Understanding the Environments of

Business
 Chapter Outline
 Organizational Boundaries and Environments
 The Economic Environment
 The Global Economy in the 21st Century
 The Technological Environment
 The Political-Legal Environment
 The Sociocultural Environment
 The Business Environment
 Organizational Boundaries and
Environments
All businesses—
regardless of their
size, location or
mission— operate
within a larger
external
environment.
What Is the External Environment?

Everything outside
an organization’s
boundaries that
might affect it
What Is an Organizational
Boundary?
• That which
separates the
organization from
its environment
Dimensions of the Dimensions of the
External Environment
 What Is the Economic
Environment?
Conditions of the economic
system in which an
organization operates
Key Goals of a Country’s Economic System
• Economic Growth • Economic Stability
– Aggregate Output and
Standard of Living – Inflation
– Gross Domestic Product • Measuring Inflation:
• Real Growth Rate The CPI
• GDP per Capita
• Real GDP – Unemployment
• Purchasing Power • Recessions and
Parity Depressions
– Productivity
– Balance of Trade
– National Debt

8
 Aggregate Output and Standard of
Living
 Business cycle is a pattern of short-term ups and downs
(expansions and contractions) in an economy
 Aggregate output is the total quantity of goods and
services produced by an economic system during a given
period. Increase in aggregate output is economic growth
 Standard of living is the total quantity and quality of
goods and services that a country’s citizens can purchase
with the currency used in their economic system
 Growth makes possible higher standards of living
 In order to know how much standard of living is
improving one needs to know how much nation’s
economic system is growing
 Gross Domestic Product
 GDP, or gross domestic product, is the total value of all
goods and services produced within a given period by a
national economy through domestic factors of production.
 GDP is a measure of aggregate output.
 If GDP is going up aggregate output is going up. If
aggregate output is going up the nation is experiencing
economic growth
 GNP, or gross national product, is 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
 Gross Domestic Product
• Real Growth Rate: The growth rate of GDP adjusted for inflation and
changes in the value of the country’s currency
 Growth depends on output increasing at a faster rate than population
• GDP per Capita means GDP per person.
 Per capita GDP of $ 32, 839 means that the country produces good and
services equal in value of $ 32,839 for every person.
 GDP per capita is a better measure than GDP itself of the economic
well being of the average person
• Real GDP: GDP calculated to measure for the changes in currency
values and price changes
• Nominal GDP: GDP measured in current dollars or with all
components valued at current prices
 What Is Purchasing Power Parity?

• Principle that exchange rates are set so

that the prices of similar products in
different countries are about the same
• Purchasing Power Parity gives a better
idea of what people can actually buy
with financial resources allocated to
them by respective economic system
• Gives a better sense of standards of
living across the globe
 What Is Productivity?

• Measure of
economic growth
that compares
how much a
system produces
with the
resources needed
to produce
Productivity and Labor Compensation in U.S.
Manufacturing

Copyright 2004 Prentice Hall, Inc. 14

 What Is Balance of Trade?
• Economic value of all the products that a
country exports minus the economic
value of imported products.
• A positive balance of trade results when
a country’s exports more tan imports
• A negative balance of trade results when
a country imports more than its exports
• A negative balance of trade is called
trade deficit
 How does a Trade Deficit affect
Economy?
• The deficit exists because the amount of
money spent on foreign products have not
been paid in full
• It is borrowed money and borrowed money
cost more in the terms of interest
• The money that flows out of the country to
pay of the debt can’t be used to invest in
productive enterprises either in home or
overseas
What Is National Debt?

Amount of money
that a government
owes its creditors
 How Does National Debt Affect
Economic Growth?
• Taxes is the most obvious way the government raises money
• It also sells bonds – securities through which it promises to
pay buyers certain amounts of money by specific future dates
• The government sells bonds to individuals, households,
banks, insurance companies , industrial corporations,etc
• These bonds are attractive investments because they are safe
• By selling bonds the government competes with other
potential borrowers for the loanable money
• The more money the government borrows the less money is
available for the private borrowing and investment that
increase productivity
 What Is Stability?

Condition in an economic
system in which the amount
of money available and the
quantity of goods and
services produced are
growing at about the same
rate
 What Is Inflation?
Occurrence of
widespread price
increases throughout an
economic system
When Did the Cost of a Hamburger Go
Up?
 Measuring Inflation: The CPI

Measure of the prices of

typical products purchased
by consumers living in
urban areas
Selected CPI Values

To find inflation rate between 1997

and 1998, need to know the changes
from one year to another
Subtract value of 1997 from value
of 1998
163.0 – 160.5 =2.5
Inflation rate =
change in price index/ Initial
price index X 100
2.5 / 160.5 X 100 = 1.6%
 What Is Unemployment?

Level of
joblessness
among people
actively seeking
work in an
economic system
Recessions and Depressions

 Recession is a period
during which aggregate
output, as measured by
real GDP, declines
 Depression is a
particularly severe and
long-lasting recession
 Managing the Economy
• Government acts to manage economic system through
two sets of policies:
i. Fiscal
ii. Monetary
• Fiscal Policies :
determine how the government collects and
spends its revenues
Tax increases can function as Fiscal policies
not only to increase revenues but to manage the
economy as well
 Managing the Economy
• Monetary policies focus on controlling the size of nation’s
money supply working through the nation’s central bank
• It can influence the supply of money by promoting interest
rates to up or down
• Higher interest rates make money expensive to borrow
thereby reduce spending by those who produce goods and
services. (tight monetary policy)
• Lower interest makes money less expensive to borrow thereby
increase spending by those who produce goods and services
and thus stimulates economy (easy monetary policy)
• Government can influence through monetary policy the
aggregate market for products by influencing supply of money
 Managing the Economy

 Stabilization policy
embraces both fiscal
and monetary policies
—the goal is to smooth
out fluctuations in
output and
unemployment and to
stabilize prices
 The Global Economy in the 21st
Century

Major forces driving the economy:

 The information revolution will continue to
enhance productivity across all economic
sectors.
 New technological breakthroughs will
create entirely new industries.
 Increasing globalization will create much
larger markets while fostering tougher
competition among global businesses
Internet Users per 1,000 People
Information-Technology Spending
The Export Resurgence
What Is Technology?

All the ways by

which firms
create value
for their
constituents
Product and Service Technologies
Technologies employed for
creating products—both
physical goods and services
—for customers
Business Process Technologies
Business process technologies are used
not so much to create products as to
improve a firm’s performance of internal
operations.
 Enterprise Resource Planning, or ERP, is
a large-scale information system for
organizing and managing a firm’s
processes across product lines,
departments and geographic locations
ERP Applications
 What Is the Political-Legal
Environment?

Conditions
reflecting the
relationship
between business
and government
 What Is the Sociocultural
Environment?
Conditions including the customs,
mores, values and demographic
characteristics of the society in
which an organization functions
 Customer Preferences and Tastes

 Customer preferences and tastes vary both

across and within national boundaries.
 Consumer preferences can vary widely within
the same country.
 Consumer preferences and tastes change
over time
 The Business Environment

 Redrawing Corporate Boundaries To stay

competitive, companies are removing
traditional corporate boundaries.
 For example building partnerships or
temporary alliances with other companies or
competitors
 Core competencies are the skills and
resources with which an organization competes
best and creates the most value for owners
 Emerging Challenges and Opportunities in the
Business Environment
 Outsourcing is the strategy of paying suppliers
and distributors to perform certain business
processes or to provide needed materials or
services
 Viral marketing is a strategy of using the
Internet and word-of-mouth marketing to spread
product information
 Business process management is an
approach by which firms move away from
department-oriented organization and toward
process-oriented team structures that cut across
old departmental boundaries
 Business process management
• Functionally oriented business organize in hierarchies with organizational
units responsible for particular functions
• Integration of these functions take place one level higher in the
organization, away from the work that is being done.
• This leads to good performance on a functional level but poor integration
between functions.
• Companies that are business process oriented organize differently
• They favor structures that allow interaction between functions such as
matrix organization.