C H A P T E R 2UNDERSTANDING THE ENVIRONMENTS OF BUSINESS

CHAPTER OVERVIEW

All businesses, regardless of their size, location, or mission, operate within a larger external environment. This external environment consists of everything outside an organization’s boundaries that might affect it. The external environment plays a major role in determining the success or failure of any organization.

The economic environment refers to the conditions of the economic system in which an organization operates. The basic goals of an economic system are stability, full employment, and growth. Measures of how well an economy has accomplished these goals include gross national product, gross domestic product, productivity, balance of trade, and national debt. The U.S. government uses fiscal policies to manage the effects of its spending and revenue collection and monetary policies to control the size of the nation’s money supply.

The technological environment generally includes all the ways by which firms create value for their constituents. Technology includes human knowledge, work methods, physical equipment, electronics and telecommunications, and various processing systems that are used to perform business activities.

The political-legal environment reflects the relationship between business and government, usually in the form of government regulation of business. For example, the legal system defines in part what an organization can and can’t do. Although the United States is basically a free market economy, it still has major regulation of business activity. Likewise, various government agencies regulate important areas such as advertising practices, safety and health considerations, and accept-able standards of business conduct.

The sociocultural environment includes the customs, mores, values, and demographic characteristics of the society in which an organization functions. Sociocultural processes determine the goods and services as well as the standards of business conduct that a society is likely to value and accept.

Business today is faster paced, more complex, and more demanding than ever before. The challenges businesses face and their solutions make up the business environment.

CHAPTER OUTLINE

OPENING CASE: MAKING THE GRADE

1. ORGANIZATIONAL BOUNDARIES AND ENVIRONMENTSa. Organizational Boundariesb. Multiple Environments

2. THE ECONOMIC ENVIRONMENTa. Economic Growth

i. Aggregate Output and Standard of Livingii. Gross Domestic Product

1. Real Growth Rate2. GDP per Capita

39

3. Real GDP4. Purchasing Power Parity

iii. Productivity1. Balance of Trade2. National Debt

b. Economic Stabilityi. Inflation

1. Measuring Inflation: The CPIii. Unemployment

1. Recessions and Depressionsc. Managing the U.S. Economy

i. Fiscal policies ii. Monetary policies

iii. Stabilization policyd. The Global Economy in the Twenty-first Century

i. Three Major Forcesii. Projected Trends and Patterns

3. THE TECHNOLOGICAL ENVIRONMENTa. Product and Service Technologiesb. Business Process Technologies

i. Enterprise Resource Planning

4. THE POLITICAL-LEGAL ENVIRONMENT

5. THE SOCIOCULTURAL ENVIRONMENTa. Customer Preferences and Tastesb. Ethical Compliance and Responsible Business Behavior

6. THE BUSINESS ENVIRONMENTa. Redrawing Corporate Boundariesb. Emerging Challenges and Opportunities in the Environment of Business

i. Outsourcingii. Outsourcing versus Vertical Integration

iii. Disadvantages of Outsourcingc. Viral Marketingd. Business Process Managemente. The Aftermath of 9/11

LEARNING OBJECTIVES

1. Explain the concepts of organizational boundaries and multiple organizational environments.2. Explain the importance of the economic environment to business and identify the factors used to

evaluate the performance of an economic system.3. Discuss the current economic picture in the United States and summarize expert predictions about

its future.4. Describe the technological environment and its role in business.5. Describe the political-legal environment and its role in business.6. Describe the sociocultural environment and its role in business.

40

7. Discuss the business environment and identify emerging challenges and opportunities in the environment of business.

LECTURE OUTLINE FOR POWERPOINT

1. ORGANIZATIONAL BOUNDARIES AND ENVIRONMENTSAll businesses, regardless of their size, location, or mission, operate within a larger external environment.External environment—Everything outside an organization’s boundaries that might affect it.

a. Organizational Boundaries—That which separates the organization from its environment. Today boundaries are becoming increasingly complicated and hard to pin down.

b. Multiple Environments include economic conditions, technology, political-legal considerations, social issues, the global environment, issues of ethical and social

41

responsibility, the business environment itself, and numerous other emerging challenges and opportunities.

2. THE ECONOMIC ENVIRONMENTEconomic environment—Conditions of the economic system in which an organization operates

a. Economic Growthi. Aggregate Output and Standard of Living

1. Business cycle—Pattern of short-term ups and downs (expansions and contractions) in an economy

2. Aggregate output—Total quantity of goods and services produced by an economic system during a given period

3. Standard of living—Total quantity and quality of goods and services that a country’s citizens can purchase with the currency used in their economic system

42

ii. Gross Domestic ProductGross domestic product (GDP)—Total value of all goods and services produced within a given period by a national economy through domestic factors of productionGross national product (GNP)—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

1. Real Growth Rate—the growth rate of GDP adjusted for inflation and changes in the value of the country’s currency

2. GDP per Capita—GDP per person and reflects the standard of living.3. Real GDP—GDP calculated to account for changes in currency values

and price changes versus Nominal GDP, GDP measured in current dollars or with all components valued at current prices.

43

4. Purchasing Power Parity—Principle that exchange rates are set so that the prices of similar products in different countries are about the same.

iii. Productivity—Measure of economic growth that compares how much a system produces with the resources needed to produce it.

There are a number of factors which can inhibit the growth of an economic system including:

1. Balance of Trade—the economic value of all the products that a country exports minus the economic value of imported products.

a. Trade Deficit—A positive balance of trade results when a country exports (sells to other countries) more than it imports (buys from other countries).

b. Trade Surplus—A negative balance of trade results when a country imports more than it exports.

44

2. National Debt—Amount of money that a government owes its creditors. The U.S. national debt is over $6 trillion.

45

b. Economic StabilityCondition 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.Factors which threaten stability include:

i. Inflation—Occurrence of widespread price increases throughout an economic system

1. Measuring Inflation: The CPI—Measure of the prices of typical products purchased by consumers living in urban areas

ii. Unemployment—Level of joblessness among people actively seeking work in an economic system. Unemployment may be a symptom of economic downturns.

1. Recessions and DepressionsRecession—Period during which aggregate output, as measured by real GDP, declines

2. Depression—Particularly severe and long-lasting recession

c. Managing the U.S. Economyi. Fiscal policies—Government economic policies that determine how the

government collects and spends its revenuesii. Monetary policies—Government economic policies that determine the size of a

nation’s monetary supply

46

iii. Stabilization policy—Government policy, embracing both fiscal and monetary policies, whose goal is to smooth out fluctuations in output and unemployment and to stabilize prices

d. The Global Economy in the Twenty-first CenturyThe decade of the 1990s saw a sustained period of expansion and growth that served to increase business profits, boost individual wealth, and fuel optimism. During the latter part of 2001 and into 2002, however, economic growth began to stall.

47

i. Three Major Forces1. The information revolution will continue to enhance productivity across

all sectors of the economy, most notably in such information-dependent industries as finance, media, and wholesale and retail trade.

2. New technological breakthroughs in areas such as biotechnology will create entirely new industries.

3. Increasing globalization will create much larger markets while also fostering tougher competition among global businesses; as a result, companies will need to focus even more on innovation and cost cutting.

ii. Projected Trends and Patterns—There are a number of projections for the near future. Sudden changes in environmental factors, such as war, can alter these projections.

3. THE TECHNOLOGICAL ENVIRONMENTTechnology has a variety of meanings, but as applied to the environment of business, it generally includes all the ways by which firms create value for their constituents.

48

a. Product and Service Technologies—the technologies employed for creating products (both physical goods and services) for customers. Although many people associate technology with manufacturing, it is also a significant force in the service sector.

b. Business Process Technologies—are used not so much to create products as to improve a firm’s performance of internal operations (such as accounting, managing information flows, creating activity reports, and so forth). They also help create better relationships with external constituents, such as suppliers and customers.

i. Enterprise Resource Planning—Large-scale information system for organizing and managing a firm’s processes across product lines, departments, and geographic locations

4. THE POLITICAL-LEGAL ENVIRONMENTConditions reflecting the relationship between business and government, usually in the form of government regulation. Pro- or anti-business sentiment in government can further influence business activity. Political stability is also an important consideration, especially for international firms.

49

5. THE SOCIOCULTURAL ENVIRONMENTConditions including the customs, mores, values, and demographic characteristics of the society in which an organization functions

a. Customer Preferences and Tastes—Customer preferences and tastes vary both across and within national boundaries. Similarly, consumer preferences can also vary widely within the same country. Consumer preferences and tastes also change over time. Finally, sociocultural factors influence the way workers in a society feel about their jobs and organizations.

b. Ethical Compliance and Responsible Business Behavior

6. THE BUSINESS ENVIRONMENTa. Redrawing Corporate Boundaries—To stay competitive, companies are removing

traditional corporate boundaries. For example building partnerships or temporary alliances with other companies or competitors.

i. Core competency—Skills and resources with which an organization competes best and creates the most value for owners

b. Emerging Challenges and Opportunities in the Environment of Businessi. Outsourcing—Strategy of paying suppliers and distributors to perform certain

business processes or to provide needed materials or resourcesii. Outsourcing versus Vertical Integration

Outsourcing is why vertical integration is no longer as popular as it once was.1. Vertical integration—Strategy of owning the means by which an

organization produces goods or services.

50

iii. Disadvantages of Outsourcing—The expected benefits of outsourcing are sometimes not realized. For example, suppliers often don’t understand what they are supposed to do, charge too much, and provide poor service.

c. Viral Marketing—Strategy of using the Internet and word-of-mouth marketing to spread product information. Using various formats—games, contests, chat rooms, and bulletin boards—marketers encourage potential customers to try out products and tell other people about them.

d. Business Process Managementi. Process—Any activity that adds value to some input by transforming it into an

output for a customer (whether internal or external)ii. Business process management—Approach by which firms move away from

department-oriented organization and toward process-oriented team structures that cut across old departmental boundaries

e. The Aftermath of 9/11—The flexibility and strength inherent in the U.S. political and economic systems became just as obvious as their flaws. Most people kept their jobs, and most businesses kept going. Even as some economic sectors declined, others continued to expand. Exports continue to flow into other countries, as did foreign direct investment.On the other hand, American business now faces major changes. A specific effect that businesses themselves are already addressing involves workplace security.

51