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CHAPTER 2
Understanding the
Environments of Business
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
2-2
Chapter Outline
Organizational Boundaries & Environments
The Economic Environment
The Technological Environment
The Political-Legal Environment
The Socio-cultural Environment
The Business Environment
Redrawing of Corporate Boundaries
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
2-3
Organizational Boundaries
& Environments
External Environment
Factors beyond an organization’s boundaries
Organizational Boundary
That which separates the organization
from its environment
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
2-4
Dimensions of the External Environment
Economic environment
Technological environment
Sociocultural environment
Business environment
Global environment
Political-Legal environment
Emerging challenges and opportunities
 Outsourcing
 Viral marketing
 Business Process Management
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
2-5
The Economic Environment
The conditions of the economic system in which
an organization operates
Key economic goals:
Economic Growth
Aggregate Output & Standard of Living
Gross Domestic Product
Productivity
Balance of Trade
National Debt
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
2-6
The Economic Environment
Economic Stability
Inflation
Measuring Inflation: The CPI
 Full Employment
Low unemployment
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
2-7
Economic Growth
Business cycle
The typical pattern of short-term
ups and downs in an economy
(peak, recession, trough and recovery)
Recession = a period during which aggregate
output declines
Depression = severe and prolonged recession
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
2-8
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
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
2-9
Measuring Economic Growth
Gross Domestic Product (GDP)
 value of all goods & services
produced by a national economy
within a given period
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
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
2-10
Measuring Economic Growth
Real Growth Rates
 Adjust for inflation & currency fluctuations
GDP per Capita
Real GDP
Purchasing Power Parity
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
2-11
Measuring Economic Growth
Productivity: measure of economic growth that compares
production with the resources required
 Increases in productivity = increases in standard of living
 Growth reflected in real GDP growth
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
2-12
Measuring Economic Growth
Balance of Trade
 Value of all exported products minus the value of
imported products
 Positive balance = more exports = economic growth
National Debt
 Amount of money that a
government owes its creditors
 Increases by amount of budget deficit
 Can decrease when have budget surplus
 Lower debt = more $ for private investment
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
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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
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
2-14
Inflation
Inflation
 widespread price increases in an economic system
Consumer Price Index (CPI)
 Measures the changes in prices of typical products
purchased by consumers
Deflation
 A period of generally
falling prices
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
2-15
When Did the Cost of a Hamburger Go Up?
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
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Unemployment
Level of joblessness among people actively
seeking work in an economic system
Types of Unemployment
Frictional
Seasonal
Cyclical
Structural
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
2-17
Managing the Canadian Economy
Fiscal policies
 determine how the government collects
and spends its revenues
Monetary policies
 determine the size of a nation’s monetary supply
 High interest rates = tight monetary policy
 Low interest rates = easy monetary policy
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
2-18
Managing the Canadian Economy
Stabilization Policy
Using fiscal & monetary policies
to stabilize prices and to smooth out
fluctuations in output and unemployment
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
2-19
The Technological Environment
Technology:
All the ways firms create value for their
constituents
Knowledge, methods, equipment, systems, etc.
Research and Development (R & D)
Basic (pure)
Applied
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
2-20
The Technological Environment
Product and Service Technologies
 Technologies employed for creating
products—both physical goods and
services—for customers
 R&D intensity = % of sales spent on R&D
 Technology Transfer = getting new technology out of lab
and into the marketplace
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
2-21
Process Technologies
Enterprise Resource Planning (ERP)
 a large-scale information system for organizing
and managing a firm’s processes across product
lines, departments and geographic locations
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
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ERP Applications
Human Resources
 Benefits
 Payroll
Data Analysis
 Product costs
 Job costs
Sales and Marketing
 Sales orders
 Pricing system
Customer Service
 Field service
 Quality
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
2-23
ERP Applications
Supply-Chain Management
 Forecasting
 Purchasing
 Distribution
Accounting and Finance
 Accounts payable and receivable
 Asset management
Manufacturing
 Material requirements planning
 Scheduling
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
2-24
The Political-Legal Environment
Reflects the relationship between
business & government, e.g. regulations
Pro- or anti-business sentiment
Canadian government has put a halt to bank mergers
Political stability
International relations
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
2-25
The Socio-Cultural Environment
Customs, values, attitudes & 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
 affects job significance
Ethical Compliance and Responsible Behaviour
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
2-26
The Business 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
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
2-27
Emerging Challenges and Opportunities in
the Business Environment
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
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
2-28
Emerging Challenges and Opportunities
in the Business Environment
Outsourcing
 paying suppliers & distributors to perform certain
business processes
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
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
2-29
Redrawing Corporate Boundaries
Acquisitions and Mergers
 Horizontal, vertical or conglomerate mergers
 Friendly or hostile takeovers
 Poison pill defence against hostile takeover
Divestitures and Spinoffs
 Selling part of existing business or setting it up as a
new corporation
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada
2-30
Redrawing Corporate Boundaries
Employee-Owned Corporations
 Employee stock ownership programs (ESOPs)
Strategic Alliances
 Two or more companies temporarily join forces
Subsidiary and Parent Corporations
 Parent corporations own subsidiary corporations
Business, Sixth Canadian Edition, by Griffin, Ebert, and Starke
Copyright © 2008 Pearson Education Canada