Chapter 1 The Environment of Business

Key Contents Business Business Environment Political / legal Economic Technological Social / cultural International

Business The organization: The process: A group of people, with common purpose Providing goods and services to satisfy customer requirements in order to maximize profit An enterprise, commercial entity, or firm in either the private or the public sector, concerned with providing products or services to satisfy customer requirements. The process: The organized effort of individuals to produce and sell, for profit, the products and services that satisfy society’s needs.

The Organized Effort of Individuals 3-Satisfying Customer Needs 2-Providing Goods and Services 1-Combining Resources

Satisfying Needs People buy goods and services not just to own them, but to satisfy particular needs Businesses that understand customer needs, and work to satisfy those needs, are usually successful

Business The goal: Satisfying customer needs The means: Providing goods and services Process: production (operations) manufacture, process, assemble, create, …… Factors of production (Inputs: Resources ) (N, L, K, E) Land and Natural resources Labor Capital Entrepreneurship A person who risks time, effort, and money to start and operate a business Outputs: Goods and services (marketing & logistics) sales, promotion, distribution, services, …

Business Profit The purposes of profit Stakeholders To reward business owners for producing goods and services consumers want As payment for business owners assuming the risks of ownership Stakeholders All of the different people or groups or people who are affected by the policies and decisions made by an organization

The Relationship Between Sales Revenue and Profit Profit is what remains after all business expenses have been deducted from sales revenue. A loss (negative profit) results when a firm’s expenses are greater than its revenues.

The Goal Maximize Profit by satisfying customer requirement Profit: revenues – costs Revenues: sales volume x price Costs: costs of goods sold (COGS); Inputs: Resources (L, K, N, E) (logistics) Purchase/procurement/sourcing, transportation, warehousing, handling, …… Expenses: selling, general, administrative, depreciations, …

Business: activities purchase, sale , lease, and rental of personal or real property; Manufacturing, processing, and/or marketing of products, commodities, or any other personal property; sale of services to the public; the activities of providing goods and services

Business Functions/Subjects Purchase/procurement/ sourcing Warehousing Handling Transportation Operations Sales/promotion Distribution After sale services Management Human Resources Finance Production Marketing Logistics Accounting International E-commerce

Business: setup & run Forms of Business Ownership Organization Structure and Behavior Human Resources Finance Production Marketing Logistics Accounting International Business Environment: legal, social, cultural

Business Environment Social / cultural Technological Economic Current standards and future trend of industry specific technology Economic Political / legal International

Social and Cultural Social structure Values and traditions Beliefs and religions Life styles and purchase habits Others

Political / Legal Political Stability (government, racial conflicts, terrorists, …) Political System (democracy, human rights, …) Laws and Regulations toward Business (in general, to specific industries, …) Legal system (procedures, efficiency, favorability, …) others

Economic Economics Economic System Economic Performance (macro) Industry specific environment (micro)

Economics Economy The system through which a society creates and distributes wealth Economics The study of how wealth (anything of value) is created and distributed Microeconomics The study of the decisions made by individuals and businesses Macroeconomics The study of the national economy and the global economy

Basic Economic Questions to Answer: Economic Systems Basic Economic Questions to Answer: (What? How? For Whom? Who?) What goods and services will be produced? How will they be produced? For whom will they be produced? Who owns and controls the major factors of production? Market Economy (Capitalism) Planned (Command) Economy (Socialism and Communism) Mixed Economy (private and public)

Market Economy (Capitalism) An economic system in which individuals own and operate the majority of businesses that provide goods and services Derived from Adam Smith’s laissez-faire capitalism in which a society’s best interests are served by individuals pursuing their own self-interest (the invisible hand)

Free Capitalism Creation of wealth is the concern of private individuals Resources used to create wealth must be privately owned Economic freedom ensures the existence of a free market economy Businesses and individuals decide what to produce and buy; the market determines quantities sold and prices Limited role of government

Basic Assumptions for Adam Smith’s Laissez-Faire Capitalism Insert Figure 1.3, p. XX

Planned Economy (Socialism) Key industries (e.g., transportation, utilities, and banking) are owned and controlled by the government Small-scale private businesses may be permitted and workers may choose their own occupations Production is based on national goals, and distribution is controlled by the state Intent is the equitable distribution of income, elimination of poverty, social services to all who need them, elimination of the economic waste of capitalistic competition

Command Economy (Communism) All factors of production are owned and controlled by the government as proxy for ownership by all citizens Production is based on centralized state planning to meet the needs of the state and not necessarily the needs of its citizens The state dictates occupational choices and sets prices and wages Intent is to create Karl Marx’s concept of a classless society where all contribute according to their ability and receive benefits according to their needs.

Mixed Economy with elements of capitalism and socialism Households (private) Consumers of goods and services Resource owners of some factors of production Businesses (partly private, partly public) Produce goods and services to exchange for revenues (money) Use revenues to purchase factors of production Governments (public) In exchange for taxes, governments provide public services that would not be provided by business or would be produced only for those who could afford them

The Circular Flow in Mixed Economy

Debate Issue: Should There Be Less Government Involvement? YES Today, there are too many government controls that inhibit business owners. The added costs of adhering to government regulations are passed on to consumers in the form of higher prices. There is no need for all the government rules and regulations because business owners are socially responsible. NO Without adequate government controls, business would take advantage of consumers. While government rules and regulations cost money, the added safety and protection are well worth the money. While the majority of business owners may be socially responsible, there are some who need the encouragement provided by government regulations.

The Proper Role of Government Major economic entity? Administrative authority? Service provider?

Measuring Economic Performance Productivity The average level of output per worker per hour May change with capital input and technology Economic growth: aggregate output, GDP, standard of living Economic health: Economic Stability: business cycle, inflation, unemployment

Economic Growth Gross domestic product (GDP) National income The total value of all goods and services produced by all people within the boundaries of a country during a one-year period National income The total income earned by various segments of the population, including employees, self-employed individuals, corporations, and other type of income

GDP in Current and Inflation-Adjusted Dollars Source: U.S. Bureau of Economic Analysis website at www.bea.gov, accessed September 14, 2008. .

Consumer Price Index 1982 – 1984 = 100 172.2 +3.4% 177.1 +2.8% 179.9 Year Annual Average Percent Change 2000 172.2 +3.4% 2001 177.1 +2.8% 2002 179.9 +1.6% 2003 184.0 +2.3% 2004 188.9 +2.7% 2005 195.3 2006 201.6 +3.2% 2007 207.3 2008 215.4 +3.8% Source: Bureau of Labor Statistics, ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt, accessed February 17, 2009.

Measuring Economic Health Inflation rate An economic statistic that tracks the increase in prices of goods and services over a period of time; usually calculated on a monthly or annual basis Prime interest rate The lowest interest rate that banks charge their most creditworthy customers Productivity rate An economic measure that tracks the increase and decrease in the average level of output per worker

Measuring Economic Health (cont’d) Unemployment rate The percentage of a nation’s labor force unemployed at any time Unemployment Unemployed: in the labor force; actively looking for a job and do not have one

Measuring Economic Health (cont’d) New housing starts The total number of new homes started during a specific time period. Bank credit A statistics that measures the lending activity of commercial financial institutions Corporate profits The total amount of profits made by corporations over selected time periods Balance of trade The total value of a nation’s exports minus the total value of its imports over a specific period of time

The Business Cycle The recurrence of periods of growth and recession in a nation’s economic activity Recession – depression - recovery - expansion Recession: two consecutive three-month periods of decline in a country’s gross domestic product Depression: a severe recession that lasts longer than a recession

The Business Cycle (cont’d) Monetary policies Federal Reserve decisions that determine the size of the supply of money in the nation and the level of interest rates Fiscal policy Government influence on the amount of savings and expenditures; accomplished by altering the tax structure and by changing the levels of government spending Federal deficit A shortfall created when the federal government spends more in a fiscal year than it receives National debt The total of all federal deficits

Types of Competition Rivalry among businesses for sales to potential customers Perfect (or pure) competition Monopolistic competition Oligopoly Monopoly

Perfect (or pure) competition The market situation in which there are many buyers and sellers of a product, and no single buyer or seller is powerful enough to affect the price of that product Supply: The quantity of a product that producers are willing to sell at each of various prices Demand: The quantity of a product that buyers are willing to purchase at each of various prices Market Price (Equilibrium): The price at which the quantity demanded is exactly equal to the quantity supplied

Monopolistic competition A market situation where there are many buyers along with a relatively larger number of sellers who differentiate their products from the products of competitors Product differentiation The process of developing and promoting differences between one’s products and all similar products

Oligopoly A market situation (or industry) in which there are few sellers E.g., automobile manufacturers, car rental agencies, and farm implement industries Sizable investments are required to enter into the market Each seller has considerable control over price The market actions of one seller can have a strong effect on competitors

Monopoly A market (or industry) with only one seller Natural monopoly An industry requiring huge investments in capital and within which duplication of facilities would be wasteful and thus not in the public interest Legal monopoly (limited monopoly) A monopoly created when the federal government issues a copyright, patent, or trademark protecting the owners of written materials, ideas, or product brands from unauthorized use by competitors