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PART 01-THE ENVIRONMENT OF BUSINESSCHAPTER-01

Dr. Gehan Shanmuganathan, (DBA)

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SITUATION ANALYSIS

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SITUATION ANALYSIS

Global terrorism

Global economic crisis

Political instability in gulf and other parts of the

world

Increasing unemployment

Increasing number of business failures

Reduced consumer spending

Slow down home building and increased

foreclosures

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SOLUTIONS…

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SOLUTIONS….

American’s belief is that we could recover

through Change and Creativity Free enterprise allows the Americans to

decide what to produce, how to produce, what price to sell, and where to sell through “free enterprise” system.

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CHAPTER-01EXPLORING THE WORLD OF BUSINESS AND ECONOMICS

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CHAPTER FOCUS

What business is How business go that way Our future in business and reasons to study

business Define business What is capitalism and command economies How the nations measure economic

performance Four types of competitive situation Events that shape today’s business systems Current business environment Business challenges

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WHY STUDY BUSINESS ?

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WHY STUDY BUSINESS

Knowledge is life time wealth Help to choose a career Be a successful employee by performing

the role with relevant skills and working in cultural diversity

To improve your management skills To start your own business- work hard,

extra work hours, required knowledge To become a better informed consumer

and an investor

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BUSINESS DEFINITION..

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BUSINESS DEFINITION

Business is the organized effort of individuals to produce and sell, for a profit, the goods and services that satisfy society’s needs (Pride B.,Hughes B., Kapoor J., 2012)

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THE ORGANIZED EFFORT OF INDIVIDUALS

Things to organize –materials, human , financial, and information

Material resources- raw materials, buildings and machinery

Human resources- people who furnish their labor for a wage

Financial resources – money required to pay wages, raw materials, rent and etc

Information resources- methodology used to measure how effectively managers use other resources combined

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BUSINESS TYPES

Production- Fast Moving Consumer Goods (FMCG)- e.g-Coca cola

Service- Verizon, Financial Institutions

Marketing intermediary- e.g Best Buy, Walmart

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SATISFYING NEEDS

Customers need different solutions

Different products for different needs/ wants

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BUSINESS PROFITS

Profits through high turnover and low expenses

Importance of profits for stakeholders

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TYPES OF ECONOMIC SYSTEMS

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TYPES OF ECONOMIC SYSTEMS

Economics is the study of how wealth is created and distributed

“who get what” It is all about making decisions on scarcity

of resources Micro (decisions made by households and

businesses)and macroeconomics (taxes, government spending, interest rates, and similar decisions on nations)

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HOUSEHOLDS

Made up of individuals who are customers As resource owners, members of households

provide businesses with labor, capital, and other resources. In return, businesses pay wages, rent, dividends, and interest which households receive as income

Consumers buy products and services produced by businesses

70% of total products of the nation (US) is consumer products (purchase for personal consumption)

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BUSINESS

Exchange money for natural resources, labor,

and capital to produce goods and services

Exchange their goods and services to sales

revenue

Businesses retain their profits for future

growth, while households save their earnings

for savings

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GOVERNMENT

Constitution is framed government to intervene to private sector businesses to protect and promote public welfare

Local, state, and federal government discharge these responsibility through regulation and provision of service

Services are national defense, police and fire protection, education, roads, construction and highways

To produce these services, government collects a variety of taxes from households such as personal income tax and sales tax. From businesses, corporate income taxes are collected

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FACTORS OF PRODUCTION

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FACTORS OF PRODUCTION

Land and natural resources- land, water, oil, forest

Labor- time and effort used by employees

Capital- money, equipment, facilities, machines

Entrepreneurship- willingness to take the risk of starting and operating the business

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ECONOMIC SYSTEMS

Capitalism

Command economies (Socialism)

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CAPITALISM

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CAPITALISM

Economic system in which individuals own (private sector) and operate majority of businesses that provide goods and services

Society’s interests are best served when the individuals within that society are allowed to pursue their own self-interest (invisible hand- Adam Smith)

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ADAM SMITH’S BASIC ASSUMPTIONS OF CAPITALISM

Creation of wealth is a concern of private

individuals, not government

Private individuals must own resources used

to create wealth

Economic freedom ensure the existence of

competitive markets that allow both buyers

and sellers to enter and exist as they wish

(market economy)

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CAPITALISM IN THE UNITED STATES

Practices a mixed economy

Economic decisions are made through the interaction of households, businesses, and governments

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COMMAND ECONOMIES

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COMMAND ECONOMIES (SOCIALISM)

Government decides what, where, how, how many, and at what price to produce (sell) goods and services through centralized government planning system

Examples are North Korea, and Cuba

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SOCIALISM (COMMAND ECONOMIES) Key industries are owned by government and these

industries are transportation, communication, utilities, banking, and steel

Private ownership of small business is allowed The focus of the socialism is the elimination of poverty

and equal distribution of wealth among the population Countries transitioning from socialism to capitalism

are France, Sweden, and India Disadvantages of socialism is increased taxation, loss

of incentives and motivation for both individuals and business owners (discuss motivation…….)

Today North Korea and Cuba are evident of being socialist countries

However, special talents and skills are given privileges (professionals and athletes)

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ADAM SMITH AND KARL MARX

Adam Smith is the father of capitalism with a view point of free market (Scottish Philosopher 1723-1790)

Karl Marx is the father of socialism with a view point of classless society whose citizens equally own all the economic resources (German Philosopher 1818-1883)

Discuss classlessness

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MEASURING ECONOMIC PERFORMANCE

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MEASURING ECONOMIC PERFORMANCE Productivity- average output per labor per hour (between

1979 and 2006 US growth is 3.9% - 2006 stats) Good and the bad of increased productivity of a nation-

Discuss…….. Gross Domestic Products (GDP) – total dollar value of all

the goods and services produced by all the people in a country with in a year. To make a comparison, the country need to adjust the dollar

value to inflation or deflation Inflation is a general increase in all the prices and a deflation is

general decrease in all the prices Consumer Price Index (CPI)- monthly measure of

changes in prices of fixed basket of goods purchased by a typical consumer in an urban area Goods listed in the CPI are food and beverages, transportation,

housing, clothing, medical care, recreation, education, and communication

Producer Price Index (PPI)- Prices at the whole sale level

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BUSINESS CYCLE AS A MEASUREMENT

The regular fluctuations in businesses

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ECONOMIC DEPRESSION

Longer than a recession

High unemployment rate

Low wages

Reduced purchasing power

Lack of confidence in economy

General decrease in business activities

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WHAT DOES GOVERNMENT DO TO OFFSET THE EFFECTS OF RECESSION?

Monitory policy- federal reserve decisions that

determine the size of the supply of money on the

nation and the level of interest rates (stimulus plan)

Fiscal policy- the government could influence the

amount of savings and expenditure by altering the

tax structure and changing the level of government

spending

Federal deficit- government spending is greater

than its earnings which leads to national debt

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TYPES OF COMPETITION

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TYPES OF COMPETITION Capitalism induces competition for the benefit of the

customer Perfect competition- where there are many

buyers and sellers for one product and they cannot affect the price of that product- market is symmetric, homogenous products, no one could control the market e.g- wheat Demand and supply/ equilibrium market or

price( graphical demonstration) Monopolistic competition- many sellers and

buyers in the market and the sellers differentiate their products/ services to increase their revenue

Oligopoly- few sellers. Eg- automobile, airline Monopoly – one seller. Eg- public utilities

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AMERICAN BUSINESS TODAY

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AMERICAN BUSINESS TODAY

Early business development –barter systems- domestic system- factory systems- specialization

New systems and e-business – regionalization and globalization (service economy)

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CURRENT BUSINESS ENVIRONMENTS

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CURRENT BUSINESS ENVIRONMENTS

Competition/Rivalry Environments

Political Economic Socio-cultural Technological Ethical Environmental (ecological) Legal

Global

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POLITICAL / LEGAL FACTORS Legislative structure Political structure Government stability Political orientation Taxation policies Employment legislation Pressure groups Trade union power Relationship with foreign governments Foreign trade regulations Competitive behaviour legislation

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ECONOMIC FACTORS

Business cycles

Interest rates

Level of confidence

Investment incentives and policies

Unemployment levels

Energy costs

GNP, GDP

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TECHNOLOGICAL FACTORS

Levels of R & D expenditure

Patterns and speed of technological change

Product life cycles

National attitude towards technology

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SOCIAL AND CULTURAL FACTORS

Demographic structures

Lifestyles

Social mobility

Attitudes

Consumerism

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ECOLOGICAL FACTORS

Ecological consciousness

Ecological management

Eco-friendly products

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ETHICAL FACTORS

Business ethics

Ethical ideology

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HOW COULD WE FACE THE CHALLENGES AHEAD?

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BEING CREATIVE AND DIFFERENT..

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QUESTIONS…….

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WEEKLY ASSIGNMENT –01

Describe what capitalism is and explain the

critical factors that affect businesses in a

such economy.