Ebook The business environment (fifth edition): Part 1

Ebook The business environment (fifth edition): Part 1 presents the following content: Chapter 1 business organisations: the external environment; chapter 2 business organisations: the internal environment; chapter 3 the political environment; chapter 4 the macroeconomic environment; chapter 5 the demographic, social and cultural context of business; chapter 6 the resource context; chapter 7 the legal environment.

The Business Environment

fifth edition

Additional student support at

Additional student support at

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Key Features

 Learn about the latest issues in business: technology

and e-business, corporate responsibility, and

socio-cultural influences

 Apply theory to practice through diverse cases and

examples, such as Amazon, Toyota and the mobile

phone market

 Study online! Test your knowledge through self-assessment

questions, and find useful weblinks at

www.pearsoned.co.uk/worthington

What roles do culture, diversity and ethics play in the dynamic world of business

organisation? What are the impacts of globalisation, social and technological change on

business decisions?

Using well-known examples and case studies from the public and private sectors, this fifth

edition of The Business Environment addresses these key questions and many more.

Encouraging students to consider the challenges and opportunities that managers face in the

business environment, it provides a strong basis from which to build an overall understanding of

the context of business.

ISBN 0-273-70424-9

9 780273 704249

www.pearson-books.com

Ian Worthington is a Reader and Chris Britton a Principal

Lecturer in the Department of Strategy and Management at

Leicester Business School, De Montfort University.

fifth edition

The Business Environment

The Business Environment

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fifth edition

Ian Worthington and Chris Britton

Leicester Business School, De Monfort University, Leicester

The Business Environment

Pearson Education Limited

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Essex CM20 2JE

United Kingdom

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Full contents ix

1 Business organisations: the external environment 3

2 Business organisations: the internal environment 18

3 The political environment 41

4 The macroeconomic environment 80

5 The demographic, social and cultural context of business 120

9 Size structure of firms 231

11 Government and business 289

14 International markets and globalisation 367

15 Governments and markets 402

16 The technological environment: e-business 431

17 Corporate responsibility and the environment 447

Brief contents

Contributors xviii

1 Business organisations: the external environment 3

The immediate or operational environment 9

Mini case: Levi Strauss: jean therapy? 10

Case study: A shock to the system 15

2 Business organisations: the internal environment 18

Ian Worthington and Zena Cumberpatch

Approaches to organisation and management 19

Mini case: Change at Deutsche Bank? 23

Contents

Part One INTRODUCTION

The virtual organisation 29

Case study: Structuring global companies 36

Mini case: Action on the environment 50The three branches or functions of government 52

Mini case: Supranational lobbying 54

Appendix 3.1: A democratic political system in action:

Appendix 3.2: Subnational government: UK local authorities 68Appendix 3.3: Supranational government: the European Union 71

Case study: Left out in the cold 77

Mini case: Global economic crisis 96Government and the macroeconomy: objectives 97

Mini case: Indicators of success 103Government and the macroeconomy: policies 104The role of financial institutions 109International economic institutions and organisations 111

The demographic environment of business 121

Case study: The effects of an ageing population 138

xiContents

Notes and references 170

Diane Belfitt and Martin Taylor

Mini case: Jean-Marc Bosman – a case of foul play? 178Business organisations and the law 179

Case study: The sale of goods and the Internet 191

Private sector organisations in the UK 200

Mini case: Daimler-Benz under pressure 206Public sector business organisations in the UK 209Business organisations in mainland Europe 212The public sector in mainland Europe 216Legal structure: some implications 217

Franchising, licensing and joint ventures 222

Case study: The entrepreneurial spirit 226

Part Three FIRMS

Mini case: The life cycle model 274

Case study: Spending on leisure services 283

Appendix 10.1: The Standard Industrial Classification (SIC), 2003 288

Regional policy 291Regional aid within the European Union 294

Mini case: Attracting foreign inward investment 296

More recent developments in urban policy 301Local government and business in the UK 302Business as an influence on government 303

Case study: Government and business – friend or foe? 310

Case study: The Common Agricultural Policy of the European Union 335

Part Four MARKETS

Introduction 342Market structures – in theory and practice 343

Mini case: Price wars in the market for milk 348

Measuring the degree of actual competition in the market 356

Case study: A Porter’s five-force analysis of the market for mobile phones 361

Mini case: The World Trade talks 370

The history of the balance of payments in the United Kingdom 377

Mini case: The current account of the balance of payments 379

Case study: Multinationals and FDI 398

Government and the labour market 420

Case study: The end of the block exemption 425

Business applications 1: business-to-business (B2B) commerce 434

Business applications 2: business-to-consumer (B2C) commerce 439

Mini case: Body Shop values report 460The benefits to business from the implementation of environmental

Corporate responsibility without intervention? 463

Case study: The Braer oil tanker disaster 465

Part Five ISSUES

Analysing the business environment: broad approaches 474

Mini case: Multinational inward investment: a PESTLE analysis 475

Case study: Scanning the environment: East Midlands Electricity Plc 491

Visit www.pearsoned.co.uk/worthington to find valuable online resources

Companion Website for students

 Self-test questions for every chapter

 Links to articles and resources on the Internet

 Searchable online glossary

For instructors

 Complete, downloadable Instructor’s Manual

 Suggested answers to case study questions

 PowerPoint slides that can be downloaded and used as OHTs

 Testbank of question material

Also: The Companion Website provides the following features:

 Search tool to help locate specific items of content

 E-mail results and profile tools to send results of quizzes to instructors

 Online help and support to assist with website usage and troubleshootingFor more information please contact your local Pearson Education sales repre-

sentative or visit www.pearsoned.co.uk/worthington

AuthorsIan Worthington, BA (Hons), PhD, is a Reader in Corporate Social Responsibility inthe Department of Strategy and Management, Leicester Business School, DeMontfort University, where he specialises in business environment and greeningbusiness He has published both in Britain and the USA and is co-author of a recentbook on economics.

Chris Britton, BA (Hons), MSc, is Principal Lecturer in the Department of Strategyand Management, Leicester Business School, De Montfort University Her teachingand research interests lie in the field of industrial economics and labour markets,where she has contributed to several publications, including co-authorship of a

book on executive recruitment for The Economist With Ian Worthington and Andy

Rees she has recently completed a book on Business Economics

ContributorsDiane Belfitt, BA (Hons), Diploma in Welfare Law, has taught law at a number ofinstitutions, including Leicester Polytechnic, Leicester University and CharlesKeene College in Leicester She has examined for a number of Examination Boards

Zena Cumberpatch, BA (Hons), MSc, is Senior Lecturer at Nene College,Northampton Her main research interests include teaching and learning strategiesand gender issues; she has given conference papers on these topics

Martyn Kendrick, BA (Hons), FCII, Chartered Insurance Practitioner, is PrincipalLecturer and Deputy Head in the Department of Strategy and Management,Leicester Business School, De Montfort University His main teaching and researchinterests lie in the fields of business ethics, corporate responsibility and E-Business

Dean Patton, BA (Hons), PhD, PGCE, is a Senior Research Fellow in the School ofManagement at Southampton University His teaching and research interests centre

on small firms and environmental policies within business He has published inboth these areas

Martin Taylor, LLB, LLM, FRAS I, LTM, is a Senior Lecturer in the School of Law at

De Montfort University, Leicester, where he teaches business and commercial law

on a range of undergraduate and postgraduate courses His research interestsinclude online trading, consumer protection, and light pollution and nuisance He

is a legal advisor on the latter to the Campaign for Dark Skies and the BritishAstronomical Association

Contributors

Interest in business studies has never been greater; witness, for example, the tacular growth in the number of business schools in British universities andinstitutes of higher education over the last ten years and the rapidly increasingnumber of courses at degree and sub-degree level in which business is an impor-tant, and frequently dominant, element Accompanying this growth ininstitutional provision has been an equally impressive growth in the number ofbooks and journals devoted to the various aspects of business – including texts onmanagement principles and practice, organisation theory, strategic management,marketing, human resource management, business economics, accounting andfinance, and so on While such contributions have invariably been welcomed andhave augmented our knowledge of the business world, the overwhelming preoccu-pation of scholars with the internal aspects of organisational life has tended tomean that the external influences on business activity have received little atten-tion This book is an attempt to redress the balance.

spec-It should be stated at the outset that our central aim is to provide a study of ness, rather than a study for business – a text for students rather than practitioners,although hopefully the latter will find much of the material useful and informative

busi-In embarking on this study, we recognise that our perspective has been conditioned

by years of teaching students on business studies courses in a variety of institutions,

as well as our own interests and specialisms, and consequently the choice of subjectmatter and the ordering of material will not suit all tutors teaching on BusinessEnvironment courses We have, however, attempted to discuss all the mainstreamareas found on degree and HND-level courses in the large number of institutionswith which we are familiar, as well as exploring some newer topics which are begin-ning to receive prominence in a growing number of business schools (e.g corporateresponsibility) In addition, whilst adopting a UK perspective, we have also drawn asubstantial amount of our material from European and international sources –something often promised but not always delivered!

Each chapter in the book follows a common format, which includes objectives, acase study, review questions and assignments, and a guide to further reading Acomprehensive review of data and information sources is included in Chapter 16(now Chapter 18) and we would strongly encourage students to make regular use ofthese sources, particularly the quality newspapers and journals which contain awealth of information and analysis on the changing business environment

In carrying out this study, we have received considerable help from numerousorganisations to whom we extend our thanks These have included the Department

of Trade and Industry, the Department of the Environment, the Cabinet Office, theMonopolies and Mergers Commission, the European Commission, the EuropeanInformation Centre (Leicester City Council), Business in the Community, and theConfederation of British Industry

Our gratitude also goes to the students and staff of Leicester Business School whohave unwittingly helped us to gather information and to formulate our ideas over

Preface to the first edition

more years than we would care to mention In particular we would like to edge the considerable help and encouragement given to us by Gary Cook, AndyRees, Professor Derrick Ball, Professor John Coyne and the staff of De MontfortUniversity Library To Janice Cox, who typed the majority of the script underdemanding circumstances, goes our special thanks and admiration – she never oncecomplained and always met the deadlines.

acknowl-We would also like to acknowledge the considerable help, support and agement given to us by Dr Penelope Woolf of Pitman Publishing who has retainedfaith in us throughout the project To her go our special thanks

encour-Our greatest debt, however, is owed to our families who have paid the highestprice in terms of lost time, boring conversations, tetchiness and a general lack ofconsideration Despite all this they have remained encouraging, supportive andloving It is to them that we rightly dedicate this book

Reactions to the first edition were very favourable and we were encouraged by thisfact In the new edition, we have updated the facts and figures from the originalbook, and added some new information and a number of new case studies whichhave contemporary relevance Each chapter now contains additional case material

in the form of mini cases which are used to highlight specific aspects of the text Asever we remain grateful to our colleagues and to our students for their continuingsupport and encouragement, and to the large number of organisations that havekindly provided us with material We would also like to thank Beth Barber ofPitman Publishing for her support and guidance

Preface to the second edition

While retaining the successful format of previous editions, we have taken theopportunity to make a number of changes in the third edition, most notably inChapters 3 and 17 Chapter 3 now provides a more generic view of the politicalenvironment, which is useful for cross-national comparisons; Chapter 17 looks inmore detail at the concept of corporate social responsibility In addition, facts, fig-ures and tables from the previous edition have been updated and there is some newinformation and a number of new case studies and mini cases reflecting recentdevelopments in the business environment.

We continue to be grateful to our colleagues and students for their encouragementand support and would like to thank in particular Jo Webb, Bharat, Rebecca Coleman,Michael Edwards and Nikos Karaoularis of De Montfort University Library for theirhelp and advice with part of Chapter 16 Special thanks, too, must go to MagdaRobson and Sadie McClelland at Pearson Education for all their help and support; weare very grateful and have enjoyed working with them on the project

In writing the fourth edition of the book we have been guided by the very helpfulobservations of our reviewers and by our own feelings on how we could build uponthe well-received format of previous editions Apart from updating the facts and fig-ures to reflect recent developments, we have added a new chapter on technology(Chapter 16), additional material in a number of other chapters and a variety ofnew, topical case studies and mini cases, many of which have an internationalfocus Added to this all chapters now include key terms, a summary of key learningpoints and numerous weblinks which students can use to research an organisation

or issue in more detail A complete glossary of terms and their definitions can befound at the end of the book

As in the past a number of individuals have contributed significantly to this ect, particularly Jo Webb and Carol Keddie of De Montfort University Library andthe team at Pearson Education who guided us through the process of assembling

proj-xxiPreface

Preface to the third edition

Preface to the fourth edition

this edition To them, and to our colleagues and students who have encouragedand supported us over the years, we would like to give our special thanks

We are delighted by the continuing success of the book and by the many kind ments we have received from the staff and students who use it Given such a response

com-we have retained many of the features of previous editions as com-well as the generalformat of the book, but have added some new material and have updated the factsand figures since the last edition The fifth edition now contains a new chapter onthe demographic, social and cultural context of business (Chapter 5) and the section

on globalisation has been expanded considerably We have also made a number ofother changes to meet the very helpful comments of our reviewers

We remain indebted to all those who have helped us over the years to developour understanding of the subject matter We would like to thank the team atPearson Education for their continued support and advice and our colleagues at theUniversity, particularly Gareth Glover and Jo Webb in the library All the help andsupport we have experienced is very much appreciated

Ian Worthington Chris Britton November 2005

In some instances we have been unable to trace the owners of copyright material,and we would appreciate any information that would enable us to do so

Preface to the fifth edition

Guided tour of the book

Chris Britton

The resource context

Businesses carry out a variety of activities, but their main activity is to produce goods and services to be sold on the market In the production process inputs are turned into outputs Key inputs into the production process are people, technology and natural resources.

Having read this chapter you should be able to:

 illustrate the importance of people, technology and natural resources to business

 explain what determines the quality of labour in the economy

 demonstrate the effect of technological change on business

 outline the main issues affecting natural resources

Capital Computer-aided design (CAD) Derived demand Educated workforce Factor of production Fixed capital Geographical immobility Gross investment Immobility of labour Information technology Infrastructure Innovation Investment Land

Minimum wage Natural resources Negademand Net investment Non-renewable resources NVQs Occupational immobility Occupational structure Participation rate People Process innovation Renewable resources Replacement investment Research and development

Resources Social capital Stock Technological change Technological unemployment Technology Wage rate Wages Workforce Working capital Working week

6

Learning outcomes

a fifth of the workforce Approximately 3.6 million people were self-employed It (see Mini case: Call centres).

Technologyis defined as ‘the sum of knowledge of the means and methods of

pro-ducing goods and services’ (Penguin Dictionary of Economics) It is increasingly

refers to the organisation of production as well as the actual techniques of tion itself Technological changeleads to the introduction of new products, changes in the methods and organisation of production, changes in the quality of ing and disseminating information Technology has a very big impact upon the type of investment that takes place in an economy and therefore the rate of eco- nomic growth (for a fuller discussion of technology, see Chapter 16).

exist-in the mexist-iniaturisation of components These will contexist-inue even when the capabilities of the silicon chip have been exhausted, with the development of super- the development of new languages and artificial intelligence.

Advances in information technology have many impacts upon business They are creating new products and making old products more profitable to produce

Chapter 6 · The resource context

156

Technology

2 Industrial unions They have members doing different jobs but in the same

indus-try Industrial unions are more common in other countries but some UK unions come close to this type; for example, the National Union of Miners.

3 General unions They contain members doing different jobs in different

indus-tries, like the Transport and General Workers Union.

4 White collar unions They represent the non-manual workers like teachers, social

workers, and so forth An example is UNISON.

One of the main aims for all types of union has been to counteract, and protect their been achieved through collective bargaining Over the years a situation has been collectively negotiated by trade unions and employers Although there does seem to islation of the 1980s and decline in the membership and power of the trade unions, the majority of wage increases are still negotiated by trade unions.

It is argued that the activities of trade unions through collective bargaining have served to increase the wage rate above its equilibrium level and thus cause unem- wage rate is £W and the quantity of labour being used is L Assume now that a

£W1 At this wage rate the market does not clear, the demand for labour is L1while the supply of labour is L2 There is therefore excess supply of labour, or unemploy- ment In this way trade unions are blamed for keeping wages at too high a level so that the market cannot clear.

Figure 6.2 can be used to illustrate the argument of those who oppose the setting

of a minimum wage (see Mini case: The minimum wage) Although this argument

Chapter 6 · The resource context

150

For information on trade unions in the UK see www.tuc.org.uk

web link

The effect of trade unions on the labour market

Figure 6.2

Learning Outcomes highlight core coverage

in terms of expected learning outcomes aftercompleting each chapter, to help studentsfocus their learning and evaluate their progress

Key Terms are drawn out at the start of every

chapter and are emboldened the first timethey appear in the text to enable students to

locate information quickly A full Glossary

appears at the end of the book

Colourful figures and diagrams are

used to illustrate concepts and providememorable learning aids

Links to relevant web pages are highlighted

throughout the text and repeated on the website

www.pearsoned.co.uk/worthington to help direct

students’ research

Qualitative controlsControls on the quality of goods rather than on quantity or price.

All of these serve to restrict international trade, and therefore reduce specialisation

on a world level They invite retaliation and could lead to inefficiencies.Import controlshave a wide effect on industry The 200 per cent tariffs that the Americans threatened to impose on French cheeses and wines at the end of 1992 if the GATT bottle-making industry or the insurance industry But there are powerful arguments tries, whether these industries are ‘infant’ industries or strategic industries In the and Pacific countries which receive preferential treatment in the EU for their devastation of their economies Import controls can also be used to improve the balance of payments position in the case where a deficit exists.

The United Kingdom is a member of a number of international organisations that serve to promote free trade and control the restrictions to free trade, like the World Trade Organisation (see Chapter 4 and the Mini case below).

Chapter 14 · International markets and globalisation

The WTO wants the EU to open up its markets more readily to foreign producers For example, the EU produces sugar at three times the world price but keeps imports of sugar out of the EU with tariffs of 300 per cent Any excess production is dumped on world markets which has a detrimental effect on the price of sugar and therefore on the countries producing sugar The WTO also wants the USA to reduce the subsidies it pays

to its farmers For example, in 2005 the USA will pay $4 billion in subsidies to its cotton producers, even though the WTO had ruled in 2004 that these subsidies breached world trade rules Trade barriers such as the EU tariffs and the USA subsidies have disastrous effects on developing countries which are highly dependent on agriculture – in Africa, for example, 70 per cent of the population is involved in agricultural production

There have been acrimonious exchanges between the USA and the EU in the period leading up to the resumption of these talks In September 2005, George Bush offered to end all barriers to trade provided that other countries followed suit and developing nations opened up their markets in return The EU called these ‘hollow promises’ as the implementation of this offer necessitates the agreement of the very powerful farming lobby in the USA and this is extremely unlikely In the EU, discussions over the reduction

The World Trade talks

 This shift has taken place both in terms of employment and output.

 Changes in demand are one of the major causes of changes in industrial structure,

as evidenced by the case study.

 Supply factors like technological change are also important in the process

Case study: Spending on leisure services

Summary of key points

Spending on leisure services

C A S E

S T U D Y

The growth of the service sector has been partly due to changes in the spending

as income has increased over time so has spending on services Figure 10.10 between spending on services and income This case study will look at spending on investigate factors which influence industrial structure.

illus-The relationship between income and spending can also be illustrated with cross-sectional data, where households are broken into deciles, or tenths, according income earners and the highest decile indicates the highest tenth of income earn- total spending as income increases Figure 10.12 shows that the percentage spent

on all services and leisure services within that rises as income rises.

Theme parks in the UK

The USA is the market leader in theme parks, with 450 of them, the UK has 85 and

UK the figure is once every three years while in Europe the average is once every

Notes and references

1 See, for example, Creditanstalt/EIU Vienna 1992, Eastern Investment Survey.

2 Financial Times, 2 March 1992.

3 Donaldson, P and Farquhar, J., Understanding the British Economy, Penguin, 1988, p 84.

4 See, for example, Griffiths, A and Wall, S (eds), Applied Economics, 9th edition, Financial

Times/Prentice Hall, 2001.

5 See also the concept of Gross Value Added (GVA) which is an important measure in the mation of GDP National Statistics Online has a good explanation of GVA.

esti-6 See, for example, Griffiths and Wall, op cit., ch 1.

7 Real interest rates allow for inflation.

8 See, for example, Neale, A and Haslam, C., Economics in a Business Context, Chapman &

Hall, 1991, p 141.

Chapter 4 · The macroeconomic environment

118

1 To what extent do you agree with the proposition that the market economy is the

‘best’ form of economic system? Do you have any reservations?

2 Explain how interest rates could be used to boost the economy Why, then, do

governments frequently hesitate to take such steps?

3 Using circular flow analysis, suggest why a large programme of capital

expenditure by government (e.g on new motorways, roads, railways) will benefit businesses How could such a programme be financed?

4 Which businesses are likely to benefit from a recovery in a country’s housing

market?

Review and discussion questions

1 Imagine you work in the economic development unit of a local authority Produce

a draft report outlining the benefits to the local economy of encouraging direct inward investment Indicate any disadvantages.

2 You are a trainee journalist on a regional or national newspaper As part of your

first big assignment, you have been asked to provide information on the

‘privatisation’ of eastern European economies Using journals and newspapers, provide a scrapbook of information indicating the different ways in which western companies have sought to exploit business opportunities in eastern Europe.

Assignments

Case studies of varying complexity relate

the theory represented in the chapter to reallife situations in a range of diverse

organisations

Summary of key points provide the student

with a useful revision aid

Questions and assignments provide engaging

activities for students and lecturers in and out

of the classroom situation Further questions onthe website help to evaluate their progress

1 Business organisations: the external environment

2 Business organisations: the internal environment

Part One

Ian Worthington

Business organisations:

the external environment

Business organisations differ in many ways, but they also have a common feature: the transformation of inputs into output This transformation process takes place against a background of external influences which affect the firm and its activities This external environment is complex, volatile and interactive, but it cannot be ignored in any meaningful analysis of business activity.

Having read this chapter you should be able to:

 indicate the basic features of business activity

 portray the business organisation as a system interacting with its environment

 demonstrate the range and complexity of the external influences on businessactivity

 identify the central themes inherent in the study of the business environment

Environmental change External environment General (or contextual) environment

Immediate (or operational) environment

Inputs Open system

Outputs PESTLE analysis Transformation system

1

Learning

outcomes

Key terms

Business activity is a fundamental and universal feature of human existence and yet theconcept of ‘business’ is difficult to define with any degree of precision Dictionary defini-tions tend to describe it as being concerned with buying and selling or with trade andcommerce, or the concern of profit-making organisations, and clearly all of these wouldcome within the accepted view of business Such a restricted view, however, wouldexclude large parts of the work of government and its agencies and the activities of non-profit-making organisations – a perspective it would be hard to sustain in a climate in whichbusiness methods, skills, attitudes and objectives are being increasingly adopted by theseorganisations It is this broader view of business and its activities which is adopted belowand which forms the focus of an investigation into the business environment.

A model of business activity

Most business activity takes place within an organisational context and even a cursoryinvestigation of the business world reveals the wide variety of organisations involved,ranging from the small local supplier of a single good or service to the multibilliondollar international or multinational corporation producing and trading on a globalscale Given this rich organisational diversity, most observers of the business scene tend

to differentiate between organisations in terms of their size, type of product and/ormarket, methods of finance, scale of operations, legal status and so on Nissan, forexample, would be characterised as a major multinational car producer and distributortrading on world markets, while a local builder is likely to be seen as a small businessoperating at a local level with a limited market and relatively restricted turnover

While such distinctions are both legitimate and informative, they can concealthe fact that all business organisations are ultimately involved in the same basicactivity, namely, the transformation of inputs(resources) into outputs (goods orservices) This process is illustrated in Figure 1.1

In essence, all organisations acquire resources – including labour, premises, nology, finance, materials – and transform these resources into the goods orservices required by their customers While the type, amount and combination ofresources will vary according to the needs of each organisation and may also varyover time, the simple process described above is common to all types of businessorganisation and provides a useful starting-point for investigating business activityand the environment in which it takes place

tech-A more detailed analysis of business resources and those internal aspects of tions which help to transform inputs into output can be found in Chapters 2, 6 and 16below The need, here, is simply to appreciate the idea of the firm as a transformation

organisa-Introduction

The business organisation and its environment

Further information on Nissan is available at www.nissanmotors.com The Nissan UK website address is www.nissan.co.uk

web link

5The business organisation and its environment

systemand to recognise that in producing and selling output most organisations hope

to earn sufficient revenue to allow them to maintain and replenish their resources, thuspermitting them to produce further output which in turn produces further inputs Inshort, inputs help to create output and output creates inputs Moreover, the output ofone organisation may represent an input for another, as in the case of the firm produc-ing capital equipment or basic materials or information or ideas This interrelationshipbetween business organisations is just one example of the complex and integratednature of business activity and it helps to highlight the fact that the fortunes of anysingle business organisation are invariably linked with those of another or others – apoint clearly illustrated in many of the examples cited in the text

The firm in its environment

The simple model of business activity described above is based on the systemsapproach to management (see Chapter 2) One of the benefits of this approach is that

it stresses that organisations are entities made up of interrelated parts which are twined with the outside world – the ‘external environment’ in systems language Thisenvironment comprises a wide range of influences – economic, demographic, social,political, legal, technological, etc – which affect business activity in a variety of waysand which can impinge not only on the transformation process itself, but also on theprocess of resource acquisition and on the creation and consumption of output Thisidea of the firm in its environment is illustrated in Figure 1.2

inter-Land, premises Materials Labour Technlogy Finance Managerial skills, etc.

Inputs

Goods Services Ideas Information, etc.

Outputs

Consumption BUSINESS

The firm in its environment

Figure 1.2

In examining the business environment, a useful distinction can be madebetween those external factors which tend to have a more immediate effect on theday-to-day operations of a firm and those which tend to have a more general influ-ence Figure 1.3 makes this distinction.

The immediate or operational environmentfor most firms includes suppliers,competitors, labour markets, financial institutions and customers, and may alsoinclude trading organisations, trade unions and possibly a parent company In con-trast the general orcontextual environmentcomprises those macroenvironmentalfactors such as economic, political, socio-cultural, technological and legal influ-ences on business which affect a wide variety of businesses and which can emanatenot only from local and national sources but also from international and suprana-tional developments

This type of analysis can also be extended to the different functional areas of anorganisation’s activities such as marketing or personnel or production or finance, asillustrated in Figure 1.4 Such an analysis can be seen to be useful in at least twoways First, it emphasises the influence of external factors on specific activities withinthe firm and in doing so underlines the importance of the interface between theinternal and external environments Second, by drawing attention to this interface, ithighlights the fact that, while business organisations are often able to exercise somedegree of control over their internal activities and processes, it is often very difficult,

if not impossible, to control the external environment in which they operate

‘Immediate’ or ‘operational’

environment

Suppliers Competitors Labour market Financial institutions, etc.

BUSINESS ORGANISATIONS

‘General’ or ‘contextual’

environment

Economic Political Legal Social, etc.

Two levels of environment

Figure 1.3

Environmental influences

General Immediate

Marketing system

Marketing intermediaries

Marketing intermediaries Market(s)

Environmental influences on a firm’s marketing system

Figure 1.4

While the external factors referred to above form the subject-matter of the rest ofthe book, it is useful at this point to gain an overview of the business environment

by highlighting some of the key environmental influences on business activity Inkeeping with the distinction made between general and more immediate influ-ences, these are discussed separately below In this section we examine what arefrequently referred to as the ‘PESTLE’ factors (i.e political, economic, socio-cultural,technological, legal and ethical influences) A ‘PESTLE’ (or ‘PEST’) analysiscan beused to analyse a firm’s current and future environment as part of the strategicmanagement process (see Chapter 18)

The political environment

A number of aspects of the political environment clearly impinge on business ity These range from general questions concerning the nature of the political systemand its institutions and processes (Chapter 3), to the more specific questions relating

activ-to government involvement in the working of the economy (Chapter 4) and its attempts to influence market structure and behaviour (Chapters 9, 13, 15).Government activities, both directly and indirectly, influence business activity andgovernment can be seen as the biggest business enterprise at national or local level(Chapter 11) Given the trend towards the globalisation of markets (Chapter 14) andthe existence of international trading organisations and blocs, international politico-economic influences on business activity represent one key feature of the businessenvironment (Chapters 3, 6, 14) Another is the influence of public, as well as politi-cal, opinion in areas such as environmental policy and corporate responsibility(Chapter 17)

The economic environment

The distinction made between the political and economic environment – and, forthat matter, the legal environment – is somewhat arbitrary Government, as indi-cated above, plays a major role in the economy at both national and local level(Chapters 4 and 11) and its activities help to influence both the demand andsupply side (e.g see Chapter 12) Nevertheless there are a number of other eco-nomic aspects related to business activity which are worthy of consideration Theseinclude various structural aspects of both firms and markets (Chapters 8, 9, 10, 13)and a comparison of economic theory and practice (e.g Chapters 12, 13, 14)

7Mini case: A healthy business?

The general or contextual environment

Even the world’s largest and most powerful business organisations are affected by achanging business environment, a point well illustrated by the problems currently beingfaced by General Motors (GM), the largest car company in the world In the first quarter of

A healthy business?

mini case

The social, cultural and demographic environment

Both demand and supply are influenced by social, cultural and demographic factors.Cultural factors, for example, may affect the type of products being produced or sold,the markets they are sold in, the price at which they are sold and a range of othervariables People are a key organisational resource and a fundamental part of themarket for goods and services Accordingly, socio-cultural influences and develop-ments have an important effect on business operations, as do demographic changes(Chapters 5 and 6)

The technological environment

Technology is both an input and an output of business organisations as well asbeing an environmental influence on them Investment in technology and innova-tion is frequently seen as a key to the success of an enterprise and has been used toexplain differences in the relative competitiveness of different countries (Chapter6) It has also been responsible for significant developments in the internal organi-sation of businesses in the markets for economic resources (Chapter 16)

2005, GM reported losses of over $1 billion in North America and subsequentlyannounced its intention to close some of its plants and cut 25 000 jobs over the nextthree years from its North American operations This plan follows in the wake of its job-cutting exercise in GM Europe which is ultimately expected to reduce its Europeanworkforce by around 12 000 jobs, most of them in Germany

GM’s decline in fortunes has been attributed to a number of important developments: afalling market share, problems with its product mix, rising raw material prices and the

soaring costs of providing healthcare for its US workers (see e.g Guardian, 8 June 2005,

p.19) According to the company’s Chief Executive, the latter was the most challengingproblem facing the business, with the cost of the healthcare programme estimated toaccount for around $1500 on the price of every vehicle sold

By slimming down its operations and running its remaining plants at full capacity, GM isseeking 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 offering more attractive

to customers by increasing its spending on new vehicles and by improving its marketingeffort in the hope that this will arrest the decline in market share

As far as the healthcare programme is concerned, this is likely to prove more of anintractable problem for the organisation’s 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 unique to

GM, but is one facing a large number of US corporations Indeed, according to someobservers the healthcare burden faced by corporate America is so substantial that itthreatens not only the future prospects of individual businesses but also the long-termstrength of the American economy and its international competitiveness

The legal environment

Businesses operate within a framework of law which has a significant impact onvarious aspects of their existence Laws usually govern, among other things, thestatus of the organisation (Chapter 8), its relationship with its customers and sup-pliers and certain internal procedures and activities (Chapter 7) They may alsoinfluence market structures and behaviour (e.g Chapter 13) Since laws emanatefrom government (including supranational governments) and from the judgments

of the courts, some understanding of the relevant institutions and processes isdesirable (e.g Chapters 3 and 7)

The ethical environment

Ethical considerations have become an increasingly important influence on ness behaviour, particularly among the larger, more high profile companies Onearea where this has been manifest is in the demand for firms to act in a moresocially responsible way and to consider the impact they might have on people,their communities and the natural environment (Chapter 17)

busi-Resources and resource markets

An organisation’s need for resources makes it dependent to a large degree on thesuppliers of those resources, some of whom operate in markets which are structured

to a considerable extent (e.g Chapter 6) Some aspects of the operation of resourcemarkets or indeed the activities of an individual supplier can have a fundamentalimpact on an organisation’s success and upon the way in which it structures itsinternal procedures and processes By the same token, the success of suppliers isoften intimately connected with the decisions and/or fortunes of their customers.While some organisations may seek to gain an advantage in price, quality or deliv-ery by purchasing resources from overseas, such a decision can engender a degree ofuncertainty, particularly where exchange rates are free rather than fixed (Chapter14) Equally, organisations may face uncertainty and change in the domestic mar-kets for resources as a result of factors as varied as technological change,government intervention or public opinion (e.g conservation issues)

Customers

Customers are vital to all organisations and the ability both to identify and to meetconsumer needs is seen as one of the keys to organisational survival and prosperity– a point not overlooked by politicians, who are increasingly using business tech-niques to attract the support of the electorate This idea of consumer sovereignty –

9The immediate or operational environment

The immediate or operational environment

where resources are allocated to produce output to satisfy customer demands – is acentral tenet of the market economy (Chapter 4) and is part of an ideology whoseinfluence has become all pervasive in recent years Understanding the many factorsaffecting both individual and market demand, and the ways in which firms organ-ise themselves to satisfy that demand is a vital component of a businessenvironment that is increasingly market led.

Competitors

Competition – both direct and indirect – is an important part of the context inwhich many firms operate and is a factor equally applicable to the input as well asthe output side of business The effects of competition, whether from domesticorganisations or from overseas firms (e.g see Chapter 14), is significant at themacro as well as the micro level and its influence can be seen in the changingstructures of many advanced industrial economies (Chapter 10) How firmsrespond to these competitive challenges (e.g Chapter 9) and the attitudes of gov-ernments to anti-competitive practices (Chapter 15) is a legitimate area of concernfor students of business

In a subject as all encompassing as the business environment it is possible to tify numerous approaches to the organisation of the material One obvious solutionwould be to examine the various factors mentioned above, devoting separate chap-ters to each of the environmental influences and discussing their impact onbusiness organisations While this solution has much to recommend it – not least

iden-of which is its simplicity – the approach adopted below is based on the grouping iden-ofenvironmental influences into four main areas, in the belief that this helps to focusattention on key aspects of the business world, notably contexts, firms and theirmarkets and issues of significance to entrepreneurs and to society as a whole

Analysing the business environment

Levi Strauss is a privately owned company based in San Francisco in the United States.For much of the latter half of the twentieth century its traditional blue riveted ‘501’ denimjeans – worn originally by gold-miners and cowboys – had been the world’s favourite pair

of trousers As a global brand name the 501 was almost without equal and had beenpopularised by cult movie stars such as James Dean, Marilyn Monroe and MarlonBrando Its image had always been that of a sexy and youthful product worn by therebellious; this had helped to make 501s popular with people of all ages in all countries

Levi Strauss: jean therapy?

mini case

In Part Two consideration is given to the political, economic, social, cultural,demographic, legal and resource contexts within which businesses function Inaddition to examining the influence of political and economic systems, institutionsand processes on the conduct of business, this section focuses on the macroeco-nomic environment and on those broad social influences which effect bothconsumers and key organisational resources, particularly labour, technology andraw materials The legal system and the influence of law in a number of criticalareas of business activity is also a primary concern and one which has links withPart Three.

11Mini case: Levi Strauss: jean therapy?

As one of the last major American clothing companies to maintain a significantmanufacturing base in the United States, Levi Strauss had been an important contributor

to the US economy in symbolic as well as economic terms Its announcement in February

1999 that it was to close half of its North American plants with the loss of around 6000jobs (about one-third of its workforce) represented a blow to an industry which had been

in decline for some time in the face of overseas competition Coming on the back of the

7500 jobs shed the previous year by the company, the new redundancies had asignificant impact in those areas of the United States and Canada where Levi factorieswere located

The turnaround in Levi’s fortunes provides a good illustration of how an evolvingbusiness environment can impact on an organisation, particularly if it fails to recogniseand respond to changing external circumstances In this case the problem seems to bethat the company was slow to recognise changes in fashion tastes; in effect it appears

to have taken its market for granted and forgotten about the importance of the needsand wants of its customers, many of whom were switching to alternative products such

as combat, cargo and utility trousers For those buyers who still remained loyal tojeans, competition from imported Japanese products and designer brands such asTommy Hilfiger and Calvin Klein had further eroded Levi’s formerly dominant position

In 1997, for example, Levi faced a 4 per cent cut in sales; in 1998 this increased to

Information on Levi Strauss can be obtained at www.levistrauss.com

web link

In Part Three, attention is focused on three central structural aspects: legal ture, size structure and industrial structure The chapter on legal structure examinesthe impact of different legal definitions on a firm’s operations and considers possi-ble variations in organisational goals based on legal and other influences The focusthen shifts to how differences in size can affect the organisation (e.g access to capi-tal, economies of scale) and to an examination of how changes in scale and/ordirection can occur, including the role of government in assisting small-businessdevelopment and growth One of the consequences of changes in the componentelements of the economy is its effect on the overall structure of industry and commerce – a subject which helps to highlight the impact of international compe-tition on the economic structure of many advanced industrial economies Sincegovernment is a key actor in the economy, the section concludes with an analysis

struc-of government involvement in business and in particular its influence on thesupply as well as the demand side of the economy at both national and local level

In Part Four, the aim is to compare theory with practice by examining issuessuch as pricing, market structure and foreign trade The analysis of price theoryillustrates the degree to which the theoretical models of economists shed light onthe operation of business in the ‘real’ world Similarly, by analysing basic models ofmarket structure, it is possible to gain an understanding of the effects of competi-tion on a firm’s behaviour and to appreciate the significance of both price andnon-price decisions in the operation of markets

The analysis continues with an examination of external markets and the role

of government in influencing both the structure and operation of the place The chapter on international markets looks at the theoretical basis oftrade and the development of overseas markets in practice, particularly in the con-text of recent institutional, economic and financial developments (e.g the SingleMarket, globalisation, the Euro) The section concludes with an investigation ofthe rationale for government intervention in markets and a review of governmentaction in three areas, namely, privatisation and deregulation, competition policyand the operation of the labour market

market-Finally, in Part Five, consideration is given to three aspects of business which arehighly topical One of these – corporate responsibility towards the natural environ-ment – raises fundamental questions about the moral dimension of businessactivity, a subject often overlooked by writers and commentators on the businessscene A second, on the subject of technology, looks in detail at the impact of newtechnology on organisations and on market development and examines theincreasingly important issue of ‘e-business’

The concluding chapter in this section – and, appropriately, in the book as awhole – emphasises the continuing need for organisations to monitor change inthe business environment and examines a number of frameworks through whichsuch an analysis can take place In seeking to make sense of their environment,businesses need access to a wide range of information, much of which is availablefrom published material, including government sources Some of the major types ofinformation available to students of business and to business organisations –including statistical and other forms of information – are considered in the finalpart of this chapter

A number of themes run through the text and it is useful to draw attention to these

at this point

Interaction with the environment

Viewed as an open system, the business organisation is in constant interactionwith its environment Changes in the environment can cause changes in inputs, inthe transformation process and in outputs and these in turn may engender furtherchanges in the organisation’s environment The internal and external environ-ments should be seen as interrelated and interdependent, not as separate entities

Interaction between environmental variables

In addition to the interaction between the internal and external environments, thevarious external influences affecting business organisations are also frequentlyinterrelated Changes in interest rates, for example, may affect consumer confi-dence and this can have an important bearing on business activity Subsequentattempts by government to influence the level of demand could exacerbate the sit-uation and this may lead to changes in general economic conditions, causingfurther problems for firms The combined effect of these factors could be to create aturbulent environment which could result in uncertainty in the minds of man-agers Failure to respond to the challenges (or opportunities) presented by suchchanges could signal the demise of the organisation or at best a significant decline

in its potential performance

The complexity of the environment

The environmental factors identified above are only some of the potential variablesfaced by all organisations These external influences are almost infinite in numberand variety and no study could hope to consider them all For students of businessand for managers alike, the requirement is to recognise the complexity of the exter-nal environment and to pay greater attention to those influences which appear themost pertinent and pressing for the organisation in question, rather than toattempt to consider all possible contingencies

Environmental volatility and change

The organisation’s external environment is further complicated by the tendencytowards environmental change This volatility may be particularly prevalent insome areas (e.g technology) or in some markets or in some types of industry ororganisation As indicated above, a highly volatile environment causes uncertaintyfor the organisation (or for its sub-units) and this makes decision making more dif-ficult (see Case study: A shock to the system)

13Central themes

Central themes