The business environment (wk 3)

Under this topic, we will

• Learn about business activity
• Look at the factors of production
• Cover how businesses add value
• See how internal and external factors affect business using the PESTLE
framework
• Look at the stakeholder model

Business activity
Business activity involves taking a series of inputs and producing an output. The
output could be a physical good or a service.
The process in which businesses take factor inputs and process them to produce
outputs which are then sold is called transformation process.

Three categories of business activity.

1. B2C business: Business activity where the business sells goods and services
to a final consumer.
2. B2B business: Business activity where the business sells goods and services
to another business.
3. C2C business: Business activity where consumers exchange goods and
services often facilitated by a third party such as an online auction site.

Factors of production
Factors of production is the classification of inputs used in business activity which
includes land, labour, capital and enterprise.
• Land is all the natural resources of the Earth which can be used in
production.
• labour is all the human effort, mental and physical, which is used in
production.
 • capital is any item used in production which is not used for its own sake
but for what it contributes to production. This might include equipment
and machinery, buildings, offices, shops, computers, mainframes, desks,
chairs …
• enterprise is the act of taking risks in the organization of factors of
production to generate business activity.

The Transformation Process

How these factors are brought together, in what proportions and how they work
together in the transformation process, could be very different, even in the same
type of business operating in the same industry.

One of the key elements of the transformation process is adding value and this
could be at any stage in this process.
THE PESTLE FRAMEWORK
In order to help understand and analyse these external factors, a framework is
used which summarizes a number of broad, sometimes highly related and
interacting areas, which business has to work within. This framework is referred to
as the PESTLE framework with the acronym standing for:
• Political
• Economic
• Social
• Technological
• Legal
• Environment

Political
Politics refers to power – who has power, who makes decisions and how it affects
individuals and business. Power can be wielded by local governments, national
governments and supranational governments (where decision making or laws are
made by groups or states outside national boundaries) such as the European
Union (EU).

Economic
Businesses have to operate within an economic environment. This relates to the
extent of economic activity in different ‘economies’ which could include a very
local economy, a regional economy, a national or supranational or global
economy. There are also bodies which have supernational powers – the authority
to act across different nations – such as the International Monetary Fund (IMF).
Economic activity, as we have seen, refers to the amount of buying and selling
that takes place. This activity can be looked at within a local area, a region, nation
and on a global scale.
microeconomic environment is factors and issues that affect an
individual firm operating in a particular market or industry.
macroeconomic environment is the national or global economy within which the
business operates.
Social
Businesses are affected by various trends, fashions, moods and changes in
society. The move to improving the equality between men and women in the
workplace, for example, has led to businesses having to adapt their processes
and their attitudes to employment, the way their businesses operate and how
they monitor the attitudes and behaviour of workers.

Technology
Technology is the use of knowledge in some way which enables individuals or
businesses to have greater control over their environment. Businesses
constantly think of ways in which they can employ knowledge in this way
because it can help to reduce costs, improve technical and productive efficiency
and in many cases social and allocative efficiency. Technology can also help give
a firm competitive advantage where the advantage has the key characteristics of
being distinctive and defensible.

Legal
Laws and regulation can be national or supranational. The legal framework covers
all aspects of society and businesses have to abide by these laws. A strong legal
system which is respected is fundamental to the principle of good governance,
which in turn helps provide confidence in the way in which a business operates
and so promotes trade.

Environment
There is the concern about how we use resources, not only in terms of
productive and technical efficiency but also from social and allocative efficiency
and how we manage the results of resource use in terms of the waste products
generated and the impact on ecosystems and land use.
SHAREHOLDER VALUE AND STAKEHOLDERS
We have seen how business activity is a transformation process but we have to
ask ourselves why businesses carry out this activity and for whom? We can use
two concepts to provide at least part of the answer: shareholder value and
stakeholders.

Shareholder value is the overall value delivered to the owners of business in

the form of cash generated and the reputation and potential of the business
to continue growing over time.

Stakeholder is any group or individual with an interest in a business, such as

workers, managers, suppliers, the local community, customers and owners.

Practice questions
1. Think about a business producing bottled spa water. Identify some
examples of the four factors of production which are necessary to produce
the output of that businesses.

2. Why do some economists argue for enterprise to be a separate factor of

production rather than a specialist form of labour?

3. Think of a good and a service with which you are familiar and sketch a
diagram, accompanied by a brief description, of the transformation process
which takes place to produce each.

4. Describe the value added at each stage of production of a loaf of bread

up to the point it is purchased by the consumer.

5. In a country with a democratic political system, why might a business be

concerned about a change in government?
6. Explain the possible differences between the microeconomic and
macroeconomic environment effects on a business producing costume
jewellery.

7. Explain how a concern over the effect on the environment of business

activity can lead to not only environmental change but also technological,
social and legal changes which could affect a business.

8. Explain how an investment decision might affect shareholder value in a

positive way both in the short run and in the long run.

9. Describe how a plan by a business to increase the price of its goods might
cause a conflict between the interests of managers, shareholders,
employees and customers.