1. Business and its Environment
Reza Espahbodi
Washburn University

2. 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

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

4. 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

5. 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

6. 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

7. 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

8. SWOT Analysis

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

10. 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

11. Corporate Governance – a Process for Control and Accountability

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

13. 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

14. 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.