Business and its Environment Reza Espahbodi Washburn University

A Business is a Web of interrelationships Suppliers/facilities Suppliers/inventory Suppliers/labor Suppliers/capital Complements Competitors Strategic partners Regulators Capital markets Customers Internal Web of Business

Some Frameworks for Environmental Analysis PESTLE – political, Economic, Social, Technological, Legal, Ethical Porter’s five forces SWOT – strengths, weaknesses, opportunities, threats

Business Environment Risks Business risks arise from business environment: Internal environment an improper organizational configuration a dysfunctional internal culture – dishonesty, low morale and loyalty, inflexibility, etc. inferior competencies to competition absence of process advantage – low margin ineffective internal communication – barriers to free and rapid flow of information

Business Environment Risks Local external operating environment direct competition – processes and price local labor market customer/supplier relationships – e.g., an inferior customer service process competitor innovation – new technologies that create process advantages for competitors

Business Environment Risks Global external environment lax regulatory environments in foreign countries – lower cost for competitors natural resources – competitors have access to and can buy material at lower cost global competition – competition from entrants in foreign countries cultural advantages – e.g., stronger work ethics and loyalty competitor strategic alliances

Porter’s Five forces of competitive pressures Buyer power Relative number of buyers and sellers Relative importance of the buyer, e.g., Wal-Mart Stores Supplier power Rivalry among existing firms Intense rivalries reduce profitability due to competitive pricing Threat of new entrants Barriers to entry: investment, expertise, patents, regulations Threat of substitutes

SWOT Analysis

Impact of External and Internal Risks Impediment to achieving business goals Violation of laws and regulations Unreliable financial statements – errors and fraud

Analyzing a Business’ Strategy Nature of products or services Unique products for a niche market (i.e., product differentiation strategy)? Or, non-differentiated products at low prices (i.e., low-cost leadership strategy)? Integration within value chain Vertical integration, outsourcing manufacturing and/or distribution Geographical diversification Industry diversification Diversification reduces risk, but also efficiency

Corporate Governance – a Process for Control and Accountability

Corporate Governance – Role of Internal and External Auditors Board of Directors (Audit Committee) Management Shareholders External Auditor

Corporate Governance Failures Shareholders – focused on short-term prices Board of directors – dominated by management, lacked expertise, exercised inadequate oversight Audit committees – lacked expertise and power Management – pushed the limits of accounting Self regulatory organizations – internalized standards setting and did not enforce standards (AICPA), became rule oriented and gave in to political pressures (FASB) Regulatory agencies, SEC – identified problems but did not have resources to deal with the issues External auditors – see next slide

Corporate Governance Failures What were the SEC concerns about the auditing profession? Consulting fees were impairing auditor independence. Auditors were no longer willing to confront clients over questionable accounting practices. Auditors were using technical interpretations of GAAP to comply with management’s demands.