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ISK - HULT International Business School
Navigating the Business Environment (BUS101) - G
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Chapter 1 - The Business Environment
Class 1 – Defining the business environment
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A business
organization can be seen as an ​open system​, whose performance is influenced by a whole range of phenomena in
its environment
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Society’s rising
expectations with regard to the ethical behaviour of business organizations is an example of an environmental
factor that has emerged as an increasingly critical factor to the survival of business organizations
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This ​transformation process adds value to the
inputs, so that buyers are prepared to pay more to the business organization than the cost of resources that it has
used up in the production process
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Organizations must constantly ensure that the system
continues to transform inputs into ​higher-value outputs​
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It
comprises:
- The ​macroenvironment: a whole set of factors that can indirectly affect an organization’s
relationship to its markets
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They represent general forces and pressures rather than institutions with which the
organization relates
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- The Internal Environment​: The conditions, entities, events, and factors within an organization that
influence its activities and choices, particularly the behavior of the employees
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The result has been a gradual decline in their ​profitability​, and
eventually they may cease to exist as a viable business unit
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Examples:
- The retailer ​Marks & Spencer assumed that its position was unassailable, but by the 1990s had
failed to take account of the great improvements in value being offered by its competitors
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The profits of the
fast-food company ​McDonald’s fell​ and it was forced to close branches worldwide
- Music retailers such as ​HMV and EMI ​were accused of ‘putting their head in the sand’ and ignoring
the threat to the sale of CDs posed by downloadable music sites
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- Ryanair and easyJet spotted the opportunities represented by government deregulation and
offered profitable low-cost ‘no frills’ air services,
- Organic​ Food shops
Successful organizations are not so much those that deliver value to customers today, but those that understand
how definitions of value are ​likely to change in the future​
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Moreover, Successful companies have often been those
that understand their business environment and have ​invested in growth areas​, while cutting back in areas that
are most likely to go into decline (Investments of Retained Earnings, divestitures)
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A divestiture most commonly results from a management decision to cease operating a
business unit because it is not part of a ​core competency​
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It comprises general trends and forces that may not immediately affect
the relationships that a company has with its ​customers, suppliers and intermediaries ​but, sooner or later,
macroenvironmental change will alter the nature of these relationships
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- the ​stability​ of the political system affects the attractiveness of the business environment
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- the political environment includes ​pressure groups and ​trade associations that can be influential in
changing government policy
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Purchasing power is important because, all else being equal, ​inflation decreases the amount of
goods or services you would be able to purchase
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Purchasing power may also be known as a
currency's ​buying power​
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- Trade Blocks: EU, ASEAN, NAFTA
- Trade Unions: WTO

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The Socio-demographic, cultural environment

Business organizations are concerned with the ​structure and ​values of the societies in which they operate
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Even in home markets, business organizations should understand the
processes of ​gradual change in values and attitudes ​and be prepared to satisfy the changing needs of
consumers
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- Attitudes to debt have changed and there is a tendency for increasing numbers of people to buy
products for experiential values rather than to satisfy basic utilitarian needs
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- Greater life expectancy is leading to an ageing of the population and a shift to an increasingly
‘elderly’ culture
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The Technological Environment

The ​pace of technological change is becoming increasingly rapid and marketers need to understand how
technological developments might affect them in four related business areas
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New technologies can allow ​new goods and services​ to be offered to consumers
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New opportunities for companies to ​communicate with their target customers are continuing to
emerge, with many companies using ​computer databases to target potential customers and to
maintain a dialogue with established customers (cf
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The Economic Environment

Businesses need to keep an eye on indications of a nation’s prosperity
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Many of these indicators tend to follow ​cyclical patterns ​related to a general
economic cycle of ​expansion followed by ​contraction​
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➔ Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and
services produced within a country's borders in a specific time period
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Understanding the economic environment can become particularly difficult during periods of great turbulence
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2008 study guide in ECN102)​
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The Micro-Environment (MIE)

The microenvironment of an organization can best be understood as comprising all those other organizations
and individuals who directly or indirectly affect the activities of the organization
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➔ A ​stakeholder is a party that has an ​interest in a company and can either affect or be affected by
the business
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However, the modern theory of the idea goes beyond this original notion
to include additional stakeholders such as a community, government or trade association
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Because shareholders are
essentially owners in a company, they reap the benefits of a business’ success
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Conversely,
when a company loses money, the share price invariably drops, which can cause shareholders to
lose money, or suffer declines in their portfolios’ values
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Quite simply, in a competitive
environment, no customers means no business
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In an ideal world, an organization should know its customers so well that it is
able to ​predict what they will require next, rather than wait until it is possibly too late and then react
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​Consumer groups have an increasing tendency to highlight the mis-selling of products
that are against the best long-term interests of customers, and the results of such actions range from bad
publicity to expensive product recalls and litigation
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Very often​, suppliers are crucial to an organization’s marketing success​
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Rise in World Steel in 2007;
expected shortage in raw materials with the rising demands of the BRICS and the increasing world
demographics)
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Where reliability of delivery to customers is crucial, unreliable suppliers
may thwart a manufacturer’s marketing efforts
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Successful product differentiation involves identifying and
communicating the ​unique qualities of a company's offerings while highlighting the distinct
differences between those offerings and others on the market
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If successful, product differentiation can create a ​competitive
advantage​ ​for the product's seller and ultimately​ build brand awareness
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In business-to-business marketing, one company’s supplier is likely to be another company’s customer, and it is
important to understand how suppliers, manufacturers and intermediaries work together to create value
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Large-scale manufacturing firms
usually find it difficult to deal with each one of their final customers individually, so they choose instead to sell
their products through intermediaries
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Intermediaries may need reassurance about the company’s capabilities as a supplier that is capable of working
with intermediaries to supply goods and services in a ​reliable and ethical manner
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The growth of ​direct-selling intermediaries such as ​Direct Line Insurance appeared to confirm the ability to cut
out intermediaries, who were often portrayed as parasitic and delaying middlemen: ​disintermediation has been
used to describe the process of removing intermediaries from a distribution channel and developing direct
communications
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Competitors

In highly competitive markets, keeping an eye on competitors and trying to understand their likely next moves can
be crucial
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- Indirect competitors​ may appear different in form, but satisfy a fundamentally similar need
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Government has a number of roles to play as stakeholder in commercial organizations
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- Government is increasingly expecting business organizations to take over many responsibilities
from the ​public sector (ie
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CSR)
➔ Corporate social responsibility (CSR) is a self-regulating business model that helps a
company be ​socially accountable​—to itself, its stakeholders, and the public
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To engage in CSR means that, in the ordinary course
of business, a company is operating in ways that enhance society and the environment,
instead of contributing negatively to them
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Members of pressure groups may never
have been customers of a company and are probably never likely to be, but it can impact seriously from the image
that the company has worked hard to develop
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- Shared aims​ are not necessarily narrowly political
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- Political means usually means ​lobbying (trying to persuade Ministers, MPs, European
Commissioners etc, either through direct contact or through paid intermediaries)
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The financial community

This includes ​financial institutions that have supported, are currently supporting or may support the organization
in the future
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Many market expansion plans
have failed because the company did not adequately consider the needs and expectations of potential investors
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Financial institutions
encompass a broad range of business operations within the financial services sector including
banks, trust companies, insurance companies, brokerage firms, and investment dealers​
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Bonus Study
Guide at the end + Note on the SOX Act)

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Local communities

Society at large has rising expectations of organizations, and market-led companies often try to be seen as a
‘good neighbour’ in their local communities
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Some companies are fully devoted to the development of a local community
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Social
enterprises seek to maximize profits while maximizing benefits to society and the environment
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We are all familiar with lumbering giants of companies that, like a supertanker, have
ploughed ahead on a seemingly predetermined course and had ​difficulty in changing direction​
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Such companies
may in fact create internal tensions that make them less effective at responding to changing consumer needs than
where marketing responsibilities in their widest sense are spread throughout the organization
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Cultural values can be shared in a number of ways, including: the way work is
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organized and experienced; how authority is exercised and delegated; how people are rewarded, organized and
controlled; and the roles and expectations of staff and managers
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Within the microenvironment, members of the
local community may also be customers of an organization
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Successful business organizations have
spotted ​trends​, especially the interaction between trends in the different environments (ie
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The point
cannot be stressed enough that the different elements of an organization’s environment are very much
interrelated and, in order to stress this ​interrelatedness​, we will now briefly examine some common themes that
run through all levels of the environment
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The people and organizations within a particular company’s business environment that are of
particular relevance to it are sometimes referred to as its ​environmental set​
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Value Chains

A value chain is a business model that describes the full range of activities needed to create a product or service
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A company conducts a ​value-chain analysis ​by evaluating the detailed procedures
involved in each step of its business
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TQM = Total Quality Management)
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​Backward vertical integration occurs where a manufacturer buys back in to its
suppliers
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Many firms expand in both
directions
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The idea of ​‘co-creation of value’ ​between consumers is at the heart of
‘service dominant logic’​ (Vargo and Lusch 2008)
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The information Environment

Information represents a bridge between the organization and its environment, and is the means by which a
picture of the changing environment is built up within the organization
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In 1991,
Ikujiro Nonaka began an article in the Harvard Business Review with the simple statement: ​‘In an economy where
the only certainty is uncertainty, the one sure source of lasting competitive advantage is knowledge’ (Nonaka
1991)​
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This can be manifested, for example, in the ability to spot turning points in the business cycle ahead of
competitors; to respond more rapidly to customers’ changing preferences; and to adapt manufacturing schedules
more closely to demand patterns, thereby avoiding a build-up of stocks
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The Communication Environment

Communications bring together elements within a firm’s environmental set
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Today, a customer or potential customer may rely much more on their peer
groups to establish whether a prospective seller is reliable and suitable for them
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Viral Marketing, Growth
Hacking)​
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Without an
efficient payment system that buyers and sellers can trust, world trade would become more costly and risky
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When short-term interest rates are at or approaching zero,
normal ​open market operations​, which target interest rates, are no longer effective, so instead a
central bank can target specified amounts of assets to purchase
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The Ethical Environment

Today, e​thical considerations are present in many business decisions: all systems need rules if they are to operate
efficiently and effectively
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In many less
developed economies, the dominant basis for rules is focused on embedded codes of trust
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​Ethics is essentially about
the definition of what is right and wrong
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The Ecological Environment

Only a few years ago, most business organizations in western developed economies could have dismissed
ecological concerns as something that only fanatical, minority groups in the population were concerned about
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Today, the situation is very different, and just about all business organizations need to take the
ecological environment seriously
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Business organizations are dependent on the ecological environment for ​natural resources​
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- Firms can ​gain advantage ​in a market by leading in the use of alternative natural resources ahead
of competitors, giving them a competitive advantage when the alternative becomes the only, or
most cost-effective, source available
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Systems theory, complexity & chaos

Systems theory was proposed in the 1940s by the biologist Ludwig von Bertalanffy
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By being an open system, it is very difficult to place a
boundary round the environment and to identify the complete set of components within the system
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The systems of
interest to complexity theory, under certain conditions, perform in regular, predictable ways; under other
conditions they exhibit behaviour in which regularity and predictability is lost
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Chaos theory describes the dynamics of sensitive systems that are mathematically deterministic but nearly
impossible to predict, due to their sensitivity to initial conditions
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Business cycles

The ​business cycle ​describes the rise and fall in production output of goods and services in an economy
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The business cycle should not be confused with ​market cycles, which are measured using
broad stock market indices
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The business cycle is also known as the ​economic cycle or trade cycle​
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Expansion → This is the first stage
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People generally pay their debts on time
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Prices hit their highest level, and economic indicators stop growing
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During a recession, unemployment rises, production slows
down, sales start to drop because of a decline in demand, and incomes become stagnant or decline
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Depression → ​Economic growth continues to drop while unemployment rises and production plummets
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Consumer confidence and investment levels also drop
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Trough​ → This period marks the end of the depression, leading an economy into the next step: recovery
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Recovery ​→ In this stage, the economy starts to turn around
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This stage marks the
end of one business cycle
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There is no certainty that the future
will follow the pattern of the recent past
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But for a large organization that has to invest heavily for the future, the
risks can be enormous
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One of them is the ​SWOT analysis​
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The Globalized business environment

Globalization has become a dominant theme for many business organizations
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It may be fair to say that ‘going
global’ is no longer an additional activity that companies may decide to become involved in
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However, entering
overseas markets can be ​extremely risky, ​as evidenced by examples of recent failures where companies failed to
foresee all the problems involved

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