The Business Environment
and Business Economics
The Business Environment
• What is business economics?– decision making in business• external influences on the firm
– the business environment
• internal decisions of the firm
• the external effects of business decision making
• What do business economists do?– description
– analysis
– recommendations
The Business Environment
• Political / legal factors
• Economic factors– the microeconomic environment
– the macroeconomic environment
• Social / cultural factors
• Technological factors
• PEST analysis– relationship between the four sets of factors
– importance of the economic factors
The Structure of Industry
• Importance of industrial structure to the performance of firms
• Classifying production– primary production
– secondary production
– tertiary production
• Shares in GDP and employment of the three sectors– trends over time
– current position
Output of industrial sectors(as % of GDP)
1974
54.9%
2.8%
42.3%
Secondary
Primary
Tertiary
Output of industrial sectors(as % of GDP)
1974
54.9%
2.8%
42.3%
70.9%
5.8%
23.3%
2002
Secondary Secondary
Primary Primary
Tertiary Tertiary
1974
54.7%
3.4%
41.9%
Secondary
Primary
Tertiary
Employment by industrial sector(% of total employees)
1974
54.7%
3.4%
41.9%
79.8%
1.8%
18.4%
2002
Secondary Secondary
Primary Primary
Tertiary Tertiary
Employment by industrial sector(% of total employees)
The Structure of Industry
• Classifying firms into industries– nature of an industry
– industrial sectors
– why classify firms into industrial sectors?• helps in analysing trends
• identifying specific needs
• helps to understand relationships between firms
• Standard industrial classification– nature of the system of classification
– sections, subsections• divisions, groups and classes
Standard industrial classification: 1992
The Structure of Industry
• Changes in the structure of UK economy
– expanding and contracting sections
• by output
• by employment
80
90
100
110
120
130
140
150
160
170
180
190
200
210
220
230
240
1980 1985 1990 1995 2000
GDP by industry (1980 = 100)G
DP
by
indu
stry
(19
80 =
100
)
C
A/B
80
90
100
110
120
130
140
150
160
170
180
190
200
210
220
230
240
1980 1985 1990 1995 2000
GD
P b
y in
dust
ry (
1980
= 1
00)
C
A/BD
GDP by industry (1980 = 100)
80
90
100
110
120
130
140
150
160
170
180
190
200
210
220
230
240
1980 1985 1990 1995 2000
GD
P b
y in
dust
ry (
1980
= 1
00)
E
C
A/BD
GDP by industry (1980 = 100)
80
90
100
110
120
130
140
150
160
170
180
190
200
210
220
230
240
1980 1985 1990 1995 2000
GD
P b
y in
dust
ry (
1980
= 1
00)
EF
C
A/BD
GDP by industry (1980 = 100)
80
90
100
110
120
130
140
150
160
170
180
190
200
210
220
230
240
1980 1985 1990 1995 2000
GD
P b
y in
dust
ry (
1980
= 1
00)
I
G/H
EJ-Q
F
C
A/BD
GDP by industry (1980 = 100)
20
30
40
50
60
70
80
90
100
110
120
130
140
150
1980 1985 1990 1995 2000
Employment by industry (1980 = 100)E
mp
loym
ent
by
indu
stry
(19
80 =
100
)
C
A/B
20
30
40
50
60
70
80
90
100
110
120
130
140
150
1980 1985 1990 1995 2000
Employment by industry (1980 = 100)E
mp
loym
ent
by
indu
stry
(19
80 =
100
)
C
A/B
D
20
30
40
50
60
70
80
90
100
110
120
130
140
150
1980 1985 1990 1995 2000
Employment by industry (1980 = 100)E
mp
loym
ent
by
indu
stry
(19
80 =
100
)
E
C
A/B
D
20
30
40
50
60
70
80
90
100
110
120
130
140
150
1980 1985 1990 1995 2000
Employment by industry (1980 = 100)E
mp
loym
ent
by
indu
stry
(19
80 =
100
)
E
F
C
A/B
D
20
30
40
50
60
70
80
90
100
110
120
130
140
150
1980 1985 1990 1995 2000
Employment by industry (1980 = 100)E
mp
loym
ent
by
indu
stry
(19
80 =
100
)
I
G/H
E
J-Q
F
C
A/B
D
The Structure of Industry
• Changes in the structure of UK economy
– expanding and contracting sections
• by output
• by employment
• Analysing industrial structure
The Structure of Industry
• Changes in the structure of UK economy
– expanding and contracting sections
• by output
• by employment
• Analysing industrial structure
– changes in industrial concentration
The Structure of Industry
• Changes in the structure of UK economy
– expanding and contracting sections
• by output
• by employment
• Analysing industrial structure
– changes in industrial concentration
– the distribution of SMEs in the economy
Number of businesses, employment and turnover by industrial sector (2001)
• Structure → conduct → performance
– relationship between business structure and business conduct (behaviour)
• competitive markets and competitive behaviour
• limited competition and collusion
– relationship between business conduct and business performance
• different indicators for measuring performance
• profitability, market share, growth, etc.
The Determinants of Business Performance
The Determinants of Business Performance
• Internal aims and organisation– profit maximisation as the prime goal
– other goals
– distinction between owners and managers
– importance of managers’ own objectives
– “satisficing”
The Determinants of Business Performance
• Other factors affecting performance– internal structure
– information
– competence of management
– quality of the workforce
– systems• information systems
• motivation
• technical systems
• distribution systems
• financial systems
