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Business Essentials

Ebert, Griffin, Starke, Dracopoulos

8th Canadian Edition

CHAPTER 2

The Environment
of Business

Learning Objectives

Explain the concepts of organizational boundaries and multiple organizational environments.

Explain the importance of the economic environment to business and identify the factors used to evaluate the performance of an economic system.

Describe the technological environment and its role in business.

Describe the political-legal environment and its role in business.

These learning objectives are based upon those at the beginning of the chapter. For a review of learning objectives, see the summary at the end of the chapter, as well as the list of key terms.

Learning Objectives

Describe the socio-cultural environment and its role in business.

Identify emerging challenges and opportunities in the business environment.

Understand the recent trends in the redrawing of corporate boundaries.

These learning objectives are based upon those at the beginning of the chapter. For a review of learning objectives, see the summary at the end of the chapter, as well as the list of key terms.

Organizational Boundaries and Environments
(LO 2-1)

External Environment

factors beyond an organization's boundaries that cannot be controlled

(i.e. competition)

Organizational Boundaries

that which separates the organization from its environment

Learning Objective 2-1

Page(s): 25-26

Dimensions of the External Environment
(LO 2-1)

Multiple Organizational Environments

Economic environment

Technological environment

Political-legal environment

Socio-cultural environment

Business environment

Global environment

Emerging challenges and opportunities

Learning Objective 2-1

Page(s): 26-27

Figure 2.1

Notes

Emerging challenges and opportunities include: Outsourcing, The Growing Role of Social Media, Business Process Management

The Economic Environment
(LO 2-2)

Key Economic Goals

Economic Growth

Economic Stability

Full Employment

The conditions of the economic system in which an organization operates

Learning Objective 2-2

Page(s): 26-31

The Economic Environment
(LO 2-2)

Economic Growth Overview

The Business Cycle

Aggregate Output and the Standard of Living

Gross Domestic Product (GDP) and

Gross National Product (GNP)

Productivity

Balance of Trade

National Debt

Learning Objective 2-2

Page(s): 27-30

The Economic Environment
(LO 2-2)

Business Cycle

the typical pattern of short-term ups and downs in an economy (peak, recession, trough and recovery)

Learning Objective 2-2

Page(s): 28

Figure 2.2

The Economic Environment
(LO 2-2)

Aggregate Output

measure of economic growth

total quantity of goods and services produced by an economic system during a given period

Standard of Living

total quantity and quality of goods and services that a country’s citizens can purchase with their currency

Productivity

measure of growth that compares the output of an economic system with the resources that are needed to produce the output

standard of living improves through increases in productivity

Learning Objective 2-2

Page(s): 27-29

The Economic Environment
(LO 2-2)

Gross National Product (GNP)

value of all goods and services produced by a national economy within a given period regardless of production location

Gross Domestic Product (GDP)

value of all goods and services produced by a national economy within a given period with domestic factors of production

Measuring Economic Growth

Real Growth Rates

GDP Per Capita

Real GDP

Learning Objective 2-2

Page(s): 28-29

The Economic Environment
(LO 2-2)

Balance of Trade

value of all exported products minus imported products

National Debt

amount of money that a government owes its creditors

increases/decreases based on the budget deficit/surplus

Exports

Imports

Learning Objective 2-2

Page(s): 29

Notes

Positive balance of trade: more exports = economic growth

Lower debt: more $ for private investment

The Economic Environment
(LO 2-2)

Economic Stability

condition when the amount of money available and the quantity of goods and services produced are growing at about the same rate

Threats to economic stability

Inflation

Deflation

Unemployment

Learning Objective 2-2

Page(s): 30-31

The Economic Environment
(LO 2-2)

Inflation

occurs when there is widespread price increases in an economic system

Consumer Price Index (CPI)

tool used to measure inflation

Deflation

a period of generally falling prices

Learning Objective: 2-2

Page(s): 30

Figure 2.3

The Economic Environment
(LO 2-2)

Unemployment

level of joblessness among people actively seeking work in an economic system

Types of Unemployment

Frictional

Seasonal

Cyclical

Structural

Learning Objective 2-2

Page(s): 31

Figure 2.4

Notes

When unemployment is low, there is a labour shortage which raises wages and prices.

When wage rates are too high, workers are laid off, sales drop, more layoffs, etc.

If demand stays high and prices go up, inflation sets in.

The Economic Environment
(LO 2-2)

Managing the Canadian Economy

Stabilization policies

Fiscal Policies

Monetary Policies

Learning Objective 2-2

Page(s): 31

Notes

High interest rates = tight monetary policy

Low interest rates = easy monetary policy

Stabilization Policies: fiscal and monetary policies used to stabilize prices and to smooth out fluctuations in output and unemployment

Fiscal policies: determine how the government collects and spends its revenues

Monetary policies: determine the size of a nation’s monetary supply

The Technological Environment
(LO 2-3)

Technology

all the ways a company creates value for its customers

knowledge, work methods, physical equipment, etc.

Learning Objective 2-3

Page(s): 31-33

The Technological Environment
(LO 2-3)

Research & Development (R&D)

provides new ideas for products services and processes

basic

applied

Bauer constantly innovates and spends heavily on R&D

Learning Objective 2-3

Page(s): 31-32

The Political-Legal Environment
(LO 2-4)

Reflects the relationship between business and government (e.g., regulations)

pro- or anti-business sentiment

political stability

international relations

Learning Objective: 2-4

Page(s): 33

Notes

Political stability is necessary when doing business internationally or even between provinces. If relations between countries is poor, there is less likelihood of trade between these two countries

The Socio-Cultural Environment
(LO 2-5)

Customs, values, attitudes and demographic characteristics of the society in which an organization functions

Customer preferences and tastes

vary across and within national
boundaries

Ethical compliance and responsible business behaviour

Learning Objective 2-5

Page(s): 34

Notes

In today’s changing environment, it is often difficult to accurately track and understand a business’ competitive health. Stakeholders have a right to know how a company is performing in order to make competent and informed decisions.

The Business Environment
(LO 2-6)

The Industry Environment

Porter’s five forces model is used to analyze the competitive situation in an industry.

Learning Objective 2-6

Page(s): 36

Figure 2.5

The Business Environment
(LO 2-6)

Emerging Challenges and Opportunities in the Business Environment

The most successful firms are getting leaner by focusing on their core competencies

the skills and resources with which an organization competes best and creates the most value for owners

Learning Objective 2-6

Page(s): 36-38

The Business Environment
(LO 2-6)

Outsourcing

paying suppliers and distributors to perform certain business processes

The Growing Role of Social Media

social media is now an integral part of daily communication (especially among Millennials)

Business Process Management

moving away from department-oriented organizations toward process-oriented teams

Learning Objective 2-6

Page(s): 37

Redrawing Corporate Boundaries
(LO 2-7)

Acquisitions and Mergers

horizontal, vertical or conglomerate mergers

friendly or hostile takeovers

Divestitures and Spinoffs

selling part of existing business or setting it up as a new corporation

Learning Objective 2-7

Page(s): 39

Redrawing Corporate Boundaries
(LO 2-7)

Friendly Takeover

the acquired company welcomes the acquisition, (needs cash or other benefits)

Hostile Takeover

the acquiring company buys enough of the other company’s stock to take control

a poison pill is a defense tactic that management can adopt to make a firm less attractive

Poison Pill

Learning Objective: 2-7

Page(s): 39

Redrawing Corporate Boundaries
(LO 2-7)

Employee-Owned Corporations

employee stock ownership programs (ESOP)

Strategic Alliances

two or more companies temporarily join forces

often called a joint venture

Learning Objective: 2-7

Page(s): 39

Redrawing Corporate Boundaries
(LO 2-7)

Subsidiary and Parent Corporations

subsidiary corporation owned by another corporation

parent corporations own subsidiary corporations

Parent Company

Subsidiary Company

Learning Objective: 2-7

Page(s): 39

QUICK-CHECK QUESTIONS

1) Environmental protection laws, interest rates, societal values, and the emergence of new technologies can significantly impact the profitability of a firm. These types of issues can not be controlled by a business as they are considered to exist in the ________.

A) external environment

B) internal environment

C) organization’s boundaries

D) global context

Answer:

A) external environment

QUICK-CHECK QUESTIONS

2) The total amount of money that a country owes its creditors.

A) National Deficit

B) Purchasing Power Parity Index

C) National Debt

D) Gross Domestic Product

Answer:

C) National Debt

QUICK-CHECK QUESTIONS

3) The federal government manages the Canadian economic system through two sets of policies: fiscal and monetary. Fiscal Policy refers to:

A) the control of the money supply

B) the control of interest rates

C) the government’s approach to its spending and taxation

D) the effective management and control of the national debt

Answer:

C) the government’s approach to its spending and taxation

QUICK-CHECK QUESTIONS

4) Simon would like to buy a Valentines gift for his girlfriend as a sign of his affection. To his disappointment he discovers that roses cost $75 a dozen. Luckily, he can buy chocolates for $20. According to Porter’s Five Forces Model, chocolates are a less costly _________.

A) option

B) substitute

C) replacement

D) complement

Answer:

B) substitute

QUICK-CHECK QUESTIONS

5) An organization’s core competencies refers to:

A) The company’s strategies to increase market share

B) The company’s product offerings which achieve the highest profit levels

C) The training programs used to increase employee productivity

D) The skills and resources with which they compete best and create the most value for owners.

Answer: D) The skills and resources with which they compete best and create the most value for owners.