Chapter 1Chapter 1
The Environment The Environment of Businessof Business
Key ContentsKey Contents
BusinessBusiness Business EnvironmentBusiness Environment
Political / legalPolitical / legal EconomicEconomic TechnologicalTechnological Social / culturalSocial / cultural InternationalInternational
BusinessBusiness The organization: The organization:
A group of people, with common A group of people, with common purposepurpose
Providing goods and services Providing goods and services to satisfy customer requirementsto satisfy customer requirements in order to maximize profitin order to maximize profit
An enterprise, commercial entity, or An enterprise, commercial entity, or firm in either the private or the public firm in either the private or the public sector, concerned with sector, concerned with providing providing products or servicesproducts or services to satisfy to satisfy customer requirementscustomer requirements..
The process:The process: The organized effort of individuals to The organized effort of individuals to
produce and sell, for profit, the produce and sell, for profit, the products and services that satisfy products and services that satisfy society’s needs.society’s needs.
The Organized Effort of The Organized Effort of IndividualsIndividuals
1-Combining Resources1-Combining Resources
2-Providing Goods and Services
3-Satisfying Customer Needs
Satisfying NeedsSatisfying Needs
People buy goods and services People buy goods and services not just to own them, but to not just to own them, but to satisfy particular needssatisfy particular needs
Businesses that understand Businesses that understand customer needs, and work to customer needs, and work to satisfy those needs, are usually satisfy those needs, are usually successfulsuccessful
BusinessBusiness The goalThe goal: Satisfying customer needs: Satisfying customer needs The meansThe means: Providing goods and : Providing goods and
servicesservices Process: production (operations)Process: production (operations)
manufacture, process, assemble, create, ……manufacture, process, assemble, create, …… Factors of production (Inputs: Resources )Factors of production (Inputs: Resources )
(N, L, K, E) (N, L, K, E) Land and Natural resourcesLand and Natural resources LaborLabor CapitalCapital EntrepreneurshipEntrepreneurship
A person who risks time, effort, and money to start A person who risks time, effort, and money to start and operate a businessand operate a business
Outputs: Goods and services (marketing & Outputs: Goods and services (marketing & logistics)logistics)
sales, promotion, distribution, services, …sales, promotion, distribution, services, …
Business ProfitBusiness Profit
The purposes of profitThe purposes of profit To reward business owners for To reward business owners for
producing goods and services producing goods and services consumers wantconsumers want
As payment for business owners As payment for business owners assuming the risks of ownershipassuming the risks of ownership
StakeholdersStakeholders All of the different people or All of the different people or
groups or people who are affected groups or people who are affected by the policies and decisions by the policies and decisions made by an organizationmade by an organization
The Relationship The Relationship Between Sales Between Sales
Revenue and ProfitRevenue and Profit Profit is what remains after all Profit is what remains after all
business expenses have been business expenses have been deducted from sales revenue. A deducted from sales revenue. A loss (negative profit) results loss (negative profit) results when a firm’s expenses are when a firm’s expenses are greater than its revenues.greater than its revenues.
The GoalThe Goal Maximize Profit by satisfying Maximize Profit by satisfying
customer requirementcustomer requirement Profit: revenues – costsProfit: revenues – costs
Revenues: sales volume x priceRevenues: sales volume x price Costs: Costs:
costs of goods sold (COGS); costs of goods sold (COGS); Inputs: Resources (L, K, N, E) (logistics)Inputs: Resources (L, K, N, E) (logistics) Purchase/procurement/sourcing, Purchase/procurement/sourcing,
transportation, warehousing, handling, ……transportation, warehousing, handling, …… Expenses: Expenses:
selling, general, administrative, selling, general, administrative, depreciations, … depreciations, …
Business: activitiesBusiness: activities
purchase, sale , lease, and rental purchase, sale , lease, and rental of personal or real property; of personal or real property;
Manufacturing, processing, and/or Manufacturing, processing, and/or marketing of products, marketing of products, commodities, or any other commodities, or any other personal property;personal property;
sale of services to the public; sale of services to the public;
the activities of providing goods the activities of providing goods and services and services
Business Business Functions/SubjectsFunctions/Subjects
Purchase/Purchase/procurement/procurement/
sourcingsourcing WarehousingWarehousing HandlingHandling TransportationTransportation Operations Operations Sales/promotionSales/promotion DistributionDistribution After sale servicesAfter sale services
Management Management Human ResourcesHuman Resources FinanceFinance ProductionProduction MarketingMarketing LogisticsLogistics Accounting Accounting InternationalInternational E-commerceE-commerce
Business: setup & runBusiness: setup & run Forms of Business OwnershipForms of Business Ownership Organization Structure and BehaviorOrganization Structure and Behavior Human ResourcesHuman Resources FinanceFinance ProductionProduction MarketingMarketing LogisticsLogistics AccountingAccounting InternationalInternational Business Environment: legal, social, Business Environment: legal, social,
culturalcultural
Business EnvironmentBusiness Environment
SSocial / cultural ocial / cultural TTechnologicalechnological
Current standards and future Current standards and future trend of industry specific trend of industry specific technologytechnology
EEconomicconomic PPolitical / legalolitical / legal InternationalInternational
Social and CulturalSocial and Cultural
Social structureSocial structure Values and traditionsValues and traditions Beliefs and religionsBeliefs and religions Life styles and purchase Life styles and purchase
habitshabits Others Others
Political / LegalPolitical / Legal
Political Stability (government, Political Stability (government, racial conflicts, terrorists, …)racial conflicts, terrorists, …)
Political System (democracy, Political System (democracy, human rights, …)human rights, …)
Laws and Regulations toward Laws and Regulations toward Business (in general, to specific Business (in general, to specific industries, …)industries, …)
Legal system (procedures, Legal system (procedures, efficiency, favorability, …)efficiency, favorability, …)
othersothers
EconomicEconomic
EconomicsEconomics Economic SystemEconomic System Economic Performance Economic Performance
(macro)(macro) Industry specific Industry specific
environment (micro)environment (micro)
EconomicsEconomics EconomyEconomy
The system through which a society The system through which a society creates and distributes wealthcreates and distributes wealth
EconomicsEconomics The study of how wealth (anything The study of how wealth (anything
of value) is created and distributedof value) is created and distributed MicroeconomicsMicroeconomics
The study of the decisions made by The study of the decisions made by individuals and businessesindividuals and businesses
MacroeconomicsMacroeconomics The study of the national economy The study of the national economy
and the global economyand the global economy
Economic SystemsEconomic Systems
Basic Economic Questions to Basic Economic Questions to Answer:Answer:
(What? How? For Whom? Who?)(What? How? For Whom? Who?) What goods and services will be produced?What goods and services will be produced? How will they be produced?How will they be produced? For whom will they be produced?For whom will they be produced? Who owns and controls the major factors of Who owns and controls the major factors of
production?production?
Market Economy (Capitalism)Market Economy (Capitalism) Planned (Command) Economy Planned (Command) Economy
(Socialism and Communism)(Socialism and Communism) Mixed Economy (private and public)Mixed Economy (private and public)
Market Economy Market Economy (Capitalism)(Capitalism)
An economic system in which An economic system in which individuals own and operate the individuals own and operate the majority of businessesmajority of businesses that that provide goods and servicesprovide goods and services
Derived from Adam Smith’s Derived from Adam Smith’s laissez-fairelaissez-faire capitalism in which a capitalism in which a society’s best interests are served society’s best interests are served by individuals pursuing their own by individuals pursuing their own self-interest (self-interest (the invisible handthe invisible hand))
Free CapitalismFree Capitalism
Creation of wealth is the concern of Creation of wealth is the concern of private individualsprivate individuals
Resources used to create wealth Resources used to create wealth must be privately ownedmust be privately owned
Economic freedom ensures the Economic freedom ensures the existence of a existence of a free market economyfree market economy Businesses and individuals decide Businesses and individuals decide
what to produce and buy; the market what to produce and buy; the market determines quantities sold and pricesdetermines quantities sold and prices
Limited role of governmentLimited role of government
Basic Assumptions for Basic Assumptions for Adam Smith’s Laissez-Adam Smith’s Laissez-
Faire CapitalismFaire Capitalism
Insert Figure 1.3, p. XX
Planned EconomyPlanned Economy(Socialism)(Socialism)
Key industriesKey industries (e.g., transportation, (e.g., transportation, utilities, and banking) are utilities, and banking) are owned and owned and controlled by the governmentcontrolled by the government
Small-scale private businessesSmall-scale private businesses may be may be permitted and workers may choose their permitted and workers may choose their own occupationsown occupations
Production is based on Production is based on national goalsnational goals, , and and distributiondistribution is controlled is controlled by the stateby the state
Intent is the Intent is the equitable distribution of equitable distribution of incomeincome, , elimination of poverty, social elimination of poverty, social services to all who need them, services to all who need them, elimination of the economic waste of elimination of the economic waste of capitalistic competitioncapitalistic competition
Command EconomyCommand Economy(Communism)(Communism)
All factors of production are owned and All factors of production are owned and controlled by the government as proxy controlled by the government as proxy for for ownership by all citizensownership by all citizens
Production is based on Production is based on centralized state centralized state planningplanning to meet the needs of the state to meet the needs of the state and not necessarily the needs of its and not necessarily the needs of its citizenscitizens
The state dictates The state dictates occupational choicesoccupational choices and sets prices and wagesand sets prices and wages
Intent is to create Karl Marx’s concept of Intent is to create Karl Marx’s concept of a a classless societyclassless society where where all contribute all contribute according to their ability and receive according to their ability and receive benefits according to their needs.benefits according to their needs.
Mixed EconomyMixed Economy with elements of capitalism and socialismwith elements of capitalism and socialism Households (Households (privateprivate))
Consumers of goods and servicesConsumers of goods and services Resource owners of some factors of productionResource owners of some factors of production
Businesses (Businesses (partly private, partly publicpartly private, partly public)) Produce goods and services to exchange for Produce goods and services to exchange for
revenues (money)revenues (money) Use revenues to purchase factors of Use revenues to purchase factors of
productionproduction Governments (Governments (publicpublic))
In exchange for taxes, governments provide In exchange for taxes, governments provide public services that would not be provided by public services that would not be provided by business or would be produced only for those business or would be produced only for those who could afford themwho could afford them
The Circular Flow in Mixed The Circular Flow in Mixed EconomyEconomy
Debate Issue: Should There Be Debate Issue: Should There Be Less Government Less Government
Involvement?Involvement?YESYES
Today, there are too Today, there are too many government many government controls that inhibit controls that inhibit business owners.business owners.
The added costs of The added costs of adhering to adhering to government government regulations are passed regulations are passed on to consumers in the on to consumers in the form of higher prices.form of higher prices.
There is no need for all There is no need for all the government rules the government rules and regulations and regulations because business because business owners are socially owners are socially responsible. responsible.
NONO Without adequate Without adequate
government controls, government controls, business would take business would take advantage of consumers.advantage of consumers.
While government rules While government rules and regulations cost and regulations cost money, the added safety money, the added safety and protection are well and protection are well worth the money.worth the money.
While the majority of While the majority of business owners may be business owners may be socially responsible, there socially responsible, there are some who need the are some who need the encouragement provided encouragement provided by government regulations.by government regulations.
The Proper Role of The Proper Role of GovernmentGovernment
Major economic entity?Major economic entity? Administrative Administrative
authority?authority? Service provider?Service provider?
Measuring Economic Measuring Economic PerformancePerformance
ProductivityProductivity The average level of output per worker per The average level of output per worker per
hourhour May change with capital input and May change with capital input and
technologytechnology Economic growth:Economic growth:
aggregate output, GDP, standard of aggregate output, GDP, standard of livingliving
Economic health:Economic health: Economic Stability:Economic Stability:
business cycle, inflation, unemploymentbusiness cycle, inflation, unemployment
Economic GrowthEconomic Growth
Gross domestic product (GDP)Gross domestic product (GDP) The total value of all goods and The total value of all goods and
services produced by all people services produced by all people within the boundaries of a country within the boundaries of a country during a one-year periodduring a one-year period
National incomeNational income The total income earned by various The total income earned by various
segments of the population, segments of the population, including employees, self-employed including employees, self-employed individuals, corporations, and individuals, corporations, and other type of incomeother type of income
.
GDP in Current and GDP in Current and Inflation-Adjusted Inflation-Adjusted
DollarsDollars
Source: U.S. Bureau of Economic Analysis website at www.bea.gov, accessed September 14, 2008.
Consumer Price IndexConsumer Price Index
YearYear Annual Annual AverageAverage
Percent Percent ChangeChange
20002000 172.2172.2 +3.4%+3.4%
20012001 177.1177.1 +2.8%+2.8%
20022002 179.9179.9 +1.6%+1.6%
20032003 184.0184.0 +2.3%+2.3%
20042004 188.9188.9 +2.7%+2.7%
20052005 195.3195.3 +3.4%+3.4%
20062006 201.6201.6 +3.2%+3.2%
20072007 207.3207.3 +2.8%+2.8%
20082008 215.4215.4 +3.8%+3.8%
1982 – 1984 = 100
Source: Bureau of Labor Statistics, ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt, accessed February 17, 2009.
Measuring Economic Measuring Economic HealthHealth
Inflation rateInflation rate An economic statistic that tracks the increase An economic statistic that tracks the increase
in prices of goods and services over a period in prices of goods and services over a period of time; usually calculated on a monthly or of time; usually calculated on a monthly or annual basisannual basis
Prime interest ratePrime interest rate The lowest interest rate that banks charge The lowest interest rate that banks charge
their most creditworthy customerstheir most creditworthy customers Productivity rateProductivity rate
An economic measure that tracks the increase An economic measure that tracks the increase and decrease in the average level of output and decrease in the average level of output per workerper worker
Measuring Economic Measuring Economic Health Health (cont’d)(cont’d)
Unemployment rateUnemployment rate The percentage of a nation’s labor The percentage of a nation’s labor
force unemployed at any timeforce unemployed at any time Unemployment Unemployment
Unemployed: Unemployed: in the labor force; in the labor force; actively looking for a job and do not actively looking for a job and do not
have onehave one
Measuring Economic Measuring Economic HealthHealth (cont’d)(cont’d) New housing startsNew housing starts
The total number of new homes started The total number of new homes started during a specific time period.during a specific time period.
Bank creditBank credit A statistics that measures the lending activity A statistics that measures the lending activity
of commercial financial institutionsof commercial financial institutions Corporate profitsCorporate profits
The total amount of profits made by The total amount of profits made by corporations over selected time periodscorporations over selected time periods
Balance of tradeBalance of trade The total value of a nation’s exports minus the The total value of a nation’s exports minus the
total value of its imports over a specific period total value of its imports over a specific period of timeof time
The Business CycleThe Business Cycle
The recurrence of periods of The recurrence of periods of growth and recession in a nation’s growth and recession in a nation’s economic activityeconomic activity Recession – depression - recovery - Recession – depression - recovery -
expansionexpansion Recession: two consecutive three-Recession: two consecutive three-month periods of decline in a month periods of decline in a country’s gross domestic productcountry’s gross domestic product
Depression: a severe recession that Depression: a severe recession that lasts longer than a recessionlasts longer than a recession
The Business Cycle The Business Cycle (cont’d)(cont’d)
Monetary policiesMonetary policies Federal Reserve decisions that determine Federal Reserve decisions that determine
the size of the supply of money in the the size of the supply of money in the nation and the level of interest rates Fiscal nation and the level of interest rates Fiscal policypolicy
Government influence on the amount of Government influence on the amount of savings and expenditures; savings and expenditures; accomplished by altering the tax accomplished by altering the tax structure and by changing the levels of structure and by changing the levels of government spendinggovernment spending Federal deficitFederal deficit
A shortfall created when the federal government A shortfall created when the federal government spends more in a fiscal year than it receivesspends more in a fiscal year than it receives
National debtNational debt The total of all federal deficitsThe total of all federal deficits
Types of CompetitionTypes of Competition
Rivalry among businesses for Rivalry among businesses for sales to potential customerssales to potential customers Perfect (or pure) competitionPerfect (or pure) competition Monopolistic competitionMonopolistic competition OligopolyOligopoly MonopolyMonopoly
Perfect (or pure) Perfect (or pure) competitioncompetition
The market situation in which there The market situation in which there are many buyers and sellers of a are many buyers and sellers of a product, and no single buyer or seller product, and no single buyer or seller is powerful enough to affect the price is powerful enough to affect the price of that productof that product Supply: The quantity of a product that Supply: The quantity of a product that
producers are willing to sell at each of producers are willing to sell at each of various pricesvarious prices
Demand: The quantity of a product that Demand: The quantity of a product that buyers are willing to purchase at each of buyers are willing to purchase at each of various pricesvarious prices
Market Price (Equilibrium): The price at Market Price (Equilibrium): The price at which the quantity demanded is exactly which the quantity demanded is exactly equal to the quantity suppliedequal to the quantity supplied
Monopolistic competitionMonopolistic competition A market situation where there A market situation where there
are many buyers along with a are many buyers along with a relatively larger number of sellers relatively larger number of sellers who differentiate their products who differentiate their products from the products of competitorsfrom the products of competitors
Product differentiationProduct differentiationThe process of developing and The process of developing and promoting differences between promoting differences between one’s products and all similar one’s products and all similar productsproducts
OligopolyOligopoly
A market situation (or industry) in A market situation (or industry) in which there are few sellerswhich there are few sellers E.g., automobile manufacturers, car E.g., automobile manufacturers, car
rental agencies, and farm rental agencies, and farm implement industriesimplement industries
Sizable investments are required to Sizable investments are required to enter into the marketenter into the market
Each seller has considerable control Each seller has considerable control over priceover price
The market actions of one seller can The market actions of one seller can have a strong effect on competitorshave a strong effect on competitors
MonopolyMonopoly
A market (or industry) with only one A market (or industry) with only one sellerseller
Natural monopolyNatural monopoly An industry requiring huge investments in An industry requiring huge investments in
capital and within which duplication of capital and within which duplication of facilities would be wasteful and thus not in facilities would be wasteful and thus not in the public interestthe public interest
Legal monopoly (limited monopoly)Legal monopoly (limited monopoly) A monopoly created when the federal A monopoly created when the federal
government issues a copyright, patent, or government issues a copyright, patent, or trademark protecting the owners of written trademark protecting the owners of written materials, ideas, or product brands from materials, ideas, or product brands from unauthorized use by competitorsunauthorized use by competitors