Chapter 2 The Environment of Business

Jordan Kabani
Organizational Boundaries and Environments
- External Environment
o Consists of everything outside an organization’s boundaries that might affect it
(DFN)

Organizational Boundaries
- Organizational boundary
o Separates the organization from its environment
 Ex. A grocery store (as soon as you walk in) is separate from the rest of
the world in a sense. The physical structure creates a boundary into the
business
o Vendors/distributors are normally part of the environment, but when they enter
the store they are part of the business

Multiple Organizational environments

- Organization has multiple environments
o Current economic conditions can affect performance of any business
o Some things environmentally have a more direct affect to a business
 Ex. grocery store is affected by unemployment in the area, and the
marketing of competition
The Economic Environment
- Economic environment
o The conditions of the economic system in which an organization operates (DFN)
o Recently the economic system has been categorized by:
 Low unemployment rates
 Low inflation
 Low growth
- In general, restaurants and grocery stores have increased prices
o Ex. cereal went from $4.99  $5.79
- In hard economic times, companies that cater to low costs flourish
o Ex. Costco
o Ex. dollarama
Economic Growth
- Used to be 50% of population in agriculture
- Is now ~2.1% of population
Aggregate Output and the Standard of Living
- Aggregate output:
o The total quantity of goods and services produced by an economic system during
a given period (DFN)
o It’s the main measure of growth in an economic system.
o Increase in aggregate output = economic growth
- When output grows faster than population:
o Output per capita (quantity of goods & services/person) goes up
o System provides more of the goods and services people want
o These 2 people attain a higher standard of living
 The total quality of goods and services that one can purchase using
currency in their economic system

Business Cycle
- Business Cycle
o The pattern of short-term ups and downs (expansions and contractions) in an
economy. (DFN)
o 4 phases:
 Peak
 Recession
  2 consecutive quarters when the economy shrinks
 Starts just after a peak of a business cycle
 Ends with a trough
 *A depression occurs when the trough of a business cycle is 2+
years
 Trough
 The very bottom of point of economy
o Low income/high unemployment, etc
 Recovery
o Expansion/contraction periods can be months or years
Gross Domestic Product and Gross National Product
- Gross domestic product (GDP)
o The total value of all goods and services produced within a given period by a
national economy via domestic factors of production (DFN)
o If GDP rises a nation has economic growth
o GDP tends to replace gross national product (GNP)
- Gross national product (GNP)
o The total value of all goods and services produced by a national economy within a
given period, regardless of where the factors of production are located (DFN)
 Ex. if a company in Canada has the t-shirts made in Bangladesh, it counts
as GNP not GDP
- GDP tends to track an economy’s performance over time as a primary metric
Real Growth Rate

- Real growth rate of GDP

o GDP adjusted for inflation and changes in the value of the country’s currency.
(DFN)
- ***Growth requires output increasing at a FASTER rate than the population.
o If GPD>population growth rate = better standard of living
GDP Per Capita

- GDP per capita

o GDP per person (DFN)
o Is calculated by dividing total GDP by population
 Ex. Luxembourg has highest GDP per capita of $100, 738 on average
Real GDP

- Real GDP
o GDP that has been adjusted and recalculated to account for changes in currency
values and price changes (DFN)
- Unadjusted GDP is called nominal GDP
Purchasing Power Parity

- Purchasing power parity

o Principle that exchange rates are set so that the prices of similar products in
different countries are about the same (DFN)
 o Gives us a greater idea of what people can buy/standard of living globally

Productivity
- Productivity
o A measure of economic growth that compares how much a system produces with
the resources needed to produce it (DFN)
- 2 factors of production:
o Labour
o Capital
- If more products are produced with less factors of production, prices of items go down
o Therefore as a consumer you can buy more stuff which increases your standard of
living

The Balance of Trade and the National Debt

Balance of Trade

- Balance of trade
o The economic value of all the products that a country exports minus the economic
value of its imported products (DFN)
o Positive value of trade:
 When you export more than you import
o Negative value of trade:
 When you import more than you export
- Trade deficits negatively affect economic growth because money that’s flowing out of the
country cannot be used to invest in productive enterprises
National Debt

- National debt
o The amount of money the government owes its creditors (DFN)
- Budget deficits
o The result of the government spending more in one year than it takes in during the
year (DFN)
 Occurred in Canada for many years
 Canada in approx. $651 billion national debt

Economic Stability
 - Stability
o A condition where the amount of money available in an economic system and the
quantity of goods and services produced are in around the same rate. :
- The following threaten stability
o Inflation
o Deflation
o Unemployment
Inflation
- Inflation
o Occurrence of widespread price increases throughout an economic system (DFN)
o Occurs when the amount of money put into the economy outstrips the increase in
output
 More money for ppl to spend, but same amount of quantity of products
 This causes price increases
o Supply and demand. Less supply + more demand = more
expensive shit
o Goal is 2% increase to inflation/year in Canada’
Measuring Inflation: The CPI

- Consumer Price Index (CPI)

o Measure of the prices of typical products purchased by consumers living in urban
areas (DFN)
o Measures the changes in the cost of a “basket” of goods and services a typical
family buys
 Ex. TVs, Fridge, mobile phones, food, lightbulbs, etc
 Changes overtime
o Measures inflation
- There is no 1 variable that contributes to inflation and it can’t be linked to just 1
thing/issue

Deflation
- Deflation (falling prices)
o Is evident when the amount of money injected into an economic system, lags
behind increases in actual output (DFN)
o Prices can fall because productivity is increasing, and people want to save money
or there are high levels of debt
 High debt = people don’t buy as much = bad
Unemployment
 - Unemployment
o The level of joblessness among people actively seeking work. (DFN)
- Types of Unemployment:
o Frictional unemployment
 People are out of work temporarily while looking for a new job
 Ex. you quit working at mcdons, and you are waiting to get hired
at Tim’s

o Seasonal unemployment
 People are out of work because of the seasonal nature of their jobs
 Ex. ski instructor
o Cyclical unemployment
 People are out of work because of a downturn in the business cycle
 Ex. Lay off ¼ of the design team because cannot afford to have
them all hired
o Structural unemployment
 People are unemployed because they lack the skill needed to perform
available jobs
 Ex. only jobs are for doctors, but people don’t have medical degree
 Ex. only looking for managers, but people don’t have experience to
be a manager (sadge)
- Unemployment rates generally higher for men than women

Managing the Canadian Economy

- Fiscal policies
o Policies whereby governments collect and spend revenues (DFN)
o If economy growth is decreasing, govt will do tax cuts, to get people to have more
money in pocket to spend which can stimulate economy.
- Monetary policies
o Focus on controlling the size of nation’s money supply (DFN)
 Works primarily via the Bank of Canada
- Simple principle of the power the Bank of Canada has to induce changes in the supply of
money
o Higher interest rates
 Make money more expensive to borrow
 Reduce spending by companies that produce goods and services
and consumers who buy them
  Restricting the money supply = “tight” monetary policy
o Lower interest rates
 Money is less expensive to borrow increasing spending by companies
producing goods and services and consumers who buy them
 Increasing money supply = “easy” monetary policy
- During financial crisis we decrease interest rates to stimulate economy

Research and Development (R&D)

- Innovation process includes research and development (R&D)
o those activities that are necessary to provide new products, services, and
processes (DFN)
- 2 Types of R&D
o Basic/ pure R&D
 Improves knowledge in an area without a primary focus or with
discoveries that might be immediately marketable
o Applied R&D
 Focusing specifically on how an innovation can affect/be sold in the
market
- R&D isn’t just gadgets. It can be things like discovering canola oil which helps lower bad
cholesterol and doesn’t have trans fat
o Big good for the body
Product and Service Technologies
- All aspects are enhanced by technology
o Even making Big Mac at mcdons which is down to a science and a certain
methodology thanks to technology
 Also mobile ordering food is op
- Advancement of internet and social media leaks into all business functions
o Human resources
o Marketing
o Financial transactions
- Technological breakthroughs can make current products or services obsolete, and
constantly advancing is the only way to keep up and stay alive in the business world
o Ex. apple watch made ppl not rly wear normal watches anymore
- Technology transfer
 o Getting a new technology out of the lab and into the marketplace where it can
generate profits for the company

The Political-Legal Environment

- Conditions reflecting the relationship between business and government, usually in the
form of government regulation (DFN)
- Legal system defines what an organization can and can’t do
- Canada is a free-market economy, but there is still significant regulation of busines
activity
o Ex. Canada wants no gas fueled cars sold in the country by 2025
 Incentives to drive electric car like HOV lane access w. 1 person

- Political stability is important in business

o No business wants to be in a place where relationships are unstable
 Ex. better to do business in England vs Iraq
o Political stability can even be in local and provincial levels with new mayors or
party leaders

Socio-Cultural Environment
- Socio-cultural environment
o The customs, values, attitudes, and demographic characteristics of the society in
which a company operates (DFN)
o Influences customer preference for goods and services & what standards of
business are acceptable

Customer Preferences and Tastes

- Vary across and within national boundaries, and very much across international
boundaries
o Ex. in some places people will pay for designer clothes, but in other places it
doesn’t have a market
o Ex. China has bikes for transport vs Canada has them for recreation
- Consumer preferences change overtime and are sometimes unexpected
o Ex. large lingerie market in the Middle East (wat de fk)

Ethical Compliance and Responsible Business Behaviour

- Critical element of socio-cultural environment:

o Ethical conduct
o Social responsibility
 o Ex. Members of a company are entitled to fair accounting, but often are given
only a piece of the puzzle rather than the whole picture
- MEC (mountain equipment cooperative)
o Sustainability is one of their core values
o Very eco-friendly

The Business Environment

- Business is faster-paced and more complex today vs anytime in the past

o Product life cycles are now measured in weeks or months vs previously in years
- Consumers want:
o High-quality goods & services
o Lower prices
o Faster
- Employees want:
o Flexible working hours
o Chances to work from home
- Public wants:
o Honesty
o Fair competition
o Respect for the environment

The Industry Environment

- All industries have different environments and characteristics

- All businesses are part of an industry
- Michael Porter’s 5 forces model
o Helps managers analyze sources of competitive pressure and decide on a strategy
Rivalry Among Existing Competitors

- Rivalry among companies varies across industries

- Rivalry exists in:
o Price competition
o Advertising campaigns
o Increased emphasis on customer service
o Ex. Mcdons offering free coffee every 7 coffees to compete with Tim’s
o

Threat of Potential Entrants

- New competition causes big changes to an industry

- If it’s easy for new competitors to enter a market  competition becomes intense

Buyers

- When there are a few buyers and many supplies, buyers have lots of bargaining power.
o Ex. Walmart forces suppliers to reduce prices, because they buy a lot of stuff from
suppliers
 If suppliers say no, Walmart finds new supplier

Substitutes

- If lots of substitute products are available, the industry is more competitive

o Ex. synthetic fibre can be used instead of cotton
o Internet changed the way people pay bills and get their mail
 Canada post kinda got fkd by this

Emerging Challenges and Opportunities in the Business Environment

- Successful firms deal with challenges via:

o Core competencies
- Core competencies
 o Skills and resources with which (firms) compete best and create the most value
for owners
 Ex. outsourcing non-core business processes
 Ex. using social media
 Ex. business process management
Outsourcing

- Outsourcing
o The strategy of paying suppliers and distributors to perform certain business
processes or to provide needed materials or services (DFN)
o Ex. a museum cafeteria outsourcing management of the cafeteria to a food
company

Growing Role of Social Media

- Social media (ex.IG & Snap) are very important for consumers, especially youth
- Companies are creating links to connect with consumers
o Online content as well
- Viral marketing
o Predates the social media craze and first gained prominence via basic email
transfer
 It essentially word-of-mouth marketing
 Information spreads via word of mouth like a virus
o Relies on the internet now adays
o It works because people are perma on social media

Business Process Management

- Process
o Any activity that adds value to an input, transforming it into an output for a
customer (external or internal)
- Department structure
 Ex. human resource departments performs interviews and hiring processes
 Ex. payroll departments perform employee-payment processes
- Business process management
 o An approach by which firms move away from department-oriented organization
and toward process-oriented team structures that cut across old departmental
boundaries (DFN)
o Ask “what do we need to do to stays in business & get new orders”
 Identify major processes needed to achieve goals,
 Organize resources and skills around the essential processes.
 *this processes causes faster-decision making and more
coordinated operations*

Redrawing Corporate Boundaries

- Trends apparent in recent years for successful companies

o Acquisitions and mergers
o Divestitures and spinoffs
o Employee-owned corporations
o Strategic alliances
o Subsidiary/parent corporations

Mergers and Acquisitions

- Acquisition
o One firm simply buys another firm
o The purchase of a company by another larger firm, that absorbs the smaller
company into its operations.
o It’s like owning a new property/buying a car
- Merger
o A consolidation of two firms
o The union of two companies to form a single new business (DFN)
o Horizontal merger
 When companies in the same industry merge
o Vertical merger
 When one of the companies in the merger is a supplier or customer to the
other
- Mergers or acquisitions can happen in many ways
o Friendly takeover
 The acquired company welcomes the acquisition
 o Hostile takeover
 The acquiring company buys enough of the other company’s stock to take
control, even if the other company doesn’t want it
o Poison pill
 A defense that management adopts to make a firm less attractive to an
actual or potential hostile suitor in a takeover attempt (DFN)

Divestitures and Spinoffs

- Divestiture
o Occurs when a company sells part of its existing busines operations to another
company (DFN)
o Ex. Pfizer divesting its infant-nutrition and animal-health units
- Spinoff
o A strategy of setting up more than one corporate units as new independent
corporations
 Ex. PepsiCo spun off Pizza Hut, KFC, and Taco Bell into a new
corporation called “Yum! Brands, Inc.

Employee-Owned Corporations

- Corporations are owned by some employees

o Takes form in of “employee stock ownership plans”
o Company takes a load, then buys its own stock, which is controlled by a bank or
other trustee
 Employees get part of the stock depending on seniority

Strategic Alliance

- Strategic alliance/ joint venture

o An enterprise in which 2 or more persons or companies temporarily join forces to
undertake a project (DFN)
 Ex. Magna international (autoparts) and Lyft joint to develop self-driving
systems
- 2 reasons for strategic alliance
o Spread the risk of a project (ex. if it dies, then 1 company isn’t screwed)
o Get something of value (technology/industry expenses, etc) from their partner

Subsidiary and Parent Corporations

- Subsidiary corporation
 o One that is owned by another corporation
- The parent corporation is
o the corporation that owns the subsidy corporation
o Ex. Hudson’s Bay Company owns Home Outfitters