1. Chapter 1 The Environment of Business

2. Key Contents Business Business Environment Political / legal Economic
Technological
Social / cultural
International

3. Business The organization: The process:
A group of people, with common purpose
Providing goods and services
to satisfy customer requirements
in order to maximize profit
An enterprise, commercial entity, or firm in either the private or the public sector, concerned with providing products or services to satisfy customer requirements.
The process:
The organized effort of individuals to produce and sell, for profit, the products and services that satisfy society’s needs.

4. The Organized Effort of Individuals
3-Satisfying Customer Needs
2-Providing Goods and Services
1-Combining Resources

5. Satisfying Needs
People buy goods and services not just to own them, but to satisfy particular needs
Businesses that understand customer needs, and work to satisfy those needs, are usually successful

6. Business The goal: Satisfying customer needs
The means: Providing goods and services
Process: production (operations)
manufacture, process, assemble, create, ……
Factors of production (Inputs: Resources )
(N, L, K, E)
Land and Natural resources
Labor
Capital
Entrepreneurship
A person who risks time, effort, and money to start and operate a business
Outputs: Goods and services (marketing & logistics)
sales, promotion, distribution, services, …

7. Business Profit The purposes of profit Stakeholders
To reward business owners for producing goods and services consumers want
As payment for business owners assuming the risks of ownership
Stakeholders
All of the different people or groups or people who are affected by the policies and decisions made by an organization

8. The Relationship Between Sales Revenue and Profit
Profit is what remains after all business expenses have been deducted from sales revenue. A loss (negative profit) results when a firm’s expenses are greater than its revenues.

9. The Goal Maximize Profit by satisfying customer requirement
Profit: revenues – costs
Revenues: sales volume x price
Costs:
costs of goods sold (COGS);
Inputs: Resources (L, K, N, E) (logistics)
Purchase/procurement/sourcing, transportation, warehousing, handling, ……
Expenses:
selling, general, administrative, depreciations, …

10. Business: activities
purchase, sale , lease, and rental of personal or real property;
Manufacturing, processing, and/or marketing of products, commodities, or any other personal property;
sale of services to the public;
the activities of providing goods and services

11. Business Functions/Subjects
Purchase/procurement/
sourcing
Warehousing
Handling
Transportation
Operations
Sales/promotion
Distribution
After sale services
Management
Human Resources
Finance
Production
Marketing
Logistics
Accounting
International
E-commerce

12. Business: setup & run Forms of Business Ownership
Organization Structure and Behavior
Human Resources
Finance
Production
Marketing
Logistics
Accounting
International
Business Environment: legal, social, cultural

13. Business Environment Social / cultural Technological Economic
Current standards and future trend of industry specific technology
Economic
Political / legal
International

14. Social and Cultural Social structure Values and traditions
Beliefs and religions
Life styles and purchase habits
Others

15. Political / Legal
Political Stability (government, racial conflicts, terrorists, …)
Political System (democracy, human rights, …)
Laws and Regulations toward Business (in general, to specific industries, …)
Legal system (procedures, efficiency, favorability, …)
others

16. Economic Economics Economic System Economic Performance (macro)
Industry specific environment (micro)

17. Economics
Economy
The system through which a society creates and distributes wealth
Economics
The study of how wealth (anything of value) is created and distributed
Microeconomics
The study of the decisions made by individuals and businesses
Macroeconomics
The study of the national economy and the global economy

18. Basic Economic Questions to Answer:
Economic Systems
Basic Economic Questions to Answer:
(What? How? For Whom? Who?)
What goods and services will be produced?
How will they be produced?
For whom will they be produced?
Who owns and controls the major factors of production?
Market Economy (Capitalism)
Planned (Command) Economy (Socialism and Communism)
Mixed Economy (private and public)

19. Market Economy (Capitalism)
An economic system in which individuals own and operate the majority of businesses that provide goods and services
Derived from Adam Smith’s laissez-faire capitalism in which a society’s best interests are served by individuals pursuing their own self-interest (the invisible hand)

20. Free Capitalism
Creation of wealth is the concern of private individuals
Resources used to create wealth must be privately owned
Economic freedom ensures the existence of a free market economy
Businesses and individuals decide what to produce and buy; the market determines quantities sold and prices
Limited role of government

21. Basic Assumptions for Adam Smith’s Laissez-Faire Capitalism
Insert Figure 1.3, p. XX

22. Planned Economy (Socialism)
Key industries (e.g., transportation, utilities, and banking) are owned and controlled by the government
Small-scale private businesses may be permitted and workers may choose their own occupations
Production is based on national goals, and distribution is controlled by the state
Intent is the equitable distribution of income, elimination of poverty, social services to all who need them, elimination of the economic waste of capitalistic competition

23. Command Economy (Communism)
All factors of production are owned and controlled by the government as proxy for ownership by all citizens
Production is based on centralized state planning to meet the needs of the state and not necessarily the needs of its citizens
The state dictates occupational choices and sets prices and wages
Intent is to create Karl Marx’s concept of a classless society where all contribute according to their ability and receive benefits according to their needs.

24. Mixed Economy with elements of capitalism and socialism
Households (private)
Consumers of goods and services
Resource owners of some factors of production
Businesses (partly private, partly public)
Produce goods and services to exchange for revenues (money)
Use revenues to purchase factors of production
Governments (public)
In exchange for taxes, governments provide public services that would not be provided by business or would be produced only for those who could afford them

25. The Circular Flow in Mixed Economy

26. Debate Issue: Should There Be Less Government Involvement?
YES
Today, there are too many government controls that inhibit business owners.
The added costs of adhering to government regulations are passed on to consumers in the form of higher prices.
There is no need for all the government rules and regulations because business owners are socially responsible. NO
Without adequate government controls, business would take advantage of consumers.
While government rules and regulations cost money, the added safety and protection are well worth the money.
While the majority of business owners may be socially responsible, there are some who need the encouragement provided by government regulations.

27. The Proper Role of Government
Major economic entity?
Administrative authority?
Service provider?

28. Measuring Economic Performance
Productivity
The average level of output per worker per hour
May change with capital input and technology
Economic growth:
aggregate output, GDP, standard of living
Economic health:
Economic Stability:
business cycle, inflation, unemployment

29. Economic Growth Gross domestic product (GDP) National income
The total value of all goods and services produced by all people within the boundaries of a country during a one-year period
National income
The total income earned by various segments of the population, including employees, self-employed individuals, corporations, and other type of income

30. GDP in Current and Inflation-Adjusted Dollars
Source: U.S. Bureau of Economic Analysis website at accessed September 14, 2008. .

31. Consumer Price Index 1982 – 1984 = 100 172.2 +3.4% 177.1 +2.8% 179.9
Year
Annual Average
Percent Change
2000
172.2
+3.4%
2001
177.1
+2.8%
2002
179.9
+1.6%
2003
184.0
+2.3%
2004
188.9
+2.7%
2005
195.3
2006
201.6
+3.2%
2007
207.3
2008
215.4
+3.8%
Source: Bureau of Labor Statistics, ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt, accessed February 17, 2009.

32. Measuring Economic Health
Inflation rate
An economic statistic that tracks the increase in prices of goods and services over a period of time; usually calculated on a monthly or annual basis
Prime interest rate
The lowest interest rate that banks charge their most creditworthy customers
Productivity rate
An economic measure that tracks the increase and decrease in the average level of output per worker

33. Measuring Economic Health (cont’d)
Unemployment rate
The percentage of a nation’s labor force unemployed at any time
Unemployment
Unemployed:
in the labor force;
actively looking for a job and do not have one

34. Measuring Economic Health (cont’d)
New housing starts
The total number of new homes started during a specific time period.
Bank credit
A statistics that measures the lending activity of commercial financial institutions
Corporate profits
The total amount of profits made by corporations over selected time periods
Balance of trade
The total value of a nation’s exports minus the total value of its imports over a specific period of time

35. The Business Cycle
The recurrence of periods of growth and recession in a nation’s economic activity
Recession – depression - recovery - expansion
Recession: two consecutive three-month periods of decline in a country’s gross domestic product
Depression: a severe recession that lasts longer than a recession

36. The Business Cycle (cont’d)
Monetary policies
Federal Reserve decisions that determine the size of the supply of money in the nation and the level of interest rates Fiscal policy
Government influence on the amount of savings and expenditures; accomplished by altering the tax structure and by changing the levels of government spending
Federal deficit
A shortfall created when the federal government spends more in a fiscal year than it receives
National debt
The total of all federal deficits

37. Types of Competition
Rivalry among businesses for sales to potential customers
Perfect (or pure) competition
Monopolistic competition
Oligopoly
Monopoly

38. Perfect (or pure) competition
The market situation in which there are many buyers and sellers of a product, and no single buyer or seller is powerful enough to affect the price of that product
Supply: The quantity of a product that producers are willing to sell at each of various prices
Demand: The quantity of a product that buyers are willing to purchase at each of various prices
Market Price (Equilibrium): The price at which the quantity demanded is exactly equal to the quantity supplied

39. Monopolistic competition
A market situation where there are many buyers along with a relatively larger number of sellers who differentiate their products from the products of competitors
Product differentiation
The process of developing and promoting differences between one’s products and all similar products

40. Oligopoly
A market situation (or industry) in which there are few sellers
E.g., automobile manufacturers, car rental agencies, and farm implement industries
Sizable investments are required to enter into the market
Each seller has considerable control over price
The market actions of one seller can have a strong effect on competitors

41. Monopoly A market (or industry) with only one seller Natural monopoly
An industry requiring huge investments in capital and within which duplication of facilities would be wasteful and thus not in the public interest
Legal monopoly (limited monopoly)
A monopoly created when the federal government issues a copyright, patent, or trademark protecting the owners of written materials, ideas, or product brands from unauthorized use by competitors