Market Economy Firms: Functions, Structure, and Strategies
Business Functions in a Market Economy
Firms coordinate production factors in a market economy. A fundamental feature of economic activity is the specialization of individuals in different roles to produce goods that meet the needs of the community, creating or increasing the usefulness of property. By transforming raw materials into products, companies create or increase the value of property, enhancing their capabilities to meet human needs. Firms take risks by paying in advance for the resources needed to perform their activities. They create wealth, generate employment, and develop innovations that improve the quality of goods and services, thus enhancing citizens’ quality of life.
Modern Employer Theory
Today, companies face a complex and dynamic environment due to:
- Enlarged Business Scope
- Technological and Social Changes, Globalization of Markets, and Increased Competition
Components of a Company
- Human Group: Workers, owners, and managers.
- Heritage: Economic assets, including permanent and temporary assets.
- Organization: Structure to achieve objectives effectively.
- External Environment: Legal, economic, social, cultural, and technological factors influencing the firm.
Objectives
- Traditional Objective: Maximizing profit by maximizing capital efficiency.
- Growth and Value Creation: Increasing market value through growth.
- Social Responsibility: Incorporating ethical and social responsibility goals for stakeholders (employees, customers, etc.).
Firm as a System
A firm is a set of interrelated elements within a larger system, with specific goals.
Classification of Businesses
By Activity
- Primary (natural resources)
- Secondary (processing)
- Tertiary (services)
By Size
- Large (+250 employees)
- Medium (50-250 employees)
- Small (10-50 employees)
- Micro (10 or fewer employees)
By Capital
- Private (privately owned)
- Public (state-owned)
- Mixed (private and public)
Types of Societies
Personalistic Society
Partners contribute capital and labor, focusing on prestige.
- General Partnership: Commercial company where partners provide capital, labor, and have personal liability.
- Limited Partnership: Similar to general partnership but with two types of partners.
Capitalist Society
Emphasis on economic aspects, with limited liability for partners.
- Public: Social capital sold in equal shares.
- Limited Partnership: Rights depend on capital contributed.
Social Economy
- Social Economy: Companies seeking alternatives to overcome challenges by creating jobs.
- Cooperative Economy: Formed by people with shared needs and interests.
- Labor Economics: Limited company where most capital comes from workers.
Business Environment
Overall Environment
Factors affecting all firms in an area:
- Economic: Temporary, dependent on a country’s activity.
- Sociocultural: Educational level, cultural patterns, lifestyles.
- Political-Legal: Government policies and trade laws.
Specific Environment
Factors affecting specific sectors or groups of companies:
- Service Providers: Suppliers of raw materials and resources.
- Customers: Buyers of products.
- Competitors: Rival companies producing similar goods or services.
- Dealers: Facilitators of product access.
Competitive Strategy and Benefits
Seeking a favorable position against competition through:
- Cost leadership
- Differentiation
- Segmentation and market making
Corporate Social Responsibility (CSR)
Legal and ethical obligations and commitments of a company.
Location
Production costs, variety, and competitive strategy influence location decisions.
Location Factors
- Availability and cost of land
- Easy access to raw materials
- Existence of skilled labor
- Infrastructure
- Economic and legal considerations