aims and objectives of each of the above mentioned types of organizations are discussed below.
Sole Trader is a business that is owned by only one person but there can be several employees working for that organization. At the start of a sole trader business, they may not have specific aims or objectives. The main aim of a sole trader business is to survive or sustain in the market and become stable. Then they will try to achieve the breakeven point, so that they will have no loses. Later on their purpose will be to obtain profits and in the mean time they will try to expand their business to a Partnership or Private Limited company where there will be at least two people funding to the business. Then again their main purpose will be to obtain profits, if they have already achieved the breakeven point. They will always try to provide good service to the customers. Advantages of a sole trader business are;
* No taxes to be paid
* Profits can be kept by the owner himself
* Total control of the business is with only the owner
* Can start/end easily and cheaply
* Can have the pride ownership
* Can retain profit for the development of the business
Partnership business is a type of business organization where there are two or more owners of the business. Usually there can be two partners to twenty, but there are exceptions such as major accountancy firms where there are hundreds of partners. The partners equally share the profits or losses that are made by the business and usually the partners manage the business but sometimes the work is delegated to the employees. There is a Deed of Partnership for each partner of a business which states the amount of capital each partner should invest in the business and it also states how the profits, losses and responsibilities are divided among the partners. Partnership businesses exist or their main purpose is to provide the general public with a service/goods. They also try to be in the blue ocean by being innovative and competitive. Later on the partnership objectives develop to capture more market share and in the meantime, another purpose of the partnership businesses are to satisfy their stakeholder interests.
Obtaining profits is not highly stated as a main aim, but it is obviously a motivating factor to achieve the objectives of a partnership business. Mostly partnership business aim to maximize their profits while reducing the overhead costs and increasing their sales. They also monitor the growth of the business to observe how much their business has developed relative to previous years and also to their major competitors. Advantages of partnership businesses are;
* Special taxes need not be paid
* Losses and responsibilities are shared among the partners
* Risk is spread among the partners
* Lot of financial resources are available
* Management is shared (therefore burden is shared among the partners)
* Has longer survival than sole proprietorship businesses
* Credibility increased with potential customers and suppliers. (That is the potential customers and suppliers will see that it is less risky to have business deals with partnership businesses than sole trader businesses).
Limited companies are business organizations where the shareholders of a particular business are the owners of that business. These businesses are usually run by directors who can also be shareholders. Directors are responsible to shareholders and therefore its their duty to act in the interests of shareholders. Limited companies can be divided into two;
1. Private Limited Companies [(PVT) LTD]
2. Public Limited Companies (PLCs)
Private Limited Companies | Public Limited companies |
Shares are not traded on stock exchange. | Shares are traded on stock exchange. | Shares can only be bought by friends or family. | Shares can be bought by the general Public. | The initial value of shares that is put on sale may vary (does not need to be greater than a certain value)| The initial value of shares that is put on sale for the general public must be greater than £50,000.|
Private Limited Companies
These companies can be owned by a minimum of two shareholders. The shares can be bought only by friends or family and they receive profits as dividends from the company. Shareholders have limited liability. Private Limited Companies must have the word “Limited” or the letters Ltd in its name. The main purpose of a private limited company is to provide maximum return (dividends) to their shareholders and therefore they try to maximize their profits. The long term objective of a private limited company is to maximize their market share and to expand the business. An aim of a private limited company is to maintain their business at a high standard. Advantages of Private Limited Companies are;
* Limited liability to the shareholders
* Can obtain money by selling shares
* Family members and friends have the chance of buying shares * Accounts are private
Public Limited Companies
The shares are available for the general public and the shareholders have limited liability. The business is managed by a Board of directors that is appointed from the votes of the shareholders. The main purpose of Public Limited Companies are to increase liquidity for the shareholders. Their long term objectives are to expand the company operations into other markets or to diversify. Their aims are to survive in competitive markets by being competitive, innovative and increasing the market share and limiting liability for the shareholders. Advantages of a Public Limited Company are;
* Can obtain money by selling shares
* Can sell shares to the general public
* Limited liability to the shareholders
* Can motivate the employees because shares can be bought by them Co-operatives
Co-operatives are business organizations that are formed by people who wants to work together. The minimum number of members required for a co-operative is two. Unlike the Limited company, here the members have unlimited liability. Profits made by the business is shared equally among the members. The share values do not vary. The primary purpose of a co-operative is to satisfy the members by providing goods and services to them. Therefore this helps to obtain increased income, savings and productivity as well. The main aim of a co-operative is to provide maximum economic benefits to its members. The short term objectives are to start co-operative practices and long term objectives are to make the lower income groups increase their ownership in the nation’s wealth. Franchises
Franchises are where large companies give small businesses to use their company name. Some of the examples are, Mc Donalds, Pizza Hut and Subway. There is a franchisor and a franchisee for every franchise. Franchisor is the person who gives their business name to other small businesses for an agreed period of time. He also provides materials, training and advice. Franchisee is the person who takes another business name and operates that business. But in order to do so, the franchisee must provide money to start their business. Franchisee must also give payments to the franchisor during the period of time they are using the name. The main purpose of a franchise is profitability. Since franchises are large corporations, they need to be profitable in order to sustain in the business. So the objectives they have to support this purpose is to provide quality products to their consumers at a price that meets consumer’s demands. The medium term to long term objective of a franchise is quality service. They aim to offer quick, efficient products at a reasonable price. Advantages of a franchise are;
* The franchisor will provide financial advice and assistance. * The franchisee owns the business.
* Well recognized name to the business.
* The franchisor will provide management and marketing assistance. * Lower failure rate.
Public sector business organizations consist of Government departments, Local Authorities, Health Trusts and Public Corporations. The main purposes of a public sector business organization is to increase economic growth and they also try to create the necessary infrastructure for the development of the country. One of the main aims for a public sector business is to promote fair distribution of income and wealth. The short term objectives of a public sector organization is to create employment opportunities, to assist the development of small business organizations and to avoid the limitations of the private sector.
Stakeholders and their objectives
A stakeholder of an organization can be defined as any individual or group who is interested in that organization in any way and who can affect or is affected by the achievements of the organization’s objectives.
I will be using Shell as my organization to answer the questions 1.2, 1.3, 2.2 and 2.3. There are many different stakeholder groups for large organizations. These stakeholders can be either internal such as the senior management or external, such as the Government. Shell is one of the largest and most profitable multinational companies in the world. Its head quarters is situated in the Netherlands and Shell is an Anglo-Dutch company. 2.5% of the world’s oil and 3% of its natural gas is provided by Shell. Oil and gas can be considered as resources that are in fixed or limited supply but they have a continuously increasing demand. For a day, 16 million cars are fueled by Shell’s petrol and diesel and 34 million homes are powered around the world by the liquefied natural gas sold by Shell. Around the world, there is an increasing trend of using energy which is because of higher standards of living and also due to the growing world population. Therefore there is an increasing demand for other energy sources as well. (other than oil and gas). Internal Stakeholders of Shell
The main internal stakeholders of Shell are;
Shareholders are the owners of large businesses like Shell, Virgin, M&S and etc. They are the providers of capital to set up and run the business. As a return for the capital they invested in the business, they get a share of the profits, known as dividends.
Board of Directors is chosen by the shareholders and they give a specific direction to the company. So these Board of Directors make a long-term plan (or strategy) to go in the direction. Shareholders are mainly interested upon the profit growth, share price growth and dividends. They have the power of electing the Directors.
There are more than 100,000 people worldwide, working for Shell. Some of the job titles are Senior International Mangers for finance. marketing, sales, oil and gas exploration and etc. There are also Geologists, Site Engineers, Oil Platform Workers, Business Analysts and etc.
The operation of Shell affect the employees, as stakeholders. Employees need to maintain the proper standard of work, their commitment to health and safety and excellence. These are also the important factors that are required to maintain the position of Shell as the leader in the energy field. So any mistake will harm the company reputation and also the livelihood of other employees.
One of the core values of Shell is to respect people. The employees always try to remain within Shell and they are motivated to work due to the good and safe working conditions and employment been competitive in Shell.
Employees are mainly interested upon the salaries and wages, job security, job satisfaction and motivation. They can influence Shell upon these factors; staff turnover, industrial action and service quality.
Suppliers are another internal stakeholder group. They are important for the effective and efficient production activities.
Every activity of Shell is centralized upon these core values. Shell will be using suppliers, contractors or other partners in the supply chain, only if they also show these core values.
External Stakeholders of Shell
External stakeholders do not play a role in the business, but however they have an interest of what the business does and influence the decision-making of Shell.
External stakeholders of Shell are;
2. Local communities
3. Interest Groups
Customers are the reason for the existence of a business. Shell therefore has a major objective, that is to win and maintain their customers by offering value in terms of price, safety, environmental impact and quality for the products and services they provide.
Customers are mainly interested upon the reliable quality, value for their money, product availability and customer service. It can be seen that Shell’s objectives matches with the interests of their customers. Shell achieve this objective by conducting a research process to find out customer wants and to find out the best ways to produce and provide the best products.
The research and development process mainly studies about the safety and environmental impact. Customers these days are concerned about pollution and environmental damage and they want cleaner and more efficient fuels such as biofuel. Collectively, people in the whole world have an interest in liquid biofuels for transport as people tend to travel more.
Local Communities are mainly interested upon the environment, local jobs and the impact of the business on the community. Shell respond to these interests by always aiming to create economic and social developments in its operation of oil and gas. At the same time Shell tries to minimize the negative impacts as well. Shell majorly invest to provide lasting benefits for the community. Some of these benefits include; * Create jobs for local people
* Use local contractors
* Development of local facilities (for example, health and education)
* Investment in the Community
The local communities who live close by to the oil refineries have raised issues over their safety. Shell responds to this by gaining the trust of those local communities by taking all the required safety measures. These safety measures include, operating the plants safely and making people aware about the emergency procedures they have to follow.
There is a range of interest groups that Shell needs to deal with. They are decision makers and opinion formers. Organizations and people who can influence Shell make decisions and form opinions so as to influence Shell and its activities. These include academics, government, non-government organizations (NGOs), media, business leaders and the financial community.
1. Governments – Shell operates in many countries across all regions of the world. Shell show these governments that they operate in the right way, to gain approval. Right way means creating jobs, paying taxes and provide the country with important energy supplies. Shell also promote the necessity to have effective regulation on Carbon Dioxide emission by working with the governments.
2. Media – Competitive companies like Shell require the positive opinions from media. They need the positive press coverage from newspapers, television and magazines. this will reinforce the position of shell in the market and gain new customers by the positive reputation.
3. NGOs- They influence in the decision-making process of Shell. As an example, Shell had to postpone their drilling work in British Columbia’s sacred Headwaters by listening to the concerns of many organizations who protested the drilling in order to protect the Headwaters and the wild salmon (in the water) and other natural resources as well.
4. Competitors (or other oil companies) – Shell build up partnership projects with other oil companies including their competitors BP and Texaco. These projects include activities for building new oil and gas supply lines and new refineries.
5. Business Community – Shell buy and supply to many other businesses.
Pressure groups are groups of people who have specific aims and interests and who influence major decision makers and raise public awareness about those issues. In order to overcome these barriers, Shell continuously discuss with its major pressure groups (such as friends of the Earth and Green Peace) about the main issues such as to how to dispose old oil rigs in such a way that it causes minimum damage to the environment.
Shell directly deals with all the specific pressure groups that campaign on local issues such as the preservation of plant and animal life on a specific region. Shell is always dedicated to protect human rights and help communities and thus it operates in countries only where they are able to follow their business principles.
There are many conflicts that can occur between the objectives of stakeholders. Shell look into three criteria before making any decision of the business. 1. Whether their activities will yield a good return for shareholders. 2. Whether their decision is suitable for employees and communities. 3. Whether the long-term effect of their activities will harm the environment.
in order to avoid conflicts that may happen between their stakeholders, Shell sets minimum levels for the three criteria before making a major decision or investment.
* Interest Groups
* Local Communities
Responsibilities of an organization and strategies employed to meet them
There are different types of responsibilities of an organization. These are shown in the responsibility map below;
This is put upon by law. They include the rules and regulations that needs to be followed by businesses and these rules and regulations are governed by law.
Ethical and moral responsibility
This responsibility arises by the strength of the society’s approval or disapproval.
Corporate Social Responsibility
CSR is a type of responsibility that any business has towards the society and the environment in which they have their operations. * Shareholders + Social Responsibility (SR) = Shareholders should announce any dealings they have with the operation of the company, that will benefit them either directly or indirectly. In public limited companies, this is compulsory.
* Employees + SR= Business organizations should look after their employees by providing them with a comfortable working environment. Organizations should also give them work that helps in the development of their carrier and support their life style as well. These are the social responsibilities businesses have towards their employees.
Shell is committed for the safety and health of the people who work for them. A programme called Behavior Based Safety (BBS) was conducted to all refinery employees and the in-house contractor by an external consultant. These BBS observers were been trained to conduct observation and give reports to their safety manager. Then the safety manager is always updated.
By providing a safe working environment to the employees, Shell has been socially responsible to their employees.
Absenteeism rate is very low in Shell as they provide long-term ailments for heart problems, knee problems and stiffness of shoulder for their employees. * Customers + SR = Business organizations should provide goods and services to the customer, that are environmentally friendly, clean and will not harm the customers in the short or long term.
Shell provide their customers with different energy products, materials and services which meet what they require economically and these products do not harm the environment. Shell always try to convince their consumers that the wealth that was created by them benefits the society as a whole. They also try to convince that the development of their industry in the future will gain benefits for the next generation as well.
By providing products that are environmentally friendly to their consumers, Shell has been socially responsible to their consumers.
Shell has also maintained the quality of their products because they have obtained ISO certificates such as ISO 14001, OHSAS 18001, ISO 9001 and ISO 17025 certificates. * Internal publics-services providers + SR = Business organizations must maintain good relationships and should not give false or implied information to lending institutions. * Community + SR = Business organizations should not harm or make any changes in any way to the community and their way of life neither implicitly nor explicitly.
(Related to the organization Shell) – Whenever Shell does planning or make business decisions, they consider the views of their neighbors or community. In this way, Shell can incorporate these views on the projects to share greater benefits to the communities. This further helps Shell to avoid disruptions to livelihoods and reduce impact on local wildlife and biodiversity. * Suppliers + SR = Businesses should maintain reasonable prices and also they must get their raw materials from readily available sources. They should also not exploit the suppliers by using their bargaining power to reduce the prices of raw materials.
Organizations have a responsibility to not contaminate or destruct the environment by any of the organization’s activities. There are several laws introduced by the Governments of countries in order to protect the environment. Organizations must carry out their activities by complying with the environmental acts.
Ethics and Business Code
Ethics are not enforced by law but they are the standards of behavior that is given by the society after assessing whether something is right or wrong. Business ethics are standards for businesses. These include written policies, unwritten standards and examples set by leaders.
Issues that may arise when ethics are not followed properly; * Extortion – The business will be threatened to close down if the necessary payments are not made for their operation in the neighborhood. * Bribery – These are certain payments that are done to obtain a service which is otherwise out of their reach. * Grease money – Some multinational businesses cannot obtain the services they are entitled for due to the stalling of the officials in the area. Cash payments need to be done to get the machineries to work in the required order.
Two types of ethical decisions usually happens in a business. 1. Ethical dilemma – This is the situation where a person may need to choose in a argument where both sides are arguably valid. 2. Ethical lapse – This is the situation where it is clearly seen that a person had made a wrong decision.
Usually ethics are started in companies by;
* Top Management Commitment in word and deed
* Company code of ethics
* Employee training and adoption
* Supply chain codes
* Have systems to go by ethics
(Example from Shell) – It is said in Shell’s business principles that it is required by their employees and contractors to respect the human rights of other employees and the communities in the environment where they operate. They had also incorporated human rights in their code of conduct. There is a set of principles that is put up for the suppliers by Shell which says about respecting human rights.
Management have responsibilities to all of their stakeholders.
Employees + Management Responsibility = Have policies and procedures (for recruitment, retirement and redundancy) in the business in order to manage their employees fairly.
Customers + Management Responsibility = Have ethical practice, fair trade, honesty and integrity, returns and defects policy, the service of the employee to the customer and etc.
Suppliers + Management Responsibility = Have supplier payment policies, follow transparency and fairness ethics maintain good relationships with the partners.
Competitors + Management Responsibility = Have ethical codes and practices when considering competition.
Community + Management Responsibility = Start and continue to do CSR activities. Generally Management Responsibility also includes to follow all the rules and regulations, policies and procedures and start following ethics in where the business operates.
Public Relations and Corporate Image
This is where good relationships must be build upon the company’s different public by gaining positive image and publicity and it should be possible to handle bad or negative rumors that comes to the company in any way.
The above functions will help to strengthen customer and employee loyalty and also helps to obtain a positive view of the public and gain trust for the company.
Economic Systems and how resources are allocated effectively
“An economic system can be defined as an organized way in which a state or nation allocates its resources and apportions goods and services in the national community.”
An economic system provides solutions to these questions:
1. What are the products that are been produced by using the resources?
2. How these goods can be produced?
3. For whom are these goods been produced?
There are four types of economic systems.
1. Traditional Economy (Communism)
2. Command Economy (Socialism or Planned Economy)
3. Mixed Economy
4. Free Market Economy (Capitalism)
* These economies answer the above mentioned three questions based on the social customs, rituals, habits, and religious beliefs.
* The things happening here does not change rapidly.
* The society cannot enjoy financial or occupational benefits in this type of economy.
* Standards of living rarely change.
* The economic behaviors and the relationships can be foreseen.
* Community interests have higher priority than the individual interests.
* In the past, traditional economy was used everywhere but now it is used in Aborigines, Amazon Tribes and etc.
* The Government have the control of the economy and therefore they decide on how to use and distribute resources.
* They also decide on the prices of products and salaries and wages of employees and they also decide on the job description of the employees.
* In other words, factors of production (which are land, labor and capital) are controlled by the government.
* There is no private property.
* An important factor is that this economy has no affect from the financial downturns and inflation.
* Focus on collective benefits for the society than for individuals.
* The resource allocation of a business organization should be done in the following way. Businesses are been given specific amounts of inputs and they should utilize them to produce the desired outcome of the Government.
* There are three main concepts used by the Government to allocate resources. They are motivation, public ownership and planning.
* Motivation means, consumers, workers and government have been guided to work towards the same goal.
* Public ownership is where all the factors of production been owned by the Government. (No private property).
* Planning is done for the proper allocation of the resources, such as, the labor have been directed to the jobs, the consumers have been directed to the jobs, the consumers have been directed as to what they should consume and the producers have been directed to what to produce. So a planning process is done to get the best use of the available resources.
* The sizes, quantity and the method of production of every product or service is preplanned by the government. This is done to obtain better results.
* Currently Cuba uses command economy.
Free Market Economy
* The decisions are made by the individuals themselves.
* Government does not control this economy, therefore the individuals do not depend on the Government. (Production processes are privately owned).
* The allocation of resources and distribution of goods are based on the market forces. Therefore the price system is set by supply and demand.
* A characteristic of the free market economy is that the individuals have the opportunity of free trading and they have no government barriers such as tariffs or subsidies.
* Buyers and sellers has to take the responsibility for their choices.
* USA can be taken as a free market economy and it is also involved in the mixed economy as well.
* However rich people (or high income people) have more choices than the poor people. The poor people can have no choices as well. But in the command economy, all the individuals have the same choices.
* There is motivation for the individuals who are working, because if they earn more, they will get more choices and so then they have the opportunity to consume luxury goods.
* This economy has a combination of the elements of the market and command economy.
* Most of the decisions are made by the individuals but the Government also takes part in the allocation and distribution of resources.
* Therefore both the private industry and Governmental entities control the factors of production, distribution and other economic activities.
* The main parties that are involved are the consumers, producers and the Government.
* When coming to a business organization, they operate and compete with the objective of obtaining profits and also there are some business organizations who operates with the objective of providing a service to the society.
* Consumers and producers are motivated by their self-interests whereas the public sector is motivated by providing a good service to the society.
* Ownership of the factors of production belong to the private individuals and organizations, but the Government also owns a certain portion of it.
* There is competition within the private sector.
* The resource allocation of the public sector is done by the planning process. In other words, the consumers have the choice of goods and services in the private sector, but little or no choice in the public sector.
* Government has three main functions in a mixed economy. They are provision or prohibition, subsidy or taxation and regulation.
* The Government can decide to make certain goods be available at zero cost so that those goods are available to the public. This is provision.
* Government ban certain demerit goods that may harm individuals or cause a social problem. examples of these demerits goods are drugs are pedophile literator. This is prohibition.
* Subsidies are provided by the government to the general public for the merit goods to promote them (that gives benefits to the public) and these are available at reasonable prices.
* Demerit goods are heavily taxed by the Government in order to reduce the social cost.
* Government regulates the price and quantity of certain goods and services in order to help the local community.
Impact of Fiscal and Monetary policy on Shell and its activities
Fiscal policy make changes in the total public sector expenditure and/or make changes in the overall level of taxation. All this is done to influence the level of demand in an economy.
The fiscal policy also make changes in the following;
* Taxation and other sources of income
* Government spending
* Borrowing whenever expenses are higher than the income
* Repaying of debts when income exceeds expenses
Government need to plan on what they are going to spend and the amount that is needed to raise income or borrowing. They also need to plan from which sectors (rich or the poor, firms, households) they should tax heavily and how much is the taxation.
Expansionary Fiscal Policy – This is a part of the fiscal policy that is put into action during an economic recession. This policy is used to increase demand for the goods and services. This is achieved by decreasing tax or increasing public sector spending.
Contractionary Fiscal Policy – This policy is used to reduce price inflation. So the demand of goods and services is reduced by increasing tax and decreasing public sector spending. When moving into business organizations, as a response to the contractionary fiscal policy, they reduce their output and employment as well. However tax increments may lead to reduction in work incentives and as a result productivity decreases.
Effect of fiscal policy on Shell
Income tax can increase due to a deficit in the balance of payment. (Imports greater than exports). As a result, the consumers will spend less because they have to pay more tax. Since the consumers do not spend as much as they did before, the aggregate demand for oil and gas will also fall. For example, they will move to substitutes like electric cookers instead of gas cookers and kerosene oil instead of oil.
Then this can cause a slight decrease in the Shell company’s profits (since Shell is a profitable multinational company, they won’t fell it as a significant fall in the their profits just because taxes were increased in one country (decrease in demand in one country)). So Shell might decrease their output by a small amount and sometimes employment can decrease as well.
Income tax may decrease due to the balance of payment been largely positive. (Exports greater than imports). This is the exact opposite of the above scenario. Consumers or the public tend to spend more when the income tax is less. As a result demand for oil and gas increase. This will be an advantage for Shell who are operating in America because Shell oil and gas prices are very much reduced in the international market. Profits will increase for Shell and thus output and employment will be increased as well.
Corporate tax maybe increased by the Government due to a deficit in the balance of payment. Then Shell will increase the price of oil and gas to cover their losses. As a result, the demand for those products will decrease. As Shell’s sales decrease, there will be a decrease in their profits (but not a significant decrease). Then Shell will reduce their productivity by reducing output and employment.
Corporate taxes maybe decreased by the Government when inflation is high. Then since Shell has to pay less corporate taxes, they will reduce the price of oil and gas. As a result, it will boost the demand for those products. So sales will be high and therefore profits will increase for Shell. Thus Shell will increase their output and productivity and therefore there will be more employment opportunities than in the times where corporate taxes were high.
Indirect taxes on goods and services may be increased if there is no inflation and if the Government wants to balance it. As a result, the price of oil and gas will increase. This will largely effect on the consumers with a middle or low income. However the increment of price of oil and gas will make the demand go down. Thus profits for Shell will decrease and therefore Shell will decrease its production quantities and productivity. So the demand for labor will also reduce. However Shell’s products are a “need”, other than a “want”, because there are less substitutes for oil and gas in the world. Therefore sometimes an increment in indirect taxes will not affect Shell’s demand on gas and oil. (Inelastic demand). So profits, output and employment will remain the same.
The Government may decrease the indirect taxes on goods and services when there is high inflation, and also when exports are very much greater than imports. As a result, companies like Shell will decrease their price of products (oil and gas). Then consumers have more disposable income and so they will spend more. Therefore demand for oil and gas will increase and this will make the profits increase for Shell. So Shell will increase their production quantities and productivity. So it will create a high demand for labor. (More employment opportunities).
Due to its inelastic demand for oil and gas, a reduction in indirect taxes won’t cause a higher increase in their profits but sometimes companies such as Shell will only decrease the tax value.
Public expenditure may be increased by the Government if they want to do subsidization or spend on development of the country. If they do subsidization, the prices of oil and gas may decrease. But this happens very rarely. However the consumers will tend to spend more and therefore the demand for oil and gas will increase. As a result Shell will have increased profits and revenues. Thus Shell will increase its production, creating more employment opportunities to the general public.
Public expenditure maybe decreased by the Government if there is no inflation and also if the Government has a lot of debts to other outside parties. This will naturally increase the price of goods as welfare benefits and subsidies are not there anymore. Thus the price of oil and gas will increase. Consumers will have less money to spend as the prices have increased. Low and middle income people will suffer more. However the demand that was there for oil and gas will decrease, resulting in decreased profits for Shell. Therefore Shell will decrease its production and so there will be less employment opportunities. Monetary Policy
Monetary policy is about changes in the interest rates charged by the Central Bank for lending money to other banks in an economy. Monetary policy can influence the economy via interest rates, exchange rates, control of the money supply and controls over bank lending and credit.
Usually monetary policy is used to control and balance the economy as fiscal policies can only be changed annually.
Contractionary Monetary Policy – is mainly used to reduce price inflation by making an increment in the interest rate. Expansionary Monetary Policy – is mainly used during an economic recession to increase demand and employment by reducing interest rates. But increment in demand may cause for price increment and increase consumer spending on imported goods and services.
Interest rates can be increased due to inflation, or if there is a deficit in balance of payment. People will start saving as they think that savings would increase their revenue in the long term. This leads to have less consumer spending, because people will not have enough money to spend on goods and services. So the demand will decrease for oil and gas. There can be a decrease in profits for Shell as there is less sales and thus output and employment will decrease.
The above graph shows how the quantity (output) decreases at the same price P1. There is a shift in demand curve to left and this shows that the aggregate demand has decreased.
Interest rates can be decreased due to having less demand for goods and services, or if the value in balance of payment is largely positive. Therefore there will be less savings because people cannot earn much and they would rather spend. As a result consumer spending rises. So there will be an increased demand for oil and gas. As a result, profits rise for Shell. There will be a shift to the right in the demand curve.
So quantity increases from Q1 to Q2 at the same price P1. So Shell will increase its productivity, thus creating more employment opportunities.
The above flow diagram is drawn for an example. The example is, it’s considered as importing raw materials for Shell company. exchange rates may reduce due to more printing of money notes in the country. As a result, the Shell company must pay a large value in order to purchase those materials. Therefore the company increases its prices in order to cover the loss. So the price of oil and gas increases. Consequently the demand decreases which will result to have less profits for Shell.
Impact of Competition Policy on Shell
An effective competition policy perform certain tasks.
* It creates and maximize competition in local and national markets.
* It enhances economic efficiency.
* It helps consumers’ welfare.
There are certain aims of competition policy;
* To increase competition and to gain increased efficiency.
* To make consumers have choices in the market for goods and services.
* To have improvements in technology so that it creates dynamic efficiency.
* When there is no competition, it will be unfair by the consumer because they will have less choice. So competition policy is used to examine why there is no competition. * To make suppliers have effective price competition.
Competition policy includes four pillars;
1. Antitrust and Cartels
2. Market Liberalization
3. State and Control
4. Merger Control
Antitrust and Cartels
Cartel is a formal agreement that is put up between competing firms in order to agree on certain matters such as price fixing, total industry output, market shares, allocation of customers, allocation of territories and etc. The main aim of putting up Cartel agreements is to increase individual members’ or companies profits by having less competition. It was reported in April 12th 2010 by John Donavan that Royal Dutch Shell has participated in price fixing Cartels. It was also found that Shell has lead the Cartel for many years. Shell was fined 50 percent for involving in previous Cartel agreements and another 50 percent for instigating and leading the Cartel. (Source: royaldutchshellplc.com/2010/04/12/royal-dutch-shell-participate-in-price-fixing-Cartels/)
However Shell’s fine was reduced to 81 million euros from 108 million euros because the Government was unable to prove that Shell has used Cartel agreement and lead the Cartel as well. An antitrust law is a body of law that exists to stop having monopolization (anti-competitive environment) and also to stop unfair business practices. Therefore anti-trust law mainly promote competition in the market. Market Liberalization
This means that new competition is introduced in the sectors that was monopolistic before. This will create an advantage on the consumers because they will have a choice in goods and services that they want to buy. Usually monopolistic companies must allow the other companies who wish to compete with them, to have competition. Shell has allowed other oil and gas services companies to compete with them. State aid control
This is where the Government control the help they provide to companies. They do this in such a way that competition in the single market is not stopped. This also benefits the consumers by having choices and at certain times, goods and services can be available for low prices. (When Government decides to do subsidization). Merger Control
This is where the states carry out investigations about mergers and take-overs to see if these result in dominating the market. If not, they will give approval for the merger or the take-overs between firms. In Sri Lanka, Shell was the original name that was used for the brand of gas. But in 2010, it was decided by Shell to sell 51% of its shares. As a result, the new brand “Litro Gas” was created. This can be taken as an example of a take-over.
The purpose of different types of organizations, the extent to which an organization meet the objectives of different stakeholders and the responsibilities of an organization and the strategies that were used to meet these responsibilities were presented in this report.
An explanation of economic systems and how they allocate resources effectively, the impact of Fiscal, Monetary and Competition policy on an organization and its activities are discussed in this report.
The organization that was used to discuss the above mentioned points was Shell.