1. Copyright © 2006 Pearson Education Canada Inc. 2-1 Chapter 2 Understanding the Environments of Business

2. Copyright © 2006 Pearson Education Canada Inc. 2-2 Learning Objectives Explain organizational boundaries and multiple organizational environments Explain the importance of the economic environment and identify the factors to evaluate the performance of an economic system

3. Copyright © 2006 Pearson Education Canada Inc. 2-3 Learning Objectives Discuss the current economic picture in Canada Describe the technological, political-legal, and socio-cultural environments and their impact on business Identify emerging challenges and opportunities in the business environment

4. Copyright © 2006 Pearson Education Canada Inc. 2-4 Organizational Boundaries & Environments External environment Everything outside an organization’s boundaries that might affect it Organizational boundary That which separates the organization from its environment

5. Copyright © 2006 Pearson Education Canada Inc. 2-5 Dimensions of the External Environment

6. Copyright © 2006 Pearson Education Canada Inc. 2-6 The Economic Environment The conditions of the economic system in which an organization operates Key economic factors: Economic growth Economic stability Full employment

7. Copyright © 2006 Pearson Education Canada Inc. 2-7 The Economic Environment Economic growth  Aggregate output  Standard of living  Gross domestic output  Productivity

8. Copyright © 2006 Pearson Education Canada Inc. 2-8 The Economic Environment Economic stability  Inflation  Measuring inflation: the CPI  Deflation  Unemployment

9. Copyright © 2006 Pearson Education Canada Inc. 2-9 The Economic Environment Full employment  Frictional unemployment  Seasonal unemployment  Cyclical unemployment  Structural unemployment

10. Copyright © 2006 Pearson Education Canada Inc. 2-10 Economic Growth Business cycle The typical pattern of short-term ups and downs (expansions and contractions) in an economy Four phases: peak, recession, trough and recovery

11. Copyright © 2006 Pearson Education Canada Inc. 2-11 Economic Growth Aggregate output Measure of economic growth Total quantity of goods & services produced by an economic system during a given period Standard of living Total quantity & quality of goods & services that a country’s citizens can purchase with their currency

12. Copyright © 2006 Pearson Education Canada Inc. 2-12 Measuring Economic Growth Measuring Economic Growth Gross domestic product (GDP) Value of all goods & services produced within a given period by a national economy through domestic factors of production Gross national product (GNP) Value of all goods & services produced by a national economy within a given period regardless of production location

13. Copyright © 2006 Pearson Education Canada Inc. 2-13 Measuring Economic Growth Measuring Economic Growth Real growth rates Adjust for inflation & currency fluctuations GDP per capita Real GDP Nominal GDP Purchasing power parity

14. Copyright © 2006 Pearson Education Canada Inc. 2-14 Measuring Economic Growth Productivity Measure of economic growth that compares how much a system produces with the resources needed to produce it Balance of trade The total of a country’s exports minus its imports National debt The total amount of money that a government owes its creditors

15. Copyright © 2006 Pearson Education Canada Inc. 2-15 Economic Stability Condition 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 Threats to economic stability Inflation Deflation Unemployment

16. Copyright © 2006 Pearson Education Canada Inc. 2-16 Inflation Inflation Widespread price increases in an economic system Consumer price index (CPI) Measures the prices of typical products purchased by consumers Deflation A period of generally falling prices

17. Copyright © 2006 Pearson Education Canada Inc. 2-17 Recent CPI Figures

18. Copyright © 2006 Pearson Education Canada Inc. 2-18 Unemployment Level of joblessness among people actively seeking work in an economic system When unemployment is low, there is a shortage of labour available, and wages tend to rise

19. Copyright © 2006 Pearson Education Canada Inc. 2-19 Full Employment Everyone who wants to work has an opportunity to do so In reality, full employment is impossible, because there will always be people looking for work

20. Copyright © 2006 Pearson Education Canada Inc. 2-20 Full Employment Types of unemployment Seasonal Cyclical Frictional Structural

21. Copyright © 2006 Pearson Education Canada Inc. 2-21 Managing the Canadian Economy Fiscal policies Policies whereby governments collect and spend revenues Monetary policies Policies whereby the government controls the size of the nation’s money supply

22. Copyright © 2006 Pearson Education Canada Inc. 2-22 Major Forces in the Global Economy The information revolution Enhanced productivity New technological breakthroughs Emergence of new industries Increasing globalization Larger markets Tougher competition

23. Copyright © 2006 Pearson Education Canada Inc. 2-23 The Technological Environment Technology: All the ways firms create value for their constituents Research and Development (R&D) Product and service technologies Technologies employed for creating products—both physical goods and services—for customers

24. Copyright © 2006 Pearson Education Canada Inc. 2-24 The Political-legal Environment Reflects the relationship between business & government Legal system defines in part what an organization can or can’t do Rules & regulations Political stability is an important consideration, especially for international firms

25. Copyright © 2006 Pearson Education Canada Inc. 2-25 The Socio-cultural Environment Conditions including the customs, values, attitudes, and demographic characteristics of the society in which an organization functions Customer preferences and tastes Vary across & within national boundaries Vary within the same country Change over time

26. Copyright © 2006 Pearson Education Canada Inc. 2-26 The Business Environment Three most serious issues facing Canadian business: Globalization/international competitiveness Taxation Productivity

27. Copyright © 2006 Pearson Education Canada Inc. 2-27 The Industry Environment Porter’s five forces model is used to analyze the competitive situation in an industry Rivalry among existing competitors Threat of potential entrants Suppliers Buyers Substitutes

28. Copyright © 2006 Pearson Education Canada Inc. 2-28 Redrawing Corporate Boundaries The most successful firms are getting leaner by focusing on their core competencies Core competencies The skills and resources with which an organization competes best and creates the most value for owners

29. Copyright © 2006 Pearson Education Canada Inc. 2-29 Emerging Challenges and Opportunities in the Business Environment Outsourcing Paying suppliers & distributors to perform certain business processes Vertical Integration Strategy of owning the means by which an organization produces goods or services

30. Copyright © 2006 Pearson Education Canada Inc. 2-30 Emerging Challenges and Opportunities in the Business Environment Viral marketing Using the internet and word-of-mouth marketing to spread product information Business process management Moving away from department-oriented organizations toward process-oriented teams