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Subject: Business Environment Centre of International Education

Lesson 1 Hong Kong College of Technology

Introduction to the business organisation and its environment

1. A model of business activity()

1.1) all business organisations are transformation systems which transform inputs intooutputs. ()

Inputs are the resources which flow into the production process in order to produceoutputs. ()Outputs are the goods or services or other results that derive from the production

process. ()Transformation system is a system by which inputs are converted into outputs.()

1.2) Business organisations are most commonly differentiated with respect to the size,type of product and/or market, methods of finance, scale of operations and legalstatus.(/)

ExampleNissan, for example, would be characterised as a major multinational car producerand distributor trading on world markets, while a local builder is likely to be seen as asmall business operating at a local level with a limited market and relatively restrictedturnover.

()

1.3) the most basic aim of a business organisation is to produce and sell output thatearns enough revenue to replenish their resources.()

1.4) there can be many interrelationships between business organisations. ForExample:(

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The output from one organisation may be an input for another.()

The input to one organisation may be the output for another.()

1.5) the approach to business that focuses on the transformation of inputs into outputsis called the systems approach()

2. The firm in its environment

()

External environment is the external context within which an organisation exists andoperates.()

There are two levels of business environment to an organization()

Immediate (or Operational) environment is the more immediate external influences onan organisation from its customers, competitors, suppliers and other stakeholder

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groups. ()

2.1) Operational factors have the greatest effect on day-to-day operations of a firm.()

2.2) Environmental analysing of functional activities (e.g. marketing) has two main benefits. ()

It emphasises the influence of external factors on activities within the firm.()

It emphasises that businesses are rarely able to control their externalenvironment. ()

3. The general or contextual environment

()

General (or Contextual) environment is the broad external context in which anorganisation exists and operates. It comprises the PESTLE factors.()PESTLE Analysis is the analysis of the business environment which focuses on the

political, economic, social, technological, legal and ethical influences on the firm.()

3.1) PESTLE factors represent political, economic, socio-cultural, technological, legaland ethical factors.()

Example3.2) a major change in business taxation levels will be put under economic and

political categories of PESTLE factors.()

3.3) Globalisation will be put under political and economic factors.

()

3.4) Development of electronic equipment such as the MP3 or iPod will be put undertechnological category.(MP3iPod)

3.5) Examples social and cultural environment; (:;)

Cultural factors may affect many factors relating to the sale of products.()

Both demand and supply are influenced by social and cultural factors

(

) People are a key organisational resource.

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()

3.6) A company decides that it will close its old factory because of concerns about theenvironmental impact. It is an example of Ethical category.(

)

3.7) Technology is both an input and an output of business organisations as well asbeing an environmental influence on them.()

4. The immediate or operational environment

()

4.1) Example: A company sources one of its main materials from a country on a

different continent. Possible changes in the exchange rate, affecting costs is the mainrisk associated with this resource aspect of the companys immediate environment.(A)

4.2) an organisations need for resources makes it particularly dependent on suppliers.()

4.3) A business must consider customers, competitors, suppliers and creditors whenplanning its future activities.()

4.4) Consumer sovereignty means that resources should be allocated to produceoutput to satisfy consumer demand.()

4.5) it is important to consider two factor when considering customers as part of the business environment. These factors are; 1. the factors affecting an individualsbuying habits and 2. Overall market behaviour.(12)

4.6) when considering competitors, a business should consider both domesticcompetitors and overseas competitors in addition to considering both the inputs andoutputs.()

5. Influences of Business Environments

()

Open system is a system in interaction with the external environment.()

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5.1) a business organisation is an open system which means that:()

The organisation is in constant interaction with its environment.()

The internal and external environments are interrelated and interdependent.()

5.2) the various external influences are often interrelated to each other on a business.()

5.3) if a business that decides to ignore changes in its external environment, it willlikely to experience significant decline.()

5.4) when considering the external environment, managers note particularly that theexternal environment is complex.()

5.5) When considering the environment, a manager should focus on the most pertinentand pressing factors rather than considering all possible contingencies.()

Environmental change is the predisposition of the business environment to undergochange rather than to remain static.

()

5.6) Environmental change causes greater uncertainty for the organisation; decisionmaking becomes more difficult; and analysis of the external environment becomesmore complicated.( ; ;)

5.7) every organisation operates to some extent in a unique environment.()

5.8) External influences operate at different spatial levels which means that levelsincluding local, regional, national and international.()

5.9) Business organisations are affected by influences outside their immediatemarkets. ()

5.10) the flow of influence between the organisation and its environment is two-way.()

5.11) all firms are affected by the environment in which they exist.

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()

5.12) Firms at times help to shape the environment in which they exist.()

Summary

In the process of transforming inputs into output, business organisations operate in amultifaceted environment which affects and is affected by their activities. Thisenvironment tends to be complex and volatile and comprises influences which are of

both a general and an immediate kind and which operate at different spatial levels.Understanding this environment and its effects on business operations is of vitalimportance to the study and practice of business.()

Key points

Business activity is essentially concerned with transforming inputs intooutputs for consumption purposes.()

All businesses operate within an external environment which shapes theiroperations and decisions.()

This environment comprises influences which are both operational andgeneral.

() The operational environment of business is concerned with such factors as

customers, suppliers, creditors and competitors.()

The general environment focuses on what are known as the PESTLE factors.()

In analysing a firms external environment attention needs to be paid to theinteraction between the different environmental variables, environmentalcomplexity, volatility and change and to the spatial influences.()

While all firms are affected by the environment in which they exist andoperate, at times they help to shape that environment by their activities and

behaviour.()

True/False Questions

Question 1.The term 'business' covers a wide variety of organisations.

( )True False

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Question 2.All business organisations produce goods or services.()

True False

Question 3.The outputs of one business may be the inputs of another business.()

True False

Question 4.Business activity essentially involves transforming inputs into outputs.()

True False

Question 5.All businesses have identical influences upon them.()

True False

Question 6.The consumption of a firm's output can provide resources to replenish its inputs.()

True False

Question 7.A firms external environment tends to be relatively simple and predictable.()

True False

Question 8.The environmental influences on a firm can be characterised as contextual oroperational. ()

True False

Question 9.Competitors are normally seen as part of a firm's general or contextual environment.()

True False

Question 10.A firms suppliers are normally seen as part of its operational environment.()

True False

Question 11.

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External factors often impinge upon a firm's internal operations and decisions.()

True False

Question 12.

Businesses are unable to influence any aspect of the external environment in whichthey exist and operate. ()

True False

Question 13.The external environment can affect all aspects of the transformation process.()

True False

Question 14.Consumption is the one part of the process not affected by external influences.()

True False

Question 15.The external influences on an organisation frequently interact.()

True False

Question 16.Environmental complexity is a feature of the modern business world.

(

)True False

Question 17.Small businesses are not subject to environmental change.()

True False

Question 18.The external influences on an organisation can operate at a variety of spatial levels.()

True False

Question 19.Each organisation tends to have a unique external environment.()

True False

Question 20.Studying the business environment will help us to predict environmental change witha high degree of certainty.()

True False

Case Study: General Motors

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Even the worlds largest and most powerful business organisations are affected by achanging business environment, a point well illustrated by the problems currently

being faced by General Motors (GM), the largest car company in the world. In thefirst quarter of 2005, GM reported losses of over $1 billion in North America and

subsequently announced its intention to close some of its plants and cut 25 000 jobsover the next three years from its North American operations. This plan follows in thewake of its jobcutting exercise in GM Europe which is ultimately expected to reduceits European workforce by around 12 000 jobs, most of them in Germany.(GM2005

100253

jobcutting12 000)

GMs decline in fortunes has been attributed to a number of important developments:a falling market share, problems with its product mix, rising raw material prices andthe soaring costs of providing healthcare for its US workers (see e.g. Guardian, 8 June2005, p.19). According to the companys Chief Executive, the latter was the mostchallenging problem facing the business, with the cost of the healthcare programmeestimated to account for around $1500 on the price of every vehicle sold.(862005p0.191500

)

By slimming down its operations and running its remaining plants at full capacity,GM is seeking to address some of the demand (i.e. sales) and supply side (i.e. costs)

problems it is experiencing. The company is also taking steps to make its offeringmore attractive to customers by increasing its spending on new vehicles and byimproving its marketing effort in the hope that this will arrest the decline in marketshare.

(

)As far as the healthcare programme is concerned, this is likely to prove more of anintractable problem for the organisations management, particularly as the unions arecurrently resisting any attempt to shift some of the burden on to the employees. It isworth noting that the burgeoning cost of healthcare provision is by no means uniqueto GM, but is one facing a large number of US corporations. Indeed, according tosome observers the healthcare burden faced by corporate America is so substantialthat it threatens not only the future prospects of individual businesses but also thelong-term strength of the American economy and its international competitiveness.(

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)

Case Study: Levi Strauss Jeans CompanyPlease fill the blanks by choosing appropriate words from below and answer the

question.

Levi Strauss is a (1)________ owned company based in San Francisco in the UnitedStates. For much of the latter half of the twentieth century its traditional blue riveted501 denim jeans worn originally by gold-miners and (2)________ had been theworlds favourite pair of trousers. As a global brand name the 501 was almost withoutequal and had been popularised by cult movie stars such as James Dean, MarilynMonroe and Marlon Brando. Its image had always been that of a sexy and(3)________ product worn by the rebellious; this had helped to make 501s popularwith people of all ages in all countries.

(

1)________

501 - 2)________ - 5013)________501s

As one of the last major American clothing companies to maintain a significant(4)________ base in the United States, Levi Strauss had been an importantcontributor to the US economy in symbolic as well as (5)________ terms. Itsannouncement in February 1999 that it was to close half of its North American plants

with the loss of around 6000 jobs (about one-third of its (6)________) represented ablow to an industry which had been in decline for some time in the face of overseas(7)________. Coming on the back of the 7500 jobs shed the previous year by thecompany, the new redundancies had a significant impact in those areas of the UnitedStates and Canada where Levi factories were located.

(4)________5)________19992 60006)________)

7)________. 7500

The turnaround in Levis fortunes provides a good illustration of how an evolving business (8)________ can impact on an organisation, particularly if it fails torecognise and respond to changing external circumstances. In this case the problemseems to be that the company was slow to recognise changes in fashion tastes; ineffect it appears to have taken its market for granted and forgotten about theimportance of the needs and wants of its (9)________, many of whom were switchingto alternative products such as combat, cargo and utility trousers. For those buyerswho still remained loyal to jeans, competition from imported Japanese products anddesigner brands such as Tommy Hilfiger and Calvin Klein had further eroded Levis

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formerly (10)________ position. In 1997, for example, Levi faced a 4 per cent cut insales; in 1998 this increased to 13 per cent.(8)________

9)________,Tommy HilfigerCalvin Klein10)________19974;199813

Press speculation at the time suggested that Levi might respond to the competitivechallenge by moving its manufacturing facilities (11)________ in order to reduce itscosts. (11)________

Subsequently, in September 2003 the decision was announced that the company wasto close its remaining manufacturing and finishing plants in North America as part ofa move away from its owned-and-operated manufacturing system. To remaincompetitive Levi Strauss felt it needed to focus its resources on product (12)________and development, sales, marketing and improving its retail customer relationships.Production from its North American plants was to be shifted to the companys globalsourcing (13)________.(2003912)________

13)________.

Competition () Design () Environment () Overseas ()

Cowboys () Dominant () Manufacturing () Privately ()

Customers () Economic () Network() Workforce()

Youthful

Question: To what extent do you think that moving its manufacturing overseas would

help to solve Levis problems?()

Case Study: September 11

For the most part changes in a firms (or industrys or sectors) external environmenttend to be relatively predictable and this can aid business planning. Economicindicators, for example, usually signal the onset of a recession (or recovery) well

before it occurs and this provides businesses with time to consider not only how theyare likely to be affected by economic change, but also what steps they can take to

minimise any potential threat to the organisation (or maximise any opportunity). Onoccasions, however, the business environment can change dramatically and

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unexpectedly for the worse, leaving some firms to face rapidly deteriorating tradingconditions often without any contingency plans in place.(

)

Such a situation occurred on Tuesday 11 September 2001 when terrorist attacks onthe World Trade Center and the US Department of Defense rapidly sent shock wavesthrough the global economic system, engulfing a wide range of firms and industries inall countries. The most immediate and obvious manifestation of the crisis was seen inthe airline industry where the major airline operators suddenly found people unwillingto fly, thereby significantly exacerbating the problems already being experienced as aresult of increased competition and recession in some of their markets. In the UnitedStates carriers such as United, Delta and Continental announced tens of thousands ofredundancies and further job losses were announced by British Airways, Virgin andAir Canada. Elsewhere in Europe both Swissair and Sabena went into receivershipand other operators signalled a period of retrenchment.(2001911

)

The knock-on effect of the reduction in air travel also impacted on two alliedindustries: aircraft manufacturing and tourism. Again this found expression in fallingdemand and the inevitable loss of jobs. Companies such as Airbus Industrie, Boeingand Bombardier slimmed down their workforces and additional job losses occurred insupplier organisations including Rolls-Royce and in travel, tourism and alliedindustries such as hotels, catering and car hire. For a company such as Disney, forinstance, the impact on visitor numbers at its theme parks in America and Europe wasimmediately felt and numerous other organisations and holiday destinations rapidly

experienced the effect of the decline in overseas tourists in the immediate aftermath ofthe attack.()

While it was suggested at the time by a number of observers that some businessesmight have been taking advantage of the crisis to slim down their workforces, there

seems little doubt that the attack had a significant economic as well as human andpsychological impact. Mercifully such shocks to the system tend to be few and far

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between and even when they occur some enterprising firms will find they provideunexpected business opportunities.(

)

Case study questions

1. Can you think of any other examples of major unanticipated events in your owncountry that have had a serious adverse effect on businesses?()

2. Can you think of any businesses which may have benefited commercially from theevents of September 11?(911?)

Lecturer Name: Dr Abid Nadeem

Email: [email protected]

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