Chapter 1: the global business environment
1978: China from government in the form of the Chinese Communist Party toward a more
(as China calls it) socialist market economy.
While building a business:
Political, technological, cultural and economic forces → challenges. All businesses are
subject to the influences of economic forces. But these economic forces also provide astute
managers and entrepreneurs with opportunities for profits and growth. Understanding
economic forces → Understanding:
1. How managers must contend with challenges and opportunities.
2. Why prices fluctuate from the perspective of a consumer.
Some experts estimate that right now the US accounts for about half of total world
consumption of goods and services, with only 5% of the world population.
Challenge of this generation's business people: to find the socio-economic balance between
global demand and supply.
Business = organization that provides goods and services to earn profits.
Profits = difference between a business revenue and its expenses.
Profits are rewards for risking money and time.
A business must take into account what consumers want or need. Business opportunity
involves goods or services that consumers want or need - especially if no one else is
supplying them or if existing businesses are doing so inefficiently or incompletely.
Businesses:
- Produce most goods/services we consume.
- Employ most of the working people.
- Create most innovations.
- Provide a vast range of opportunities for new businesses, which serve as their
suppliers.
- (Healthy business) Contributes to quality of life and standard of living of people in
society.
- Profits enhance personal incomes of owners and stockholders.
- Taxes help support governments.
External environments
External environment = everything outside an organization’s boundaries that might affect it.
Managers must have an accurate understanding of their environment and then strive to
operate and compete within it. Businesses can also influence their environments.
- Political-legal environment = the relationship between business and government,
usually in the forms of government regulation of business.
- Economic environment = relevant conditions that exist in the economic system in
which a company operates.
, - Global business environment = the international forces that affect a business.
Examples: intern trade agreements, intern economic conditions, political unrest.
- Domestic business environment = the environment in which a firm conducts its
operations and derives its revenues.
- Technological environment = all the ways by which firms create value for their
customers. Technology includes: human knowledge, work methods, physical
equipment, electronic, telecommunications, and processing systems.
- Socio-cultural environment = the customs, mores, values, and demographic
characteristics of the society in which an organization functions. Standard for the
business conduct.
B (benefit) corporations are businesses - each is an organization that seeks to earn profits -
but performance is measured not only by profits or growth in stock price but also by the
organization’s impact on society and the environment.
Factors of production
Economic system = a nation’s system for allocating its resources among its citizens → a
basic difference between economic systems is the way in which a system manages its
factors of production.
Factors of production = resources used in the production of goods and services.
1. Labor (human resources) = physical and mental capabilities of people as they
contribute to economic production.
2. Capital = funds needed to create and operate a business enterprise. Financial
resources to operate a business.
3. Entrepreneurs = individuals who accept the risks and opportunities involved in
creating and operating a new business venture.
4. Physical resources = tangible items that organizations use in the conduct of their
businesses. For example: raw materials, offices, storage, production facilities.
5. Information resources = data and other information used by businesses.
Types of economic systems
- Planned economy = economy that relies on a centralized government to control all or
most factors of production and to make all or most production and allocation
decisions. Communism (= political system in which the government owns and
operates all factors of production. North-Korea, Vietnam, Laos, Cuba and the
People’s Republic of China are still comunistic. China is more of a mixed market
economy) and socialism.
- Market economy = economy in which individuals control production and allocation
decisions through demand and supply. Capitalism, free enterprise to create
environments in which producers-consumers are free to sell and buy what they
choose → items produced + prices paid are largely determined by supply and
demand.
- Mixed market economy = economic system featuring characteristics of both planned
and market economies.
,Market = mechanism for exchange between buyers and sellers of a particular good or
service.
Capitalism = system that sanctions the private ownership of the factor of production and
encourages entrepreneurship by offering profits as an incentive.
Privatization = process of converting government enterprises into privately owned
companies → reduces payroll, boosted efficiency, boosted productivity, and became
profitable.
Socialism = planned economic system in which the government owns and operates only
selected major sources of production.
Demand and supply
Demand = the willingness and ability of buyers to purchase a good/service.
Supply = willingness and ability of producers to offer a good/service for sale.
The law of demand → buyers will purchase/demand more of a product as its price drops and
less of a product as its price increases.
The law of supply → producers will offer/supply more of a product for sale as its price rises
and less as its price drops.
Demand and supply schedule = assessment of the relationships among different levels of
demand and supply at different price levels.
Demand curve → graph showing how many units of a product will be disbanded/bought at
different prices.
Supply curve → graph showing how many units of a product will be supplied/offered for sale
at different prices.
Market/equilibrium price = price suppliers can charge is the same as the price that a max
number of customers is willing to pay. Quantity of goods demanded = quantity of goods
supplied.
Surplus = situation in which quantity supplied exceeds quantity demanded (overschot).
Shortage = situation in which quantity demanded exceeds quantity supplied (tekort0
Private enterprise and competition in a market economy
Private enterprise = economic system that allows individuals to pursue their own interests
without undue governmental restriction.
1. Private property rights = ownership of the resources in the hands of individuals.
2. Freedom of choice = you can sell your labor to any employee you choose, choose
which products to buy.
3. Profits = the lure profits leads some people to abandon the security of working for
someone else and to assume the risks of entrepreneurship.
4. Competition = vying among businesses for the same resources or customers.
Degrees of competition:
1. Perfect competition = market or industry characterized by numerous small firms
producing an identical product.
, 2. Monopolistic competition = market/industry characterized by numerous buyers and
relatively numerous sellers from those of competitors that are trying to differentiate
their products. Different strategies: brand names, design/styling, ads.
3. Oligopoly = market/industry characterized by a handful of (generally large) sellers
with the power to influence the prices of their products.
4. Monopoly = market/industry in which there is only one producer that can therefore set
the prices of its products. Natural monopoly = industry in which one company can
most efficiently supply all needed goods or services.
Perfect competition Monopolistic Oligopoly Monopoly
competition
All firms in an Fewer sellers than Fewer competitors. No other
industry must be in pure competition. competitors.
small.
Number of firms in
the industry must be
large (no single firm
powerful enough to
influence the price
of the product).
Products so similar
that buyers see
them as identical to
other firms.
Easy to enter/leave Easy to enter/leave Entry market is hard Entry regulated by
the market the markert. because of the large the government.
capital investment
that is needed.
Prices set by Some influence over
demand + supply the prices.
and accepted by
sellers + buyers.
Transparent:
everyone knows
prices of selling and
receiving/paying.
Economic indicators
Economic indicators = statistics that help assess the performance of an economy.
Business cycle = short-term pattern of economic expansions and contractions. Primary
measure of growth in the business cycle → aggregate output.
Aggregate output = the total quantity of goods and services produced by an economic
system during a given period. Simple: an increase in aggregate output is growth.
1. Output per capita → quantity of goods/services goes up.
2. The system provides more of the goods and services that people want.
1978: China from government in the form of the Chinese Communist Party toward a more
(as China calls it) socialist market economy.
While building a business:
Political, technological, cultural and economic forces → challenges. All businesses are
subject to the influences of economic forces. But these economic forces also provide astute
managers and entrepreneurs with opportunities for profits and growth. Understanding
economic forces → Understanding:
1. How managers must contend with challenges and opportunities.
2. Why prices fluctuate from the perspective of a consumer.
Some experts estimate that right now the US accounts for about half of total world
consumption of goods and services, with only 5% of the world population.
Challenge of this generation's business people: to find the socio-economic balance between
global demand and supply.
Business = organization that provides goods and services to earn profits.
Profits = difference between a business revenue and its expenses.
Profits are rewards for risking money and time.
A business must take into account what consumers want or need. Business opportunity
involves goods or services that consumers want or need - especially if no one else is
supplying them or if existing businesses are doing so inefficiently or incompletely.
Businesses:
- Produce most goods/services we consume.
- Employ most of the working people.
- Create most innovations.
- Provide a vast range of opportunities for new businesses, which serve as their
suppliers.
- (Healthy business) Contributes to quality of life and standard of living of people in
society.
- Profits enhance personal incomes of owners and stockholders.
- Taxes help support governments.
External environments
External environment = everything outside an organization’s boundaries that might affect it.
Managers must have an accurate understanding of their environment and then strive to
operate and compete within it. Businesses can also influence their environments.
- Political-legal environment = the relationship between business and government,
usually in the forms of government regulation of business.
- Economic environment = relevant conditions that exist in the economic system in
which a company operates.
, - Global business environment = the international forces that affect a business.
Examples: intern trade agreements, intern economic conditions, political unrest.
- Domestic business environment = the environment in which a firm conducts its
operations and derives its revenues.
- Technological environment = all the ways by which firms create value for their
customers. Technology includes: human knowledge, work methods, physical
equipment, electronic, telecommunications, and processing systems.
- Socio-cultural environment = the customs, mores, values, and demographic
characteristics of the society in which an organization functions. Standard for the
business conduct.
B (benefit) corporations are businesses - each is an organization that seeks to earn profits -
but performance is measured not only by profits or growth in stock price but also by the
organization’s impact on society and the environment.
Factors of production
Economic system = a nation’s system for allocating its resources among its citizens → a
basic difference between economic systems is the way in which a system manages its
factors of production.
Factors of production = resources used in the production of goods and services.
1. Labor (human resources) = physical and mental capabilities of people as they
contribute to economic production.
2. Capital = funds needed to create and operate a business enterprise. Financial
resources to operate a business.
3. Entrepreneurs = individuals who accept the risks and opportunities involved in
creating and operating a new business venture.
4. Physical resources = tangible items that organizations use in the conduct of their
businesses. For example: raw materials, offices, storage, production facilities.
5. Information resources = data and other information used by businesses.
Types of economic systems
- Planned economy = economy that relies on a centralized government to control all or
most factors of production and to make all or most production and allocation
decisions. Communism (= political system in which the government owns and
operates all factors of production. North-Korea, Vietnam, Laos, Cuba and the
People’s Republic of China are still comunistic. China is more of a mixed market
economy) and socialism.
- Market economy = economy in which individuals control production and allocation
decisions through demand and supply. Capitalism, free enterprise to create
environments in which producers-consumers are free to sell and buy what they
choose → items produced + prices paid are largely determined by supply and
demand.
- Mixed market economy = economic system featuring characteristics of both planned
and market economies.
,Market = mechanism for exchange between buyers and sellers of a particular good or
service.
Capitalism = system that sanctions the private ownership of the factor of production and
encourages entrepreneurship by offering profits as an incentive.
Privatization = process of converting government enterprises into privately owned
companies → reduces payroll, boosted efficiency, boosted productivity, and became
profitable.
Socialism = planned economic system in which the government owns and operates only
selected major sources of production.
Demand and supply
Demand = the willingness and ability of buyers to purchase a good/service.
Supply = willingness and ability of producers to offer a good/service for sale.
The law of demand → buyers will purchase/demand more of a product as its price drops and
less of a product as its price increases.
The law of supply → producers will offer/supply more of a product for sale as its price rises
and less as its price drops.
Demand and supply schedule = assessment of the relationships among different levels of
demand and supply at different price levels.
Demand curve → graph showing how many units of a product will be disbanded/bought at
different prices.
Supply curve → graph showing how many units of a product will be supplied/offered for sale
at different prices.
Market/equilibrium price = price suppliers can charge is the same as the price that a max
number of customers is willing to pay. Quantity of goods demanded = quantity of goods
supplied.
Surplus = situation in which quantity supplied exceeds quantity demanded (overschot).
Shortage = situation in which quantity demanded exceeds quantity supplied (tekort0
Private enterprise and competition in a market economy
Private enterprise = economic system that allows individuals to pursue their own interests
without undue governmental restriction.
1. Private property rights = ownership of the resources in the hands of individuals.
2. Freedom of choice = you can sell your labor to any employee you choose, choose
which products to buy.
3. Profits = the lure profits leads some people to abandon the security of working for
someone else and to assume the risks of entrepreneurship.
4. Competition = vying among businesses for the same resources or customers.
Degrees of competition:
1. Perfect competition = market or industry characterized by numerous small firms
producing an identical product.
, 2. Monopolistic competition = market/industry characterized by numerous buyers and
relatively numerous sellers from those of competitors that are trying to differentiate
their products. Different strategies: brand names, design/styling, ads.
3. Oligopoly = market/industry characterized by a handful of (generally large) sellers
with the power to influence the prices of their products.
4. Monopoly = market/industry in which there is only one producer that can therefore set
the prices of its products. Natural monopoly = industry in which one company can
most efficiently supply all needed goods or services.
Perfect competition Monopolistic Oligopoly Monopoly
competition
All firms in an Fewer sellers than Fewer competitors. No other
industry must be in pure competition. competitors.
small.
Number of firms in
the industry must be
large (no single firm
powerful enough to
influence the price
of the product).
Products so similar
that buyers see
them as identical to
other firms.
Easy to enter/leave Easy to enter/leave Entry market is hard Entry regulated by
the market the markert. because of the large the government.
capital investment
that is needed.
Prices set by Some influence over
demand + supply the prices.
and accepted by
sellers + buyers.
Transparent:
everyone knows
prices of selling and
receiving/paying.
Economic indicators
Economic indicators = statistics that help assess the performance of an economy.
Business cycle = short-term pattern of economic expansions and contractions. Primary
measure of growth in the business cycle → aggregate output.
Aggregate output = the total quantity of goods and services produced by an economic
system during a given period. Simple: an increase in aggregate output is growth.
1. Output per capita → quantity of goods/services goes up.
2. The system provides more of the goods and services that people want.
