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The Business Environment:
A Global Perspective
Ninth edition
Ed Thompson, Ian Worthington and Chris Britton

De Montfort University, Leicester
Harlow, England • London • New York • Boston • San Francisco • Toronto • Sydney • Dubai • Singapore • Hong Kong
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First published in Great Britain in 1994 (print)

Ninth edition published 2023 (print and electronic)
© Ian Worthington and Chris Britton 1994, 1997, 2000, 2003 (print)
© Ian Worthington and Chris Britton 2006, 2009 (print and electronic)
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ISBN: 978-1-292-41784-4 (print)
978-1-292-41786-8 (PDF)
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British Library Cataloguing-in-Publication Data

A catalogue record for the print edition is available from the British Library
Library of Congress Cataloging-in-Publication Data

Names: Worthington, Ian, 1946- author. | Britton, Chris, author. |
Thompson, Edward, 1986- author.
Title: The business environment : a global perspective / Ian Worthington,
Chris Britton and Ed Thompson, De Montfort University, Leicester.
Description: Ninth Edition. | Hoboken, NJ : Pearson, [2023] | Revised
edition of The business environment, 2018. | Summary: “The business
environment is our environment, it is the world we live in and all
aspects of the business environment should be viewed in terms of people.
Business ethics is about fairness in how a business operates; a business
environmental policy is about how we pollute or preserve our own world;
employment and unemployment are about people’s ability to house and feed
themselves. This is a book about all of us and how we interface with the
world and each other, because businesses are just organisations of
people and material things”-- Provided by publisher.
Identifiers: LCCN 2022058060 (print) | LCCN 2022058061 (ebook) | ISBN
9781292417844 (paperback) | ISBN 9781292417868 (ebook) | ISBN
9781292417851 (epub)
Subjects: LCSH: Industrial management--Great Britain. | Great
Britain--Commerce. | European Union countries--Commerce. | Industrial
policy--Great Britain. | Industrial policy--European Union countries. |
International economic relations. | Business.
Classification: LCC HD70.G7 W64 2023 (print) | LCC HD70.G7 (ebook) | DDC
658--dc23/eng/20221201
LC record available at https://lccn.loc.gov/2022058060
LC ebook record available at https://lccn.loc.gov/2022058061
10 9 8 7 6 5 4 3 2 1
23 22 21 20 19
Cover design: Kelly Miller

Cover image: bfk92/iStock/Getty Images Plus/Getty Images
Print edition typeset in 9.5/13pt Stone Serif ITCPro by Straive

Printed by Ashford Colour Press Ltd., Gosport
NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION

For Lindsey, Tom and Georgina, for Rachael, Philip,
Nick and Megan, and for Ramanjeet, Darshan, Sandra
and David – with our love

Brief contents
Contributors xix
Preface to the Ninth Edition xx
Publisher’s Acknowledgements xxii
Guided tour xxiv
Part One INTRODUCTION 1

1 Business organisations: the external environment 3
2 Business organisations: the internal environment 17
3 The global context of business 39
4 De-globalising factors: sovereignty, conflicts and political priorities 55
Part Two CONTEXTS 69

5 The political environment (P) 71
6 The macroeconomic environment (E) 103
7 The demographic, social and cultural context of business (S) 141
8 The resource context: people, technology and natural
resources (T) 163
9 The legal environment (L) 189
10 The ethical and ecological environment (E) 215
Part Three FIRMS 233

11 Legal structures 235
12 Size structure of firms 261
13 Industrial structure 285
14 Government and business 307
Part Four MARKETS 325

15 The market system 327
16 Market structure 351
17 International markets and trade 373
18 Pandemics and Covid-19 399
19 Governments and markets 419
Part Five CONCLUSION 441

20 Strategy and the changing environment 443
Glossary 469
Index 489

Contents
Contributors xix
Preface to the Ninth Edition xx
Publisher’s Acknowledgements xxii
Guided tour xxiv
Part One INTRODUCTION
1 Business organisations: the external environment 3

Learning outcomes and key terms 3
Introduction 4
The business organisation and its environment 4
The general or contextual environment 7
Mini case: The impact of regional economic conditions 8
The immediate or operational environment 9
Analysing the business environment 10
Mini case: Fresh but not so easy 10
Central themes 12
Synopsis 14
Summary of key points 14
Case study: Facing the unexpected 14
Review and discussion questions 15
Assignments 16
Further reading 16
2 Business organisations: the internal environment 17

Introduction 18
The concept of the organisation: an initial comment 18
Understanding the nature of organisations: theories of
organisation and management 19
Other theoretical approaches 23
Organisational structures 23
Mini case: ‘Into the Dragon’s Den’ 24
Mini case: Mergers and competition 27
The virtual organisation 29
Structural change 30
Aspects of functional management 30
Synopsis 35

x Contents
Case study: Reshuffle at Microsoft 36

Case study: Thomas Cook expansion 37
Assignments 38
Further reading 38
3 The global context of business 39

Introduction 40
Globalisation versus internationalisation 40
The role of multinational enterprises 43
Mini case: Transfer pricing 44
Globalisation and business 46
Mini case: Currency crisis in emerging markets 47
Globalisation and the small and medium-sized firm 48
Synopsis 49
Case study: Global financial markets – too big to fail 50
Case study: FDI flows 51
Assignments 53
Further reading 53
4 De-globalising factors: sovereignty, conflicts and

political priorities 55
Introduction 56
What is globalisation? 57
Bretton Woods System (or the ‘New World Order’) 58
The 1970s to the present 59
Isolationism 59
International conflicts 62
Sanctions 63
Case study: Local solutions to global problems 65
Environmentalism 65
Case study: Weetabix – local solutions to global problems 67
Assignments 68
Further reading 68
Part Two CONTEXTS
5 The political environment (P) 71

Introduction 72
Political systems 74

Contents xi
Government in democratic states 76

Mini case: Brought to book 79
The three branches or functions of government 82
Mini case: The power of the purse 83
Checks and balances in democracies 87
A model of the policy process 87
Synopsis 89
Appendix 5.1: A democratic political system in action: UK national
government 90
The executive branch of government 92
The judicial branch of government 97
Appendix 5.2: Subnational government: UK local authorities 97
Appendix 5.3: Other levels of government 99
Case study: The business of lobbying 100
Case study: Political campaign funding 101
Assignments 102
Further reading 102
6 The macroeconomic environment (E) 103

Introduction 104
Economic systems 105
Economies in transition 109
Politico-economic synthesis 110
The macroeconomy 111
Government and the macroeconomy: objectives 117
Mini case: Digging in for the long term 123
Government and the macroeconomy: policies 123
The role of financial institutions 128
Mini case: A new kid on the block: the rise of the credit rating
agency 130
International economic institutions and organisations 131
Synopsis 134
Case study: Austerity 136
Case study: Quantitative easing (QE) 136
Assignments 138
Further reading 139
7 The demographic, social and cultural context

of business (S) 141

Introduction 142

xii Contents
The demographic environment of business 142

The social context 147
Mini case: A new class structure? 148
Lifestyles 151
The cultural environment 153
Mini case: National cultures 155
Application: market segmentation 156
Synopsis 158
Case study: An invitation to ‘tweet’ 159
Case study: Supply and demands – a changing workforce 160
Assignments 161
Further reading 161
8 The resource context: people, technology and

natural resources (T) 163
Introduction 164
People 164
Mini case: Zero-hours contracts 166
Technology 173
Technological change 173
Mini case: The robots are coming 175
Natural resources 180
Synopsis 183
Case study: Agricultural work and Brexit 184
Case study: Fracking 184
Assignments 186
Further reading 187
9 The legal environment (L) 189

Martin Morgan-Taylor
Introduction 190
Classification of law 190
Public and private law 190
Mini case: Verity and Spindler v Lloyds Bank (1995) 191
The legal system: the courts 194
Mini case: Jean-Marc Bosman – a case of foul play? 196
Business organisations and the law 197
Contract law: the essentials 197
Agency 201
Law and the consumer 202

Contents xiii
Codes of practice 209

Synopsis 210
Case study: The sale of goods on the Internet 211
Assignments 213
Further reading 214
10 The ethical and ecological environment (E) 215

Introduction 216
Ethics and business 217
Mini case: Illegal or unethical? 218
Corporate social responsibility 219
The ‘environment’ as a business issue: the emergence of
corporate environmentalism 220
Drivers of ‘green’ business 221
Why and how firms become more environmentally responsible 225
Mini case: Going round in circles: Desso Carpets 226
Another perspective: the ‘outside-in’ view 227
Case study: Doing well by doing good 228
Assignments 230
Further reading 230
Part Three FIRMS
11 Legal structures 235

Introduction 236
Private sector organisations in the UK 236
Mini case: Companies under pressure 242
Social enterprises 245
Public sector business organisations in the UK 246
Legal structure: some implications 249
Franchising, licensing and joint ventures 254
Mini case: Cross-national joint ventures 256
Synopsis 257
Case study: Uber 258
Assignments 259
Further reading 260

xiv Contents
12 Size structure of firms 261

Introduction 262
The size structure of UK industry 262
Organisational growth 263
Methods of growth 264
Mini case: The story of a failed merger 267
Finance for growth 268
Small firms 273
Mini case: ‘Olderpreneurs’ and small firms 274
Multinationals 281
Synopsis 282
Case study: The Scottish National Investment Bank 283
Assignments 284
Further reading 284
13 Industrial structure 285

Introduction 286
The structure of industry 286
Mini case: The end of manufacturing? 290
Mini case: The life cycle model 295
Deindustrialisation 297
Synopsis 300
Appendix 13.1: The Standard Industrial Classification (SIC), 2007 301
Case study: The rise of the public service companies 302
Assignments 305
Further reading 305
14 Government and business 307

Introduction 308
Government and business: an overview 308
Selected urban policy instruments 309
Developments in urban policy: 1997–2010 312
Urban and industrial policy developments in the UK since 2010 313
Local government and business in the UK 315
Business as an influence on government 320
Mini case: A taxing issue 321
Synopsis 322

Contents xv
Case study: Public sector procurement – the Royal Navy 323

Assignments 324
Further reading 324
Part Four MARKETS
15 The market system 327

Introduction 328
The market mechanism 328
Demand 328
Supply 331
Shifts in demand and supply 335
Mini case: The effect of a factory fire on the market for microchips 336
Price controls 337
Mini case: The price of toilet rolls in Venezuela 339
Elasticity of demand 340
Cross-price elasticity of demand 343
Elasticity of supply 343
The importance of the market to business 344
Synopsis 345
Case study: The housing market in the UK 346
Assignments 348
Further reading 349
16 Market structure 351

Introduction 352
Market structures – in theory and practice 353
Porter’s five-forces model 360
Mini case: Open Skies and contestability 363
Mini case: Blizzard, Activision and Microsoft 365
Measuring the degree of actual competition in the market 366
Synopsis 368
Case study: A Porter’s five-forces analysis of the cigarette industry
in the UK 369
Assignments 372
Further reading 372

xvi Contents
17 International markets and trade 373

Introduction 374
International trade – why it takes place 374
Restrictions to international trade 375
Mini case: The cotton dispute 376
The establishment and growth of the European Union 377
‘Brexit’ and Euroscepticism 379
The balance of payments 380
The history of the balance of payments in the UK 383
Mini case: The current account of the balance of payments 385
Exchange rates 388
Exchange rates and business 394
Synopsis 394
Case study: Post-Brexit trade 395
Assignments 397
Further reading 397
18 Pandemics and Covid-19 399

Introduction 400
Pandemics 400
Pandemics in history 403
Global spread 406
Prevention 407
Case study: Covid-19 408
Mini case: FFP2/N95 respirators and surgical masks 408
Mini case: Peloton bikes 409
UK government support measures 411
The future 416
Returning to normal 417
Synopsis 417
Assignments 418
Further reading 418
19 Governments and markets 419

Introduction 420
Privatisation policy in the UK 420
Mini case: Government to the rescue 426
Competition policy 429
Mini case: Accusations of price fixing 431
Government and the labour market 432
Synopsis 436

Contents xvii
Case study: Who leads who? 437

Case study: ‘What a fine mess you’ve got me into’ 438
Assignments 439
Further reading 439
Part Five CONCLUSION
20 Strategy and the changing environment 443

David Orton
Introduction 444
The need to monitor environmental change 445
Analysing the business environment: broad approaches 446
Mini case: Multinational inward investment: a PESTLE analysis 447
Techniques 450
Limitations to environmental analysis 455
Sources of information 455
Synopsis 463
Case study: Scenario planning at Shell 464
Assignments 466
Further reading 467
Glossary 469
Index 489

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Contributors
Authors
Ed Thompson, BA (Hons), MSc, PhD, PGCertHE, CMBE, CMgr, FHEA, FRSA, MCMI is
Associate Professor and Director of Apprenticeships in Leicester Castle Business School
at De Montfort University. His research is focused on organisational behaviour and
crisis management, and is a member of the editorial board of the SGEN Research Review
in the Philippines.
Ian Worthington, BA (Hons), PhD (Lancaster), is Emeritus Professor of Corporate Sus-

tainability at De Montfort University, Leicester, UK. He has published in, and reviewed
for, a variety of academic journals in both the UK and United States and is also author
of a book entitled Greening Business: Research, Theory and Practice.
Chris Britton, BA (Hons), MSc, was formerly a Principal Lecturer at De Montfort

University where her teaching and research interests included industrial economics,
labour markets and executive recruitment. With Ian Worthington and Andy Rees, she
is also co-author of a book on business economics.
Contributors
Martin Morgan-Taylor, LLB, LLM, FHEA, FRAS I, LTM, is an Associate Professor in the
School of Law at De Montfort University, Leicester, where he teaches business and com-
mercial law on a range of undergraduate and postgraduate courses. His research inter-
ests include online trading, consumer protection, and light pollution and nuisance. He
is a legal adviser on the latter to the Campaign for Dark Skies and the British
Astronomical Association.
David Orton, BA (Hons), MSc, is a Senior Lecturer at the University of Derby where he
is programme leader of the MBA Global and MBA Global Finance programmes. His
teaching and research interests lie in the fields of strategic management and crisis and
business continuity management.

Preface to the Ninth Edition
Why study the business environment?

The business environment is our environment, it is the world we live in and all aspects
of the business environment should be viewed in terms of people. Business ethics is
about fairness in how a business operates; a business environmental policy is about
how we pollute or preserve our own world; employment and unemployment are about
people’s ability to house and feed themselves. This is a book about all of us and how we
interface with the world and each other, because businesses are just organisations of
people and material things.
In reading about the business environment you are reading about your world. You
are reading about why the prices of the things you buy might go up or down, or why
at any given time it might be harder or easier for you to get a job. By understanding
the things in this book that make up your world you will better understand how the
world works, what changes mean and the implications they might have on your
organisations (whether they are organisations that we work for, or the organisations
that we have at home). In my own life, understanding the business environment has
helped me make decisions about when and where and how to buy a home, and what
and what not to invest in. Understanding the world allows us to make informed
decisions.
Despite the global pandemic, Brexit, the Russian invasion of Ukraine and increased
international trade tensions, the world keeps on turning. People continue to learn at
home and at universities – and people continue to graduate and find jobs. It will be
sensible for somebody going for an interview to carry out some research on the poten-
tial employer and understand how they might be affected by their business
environment.
The first aim of this book is to set out the way things are in the world today. It will
do this by breaking down everything outside of a business (and cover a little bit inside
as well) into chapters organised in a logical way. In effect, what we mean by external
and internal environments in a global context in which business operates today. The
second part will cover aspects of the business environment as you might find them in
a PESTLE analysis (Political, Economic, Social, Technological, Legal, Ethical/Ecological).
The third part will cover firms and industries, as well as how government regulates
business. The fourth part will consider the importance of markets as a concept, nation-
ally and internationally. Finally, we will consider how the business environment feeds
into strategy making for organisations.
The second aim of the book is to offer you examples and opportunities to apply what
you have learned. The biggest change in this edition of the book has been the inclusion
of specific chapters on the biggest contemporary events – namely the global Covid-19
pandemic and the retreat of some aspects of globalisation, including Brexit. These new
chapters apply some of the content which are introduced elsewhere to give an all-round
perspective on how factors influence one another, and convey the complexity of the
business environment.

Preface to the Ninth Edition xxi
The context
With this edition, like the last, I feel I have to introduce some caveats at this point. A 600-
page textbook takes a while to update. As I write this (in early 2022) the terms of Brexit
arrangements are finalised, but the implications are still being worked out – particularly
at the Irish/Northern Irish boarder. The tide appears to be turning with respect to Covid-
19, with several viable vaccines, countries making progress with their distribution, and
plans for how the developing world will be supported to ensure global protection. How-
ever, things change quickly. While I will address Brexit and Covid-19, the concepts set
out here can be applied to many different contexts; the specific situations will change
over the next two to five years but the concepts will persist. Further afield, when I started
the last edition Russia was considered a friendly nation to Europe; when I started this
edition things were a bit more icy between the two nations. Now things are very different
and Ukraine has been invaded – with things in Ukraine looking increasingly like a proxy
war. . . at any rate, the most significant conflict in Europe for 20 or more years.
The second caveat is with respect to data. I have updated data wherever possible – but
in some circumstances there are simply no more updates. Sometimes data are reported
in a different way, so continuity could not be maintained if the datasets were any more
up to date, and in a few cases data had been collected by agencies which have changed
or been disbanded. As a result, some of the datasets are not as up to date as I would have
preferred, but they are sufficient to illustrate the points made in the book.
My authorship
This book is now in its ninth edition. Ian Worthington approached me to author this
title in a more stable world (2015), a time when pandemic flu was hypothetical and
before Brexit; a time when writing a book on the business environment seemed like a
less troublesome undertaking!
I have quite a broad background in terms of my experience with the business envi-
ronment, having worked for large and small private and public sector organisations.
My first degree in business studies equipped me with most of my foundational business
environment knowledge. Subsequently, I gained a master’s degree in project manage-
ment, and a doctorate in organisational behaviour. In most of my organisational work
I have applied an actor–network theory perspective to how the world works. Actor–
network theory considers all things related, nothing existing in isolation. This has
proven a logical approach writing this book too; the environment is a world of many
connections, some obvious and others less so. I hope through reading this book that
you will come to understand the world in a similar way.
Thanks on behalf of Ian, Chris and myself to a dedicated team from Pearson for their
work on this edition, particularly Archana Makhija, Supervising Producer for UK and
Canada, for her support and encouragement through the development of this edition.
And on behalf of myself, a big thanks to Ian and Chris, who handed over the updating
of the title in the 8th edition. This remains their creation, but as the person responsible
for updates I must insist that errors are my own.
Finally, take it from someone with a British PhD in Organisational Behavior: organi-
sation is spelled with a Z in English English (it’s in the OED). However, to appease my
publishers, it will appear as organisation hereafter.
Ed Thompson

Publisher’s Acknowledgements
Text Credits
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Publisher’s Acknowledgements xxiii
263 Office for National Statistics: UKBAD01 - Enterprise/local units by employ-

ment size band 2021 data (ONS); 269 European Union: Evaluation of the user guide
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for Business, Energy and Industrial Strategy: Adapted from ‘Sectoral Indicators
of Concentration and Churn 2006–2018’ from the Department for Business, Energy
and Industrial Strategy (BEIS), 2018; 369 The Office for National Statistics:
Adapted from Office for National Statistics, Opinions and Lifestyle Surveys; 369 The
Office for National Statistics: Adapted from Office for National Statistics, Adult
Smoking Habits in the UK 2019; 370 The Office for National Statistics: Adapted
from ONS Consumer Price Inflation Time Series Data (MM23); 375 Organisation for
Economic Co-operation and Development: Adapted from Financial Indicators
– Stocks: Private Sector Debt, http://stats.oecd.org/index.aspx?queryid=34814. OECD.
StatExtracts http://stats.oecd.org/; 381 Office for National Statistics: Adapted
from ONS Balance of Payments, 2021 Q4 Data www.ONS.gov.uk; 383 Office for
National Statistics: Adapted from Balance of payments, various years, www.ons.gov.
uk; 385 Office for National Statistics: Adapted from Office for National Statistics;
386 The Centre d’Études Prospectives et d’Informations Internationales:
Adapted from CEPII - BECI data, 2020; 387 Office for National Statistics: Adapted
from UK Trade ONS.gov.uk; 395 Agriculture and Horticulture Development
Board: Agriculture and Horticulture Development Board - www.AHDB.org.uk; 402
Cabinet Office: Adapted from Samuel Hilton and Caroline Baylon, Risk management
in the UK: What can we learn from COVID-19 and are we prepared for the next disas-
ter?, November 2020, National Risk Register, Cabinet Office, Crown copyright 2017;
406 World Bank: World Bank, Yearbook of Tourism Statistics, International Tourism,
Number of Arrivals (2022); 412 HM Revenue and Customs: HMRC (2022) Error and
Fraud in the COVID-19 schemes; 413 HM Revenue and Customs: ONS (2022), UK
Government Debt and Deficit (March 2022); 415 Office for National Statistics :
Office for National Statistics (2022) Inflation and price indices; 450 Harvard Business
Publishing: Adapted from Branden burger, A. and Nalebuff, B. (1995) ‘The right
game: use game theory to shape strategy’, Harvard Business Review, July–August,
pp. 57–71; 465 Jeroen van der Veer: Quoted by Jeroen van der Veer.

Guided tour
1
Business organisations:
the external environment
Business organisations differ in many ways, but they also have a common
Learning outcomesfeature:
highlight core coverage
the transformation in terms
of inputs of expected
into outputs; learning
it is through outcomes
this process that
2
after completing eachthe
chapter, to helpThis
value is created. students focusprocess
transformation their learning
takes placeand evaluate
against a their
progress.
Business organisations:
background of external influences which affect the firm and its activities. This
the internal environment

external environment is complex, volatile and interactive, but it cannot be
ignored in any meaningful analysis of business activity.
Learning
Having
The readapproach
systems this chapter you
to the should
study be able to:
of business organisations stresses the
outcomes
interaction
● indicate between a firm’s
the basic internal
features and external
of business environments. Key aspects of
activity
the internal context of business include the organisation’s structure and
● portray the business organisation as a system interacting with its environment
functions and the way they are configured in pursuit of specified organisational
● demonstrate the range and complexity of the external influences on business
objectives. If the enterprise is to remain successful, constant attention needs to
activity
be paid to balancing the different influences on the organisation and to the
● identify the
requirement central
to adapt to themes inherent
new external in the study This
circumstances. of the business environment
responsibility lies
essentially with the organisation’s management, which has the task of blending
people, technologies, structures and environments.
Key terms Environmental change Immediate (or operational) Outputs
External environment environment PESTLE analysis
General (or contextual) Inputs Transformation system
Learning Having read this chapter you should be able to:
outcomes environment Open system
Key terms are drawn out at
● outline the the
broadstart of every
approaches chapter
to organisation andand are emboldened
management, paying the first
time they appear in theparticular
text attention
to enable to thestudents
systems approach
to locate information quickly. A full
identify alternative organisational structures used by business organisations
Glossary appears at the end of the book.
●
● discuss major aspects of the functional management of firms

● illustrate the interaction between a firm’s internal and external environments
Key terms Bureaucracy Human relations approach Project team

Classical theories of Human resource Public sector
organisation management Re-engineering
Contingency approach Management Scientific management
Divisional structure Marketing Sub-systems
Downsizing Marketing concept Systems approach
Formal structures Marketing mix Theory X and Theory Y
Functional organisation Matrix structure Theory Z
Functional specialisation Organisation chart Virtual organisation
Hierarchy of needs Private sector Voluntary (or third) sector
Holding company Profit centre
M01_The_Business_Environment-A_Global_Perspective_9e.indd 3 10/02/2023 08:04
Lecturer resources tailored to support the use of this textbook in teaching is available
at go.pearson.com/uk/he/resources.

Guided tour xxv
210 Chapter 9 · The legal environment (L)
Case studies of varying complexity

service customers relate
should expect the
to receive theory
and by represented
encouraging acceptable businessin the chapter to
prac-
tices. In addition, such codes of conduct invariably identify how customer complaints
real-life situations in should
a range of diverse organisations.
be handled and many offer low-cost or no-cost arbitration schemes to help settle
disputes outside the more formal legal process. Case study: The sale of goods on the Internet 211
Whilst codes of practice do not in themselves have the force of law, they are normally
seen as a useful mechanism for regulating the relationship between business organisa-
case
tions and their customers and accordingly they have the support of the OFT, which often
study
The sale of goods on the Internet
advises trade associations on their content. Businesses, too, usually find them useful,
particularly if through the establishment of a system of self- regulation they are able to
The saleavoid the introduction
of consumer of restrictions imposed
goods on the Internet byavailable
cancellation the law. under Article 9, where the buyer
(particularly those between European member states) has a right to cancel the contract for 14 days starting
raises a number of legal issues. And these issues are on the day the consumer receives the goods or
now complicated by the fact that the UK has left services (this was seven days under the Distance
Synopsis Europe, but not stopped trading with EU member

states. First, there is the issue of trust, without which
Selling Directive). This ‘cooling-off’ period is intended
to place the consumer in the position as if they had
the consumer will not buy; they will need assurance seen the goods in store. Failure to inform the
that the seller is genuine,activities,
All business and that they fromwill get
thethe consumerof
establishment of the
this right automatically
organisation extends the
through to the sale of
goods that they have ordered. Second, there is the period to a year and 14 days. Whilst the seller can
the product to the customer, are influenced by the law. This legal environment within
issue of consumer rights with respect to the goods in place the cost of returning goods on the buyer, the
question:which businesses
what rights exist and exist
do theyandvaryoperate
across evolves overrefund
seller must time the and is a key
standard rateinfluence
outgoing on firms of
Europe?all sizes
Last, and ofinenforcement:
the issue all sectors, as illustrated
what by anThe
postage. examination of some
seller is not entitled of the
to deduct any main
costs laws
happensgoverning
should anything thegorelationship
wrong? between a business
as a restockingandfee.its All
customers.
of this places The majority of con-
a considerable
sumer laws are of relatively recent origin obligation
and on the seller;
derive from however, such data should
the attempts by successive
Information and trust stop many misunderstandings and so boost cross-
governments to provide individuals with a measure of protection against a minority of
border trade by boosting consumer faith and
Europe recognises the problems of doing business
firms that behave in ways deemed to beconfidence unacceptable.in non-face-to-face sales.
across the Internet or telephone and it has attempted
Concomitantly, they also provide reputable
to address the main stumbling blocks via directives
Another organisations with a isframework
concern for the consumer fraud. The within
which are which to carry
incorporated out their
into member business
states’ own laws.and, as such, acthas
consumer who aspaid by credit cardto
an incentive willentrepreneurial
be
Summary of key points provides the student with a useful revision aid.
And these activity
European indirectives
market-based date to aeconomies.
time when
protected by section 83 of the Consumer Credit Act
1974, under which a consumer/purchaser is not liable
the UK was a member of the EU, and so they are
for the debt incurred if it has been run up by a third
incorporated into domestic law. The original Distance
party not acting as the agent of the buyer. The
Selling Directive, implemented as the Consumer
Distance Selling Regulations extended this to debit
Protection (Distance Selling) Regulations 2000, has
cards, and removed the ability of the card issuer to
Summary of key points
been replaced by the Consumer Rights Directive
(2011-83/EU). (Note that this is different from the
charge the consumer for the first £50 of loss.
Moreover, section 75 of the Consumer Credit Act
Consumer Rights Act 2015.) The replacement
1974 also gives the consumer/buyer a like claim
Directive is a ‘maximum harmonisation’ measure,
● The legal rules within which businesses exist
against the and
creditoperate are an
card company forimportant
any part of the
meaning that the provisions are binding on, and
misrepresentation or breach of contract by the seller.
external
cannot be modified by,environment
member states.of business organisations.
Both
This is extremely important in a distance-selling
Directives attempt to address the issues of trust in
Laws affecting businesses derive transaction, where the seller may disappear.
distance●sale. In short, the consumer who does not from a variety of sources, including custom, the deci-
buy face to sions
face may oflack
theimportant
courts and legislation.
information,
What quality and what rights?
which they may otherwise have easy access to if they Assignments 259
● Laws
were buying face toareface.sometimes made at international The nextand issuesupranational levelthat
relates to the quality (including
may be Europe).
Article 6 of the Consumer Rights Directive requires expected from goods bought over the Internet.
● Contract,
to abide by regulation (and bear the agency and consumer protection
cost that security? What are three key areas governing
are the advantages and disadvan- the day-to-
inter alia for the seller to identify themselves and an Clearly, if goods have been bought from abroad, the
regulation brings) and dayfind it hard to ofrestructure if tages of this position?
address must be work provided ifbusinesses.
the goods are to be paid levels of quality required in other jurisdictions may
demand changes. Critics argue that this system is 2 What advantages arethis
there to regulated services
for in advance. Moreover, a full description of the vary. It is for reason that Europe has and
attempted to
goods and the final price (inclusive of any taxes) must intention
● Offer, acceptance, consideration, to the
create
issue legal relations and capacity are
unfair on drivers, who earn money for Uber while formal organisations?
standardise of quality and consumer
having none of the protection of employees. Finally,
central
also be provided. Theelements
new directive of bans
contract 3law.
pre-tickedUber has recently with
remedies, launched Uber Connect
the Consumer – a same
Guarantees Directive
where Uber services are less regulated than taxi firms,
boxes (e.g. for insurance), and limits card transaction day parcel pick up andThe
(1999-44/EC). delivery service
Consumer provided
Rights by has
Act 2015
there have been cases where drivers
● Agency have been are a common feature of business practice.
relationships
charges to those of the cost actually incurred by the cyclists on the same non-contractual basis
replaced The Sale and Supply of Goods to Consumeras its
accused of crimes against passengers – and Uber
trader. These provisions will help to cut hidden costs. drivers.Regulations
What other types
2002 in ofimplementing
service and companies
this Directive,
accused of not taking● Thetheserelationship
crimes seriously. between businesses think and of?their customers is governed by a variety of
▼
The seller must also inform the buyer of the right ofcan youwhich not only lays down minimum quality standards
laws, many of which derive from statute.
Questions and assignments
Case study questions
● In addition to the provide engaging
protection provided activities
to consumers by the law,for
manystudents
organisations and lecturers
1 Given the choice, would you rather
operate underwork for a com-
agreed codes of conduct.
in and out of the classroom
pany with employment rights situation.
and responsibilities, orFurther questions on the website help to evaluate
work as a self-employed contractor with limited
their progress. M09_The_Business_Environment-A_Global_Perspective_9e.indd 211 10/02/2023 08:26
Review and discussion questions

1 Numerically, the sole proprietorship is the most popular form of business organisation
throughout Europe. How would you account for this?
2 To what extent is corporate status an asset to a business organisation? Does it have

any disadvantages?
3 Examine the implications of privatising a public sector business organisation.
4 Discuss how the legal status of a business affects its objectives, its methods of finance
and its stakeholders.
5 How would you explain the rise in the popularity of franchising in recent years?
Assignments
1 You have recently been made redundant and decide to set up your own small
business, possibly with a friend. Assuming that you have £25,000 to invest in
your new venture, draft a business plan which is to be presented to your bank
manager in the hope of gaining financial support. Your plan should include a
clear rationale for the legal form you wish your business to take, your chosen
product(s) or service(s), evidence of market research, an indication of anticipated
competition and supporting financial information.
2 You work in a local authority business advice centre. One of your clients wishes
to start a business in some aspect of catering. Advise your client on the
advantages and disadvantages of the various legal forms the proposed
enterprise could take.

Part One
INTRODUCTION
1 Business organisations: the external environment
2 Business organisations: the internal environment
3 The global context of business
4 De-globalising factors: sovereignty, conflicts and
political priorities

1 Business organisations:
the external environment
Business organisations differ in many ways, but they also have a common
feature: the transformation of inputs into outputs; it is through this process that
the value is created. 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.

outcomes ● 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 business
activity
● identify the central themes inherent in the study of the business environment
Key terms Environmental change Immediate (or operational) Outputs

External environment environment PESTLE analysis
General (or contextual) Inputs Transformation system
environment Open system

4 Chapter 1 · Business organisations: the external environment
Introduction
Business activity is a fundamental and universal feature of human existence and yet the
concept of ‘business’ is difficult to define with any degree of precision. Dictionary definitions
tend to describe it as being concerned with buying and selling, or with trade and commerce,
or the concern of profit-making organisations, and clearly all of these would come within the
accepted view of business. Such a restricted view, however, would exclude 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 which business methods, skills, attitudes
and objectives have been vigorously adopted by these organisations. It is this broader view
of business and its activities that is adopted below and that forms the focus of an investiga-
tion into the business environment.
The business organisation and its environment

A model of business activity
Most business activity takes place within an organisational context and even a cursory
investigation 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 multi-billion-dollar
international or multinational corporation producing and trading on a global scale.
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/or market,
methods of finance, scale of operations, legal status, and so on. Nissan, for example,
would be characterised as a major multinational car producer and distributor trading on
world markets, while a local builder is likely to be seen as a small business operating at a
local level with a limited market and relatively restricted turnover.
web Further information on Nissan is available at www.nissan-global.com

link
➚ The Nissan UK website address is www.nissan.co.uk
While such distinctions are both legitimate and informative, they can conceal the fact
that all business organisations are ultimately involved in the same basic activity, namely
the transformation of inputs (resources) into outputs (goods or services). This process is
illustrated in Figure 1.1.
In essence, all organisations acquire resources – including labour, premises, technology,
finance, materials – and transform these resources into the goods or services required by
their customers. While the type, amount and combination of resources will vary according
to the needs of each organisation and may also vary over time, the simple process described
above is common to all types of business organisation and provides a useful starting point
for investigating business activity and the environment in which it takes place.
A more detailed analysis of business resources and those internal aspects of organisa-
tions which help to transform inputs into output can be found in Chapters 2 and 8. The
need, here, is simply to appreciate the idea of the firm as a transformation system and
to recognise that in producing and selling output, most organisations hope to earn

The business organisation and its environment 5
Figure 1.1 The business organisation as a transformation system
Inputs Outputs
Land, premises
Materials Goods
Labour BUSINESS Services
Consumption
Technology ORGANISATIONS Ideas
Finance Information, etc.
Managerial skills, etc.
sufficient revenue to allow them to maintain and replenish their resources, thus permit-
ting them to produce further output which in turn produces further inputs. In short,
inputs help to create output and output creates inputs. Moreover, the output of one
organisation may represent an input for another, as in the case of the firm producing
machinery, basic materials, information or ideas. This interrelationship between busi-
ness organisations is just one example of the complex and integrated nature of business
activity and it helps to highlight the fact that the fortunes of any single business organisa-
tion are invariably linked with those of another or others – a point 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 systems approach
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 intertwined with
the outside world – the external environment in systems language. This environment
comprises a wide range of influences – economic, demographic, social, political, legal,
technological, etc. – which affects business activity in a variety of ways and which can
impinge not only on the transformation process itself, but also on the process of resource
acquisition and on the creation and consumption of output. This idea of the firm in its
environment is illustrated in Figure 1.2.
Figure 1.2 The firm in its environment
Environmental influences
Political, social, legal,
cultural, technological, etc.
BUSINESS
Inputs Outputs Consumption
ORGANISATIONS

Figure 1.3 Two levels of environment
‘General’ or ‘contextual’ ‘Immediate’ or ‘operational’

environment environment
Economic Suppliers
Political Competitors
Legal Labour market
Social, etc. Financial institutions, etc.
BUSINESS
ORGANISATIONS
In examining the business environment, a useful distinction can be made between

those external factors that tend to have a more immediate effect on the day-to-day opera-
tions of a firm and those that tend to have a more general influence. Figure 1.3 makes
this distinction.
The immediate (or operational) environment for most firms includes suppliers, com-
petitors, labour markets, financial institutions and customers, and may also include trade
associations, trade unions and possibly a parent company. In contrast, the general (or
contextual) environment comprises those macroenvironmental factors such as eco-
nomic, political, socio-cultural, technological, legal and ethical influences on business
which affect a wide variety of businesses and which can emanate not only from local and
national sources, but also from international and supranational developments. Macro-
environmental factors might be thought of as factors so large that the business cannot
change them.
This type of analysis can also be extended to the different functional areas of an organi-
sation’s activities, such as marketing or personnel or production or finance, as illustrated
in Figure 1.4. Such an analysis can be seen to be useful in at least two ways. First, it empha-
sises the influence of external factors on specific activities within the firm and in doing
so underlines the importance of the interface between the internal and external
Figure 1.4 Environmental influences on a firm’s marketing system
Environmental influences
General
Immediate
Marketing Marketing Marketing

Market(s)
intermediaries system intermediaries

The general or contextual environment 7
environments. Second, by drawing attention to this interface, it highlights the fact that,
while business organisations are often able to exercise some degree 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.
The general or contextual environment

While the external factors referred to above form the subject matter of the rest of the
book, it is useful at this point to gain an overview of the business environment by high-
lighting some of the key environmental influences on business activity. In keeping with
the distinction made between general and more immediate influences, these are dis-
cussed separately below. In this section we examine what are frequently referred to as the
‘PESTLE’ factors (i.e. Political, Economic, Socio cultural, Technological, Legal and Ethical
influences). A PESTLE analysis (or PEST analysis) can be used to analyse a firm’s current
and future environment as part of the strategic management process (see Chapter 19).
PESTLE examines factors external to the firm; these might represent opportunities or
threats and later can be used in a SWOT analysis (whereas strengths and weaknesses are
internal factors).
The political environment

A number of aspects of the political environment clearly impinge on business activity.
These range from general questions concerning the nature of the political system and its
institutions and processes (Chapter 5) to the more specific questions relating to govern-
ment involvement in the working of the economy (Chapter 6) and its attempts to influ-
ence market structure and behaviour (Chapters 12, 16, 18).
Government activities, both directly and indirectly, influence business activity, and
government can be seen as the biggest business enterprise at national or local level
(Chapter 14). Given the trend towards the globalisation of markets (Chapters 4 and 17)
and the existence of international trading organisations and blocs, international politico-
economic influences on business activity represent one key feature of the business envi-
ronment (Chapters 5, 8 and 17). Another is the influence of public, as well as political,
opinion in areas such as environmental policy and corporate responsibility
(Chapter 10).
The economic environment

The distinction made between the political and economic environment – and, for that
matter, the legal environment – is somewhat arbitrary. Government, as indicated above,
plays a major role in the economy at both national and local level (Chapters 6 and 14)
and its activities help to influence both the demand and supply side (e.g. see Chapter 15).
Nevertheless there are a number of other economic aspects related to business activity
which are worthy of consideration. These include various structural aspects of both firms
and markets (Chapters 11, 12, 13 and 16) and a comparison of economic theory and
practice (e.g. Chapters 15, 16 and 17).

mini case The impact of regional economic conditions
For a company that trades in different markets needed for building more factories and
across the world, macroeconomic conditions (see infrastructure. To support its own steel industry
Chapter 6) in a particular part of its overall market China has been selling steel at less than the cost
can play a key role in determining its corporate European steelmakers can produce it. This is an
sales and profitability. French carmaker PSA example of the slowdown in European and
Peugeot Citroën, for instance, experienced a American economies causing Chinese businesses
significant decline in sales in 2012 as demand fell to act more aggressively, which has eventually led
in Southern Europe on the back of the recession in to the collapse of large parts of the British steel
the eurozone. In response to the problem, the industry such as the (Indian-owned) Tata steel
company announced significant job cuts aimed at works at Port Talbot near Cardiff in 2016.
reducing costs and looked to the French Since market conditions can vary substantially
government for a series of multi-billion-euro loans in different locations, some businesses can
to keep it afloat until trading conditions improved. experience significant variations in performance in
As the global economy slowed, steel industries different parts of their operations. US car giant
have been heavily affected. After a period of rapid Ford, for example, announced significant losses in
expansion (driven mostly by the growth of Chinese Europe in 2012 alongside ‘spectacular’ results in
infrastructure and social development), China’s its North American division. Like Chrysler and
economy has now started to slow as demand from other competitors including GM, Ford was able to
more developed countries who consume Chinese- offset its European losses with stronger sales in
made products has fallen. This has led to a the United States. It also posted pre-tax profits in
dramatic drop in the price of steel as it is no longer its South American and Asian markets.
Further information on the organisations mentioned in this mini case is available at

web
link www.psa-peugeot-citroen.com; www.tatasteel.com; www.ford.com;
➚ www.chrysler.com; www.gm.com
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 other variables.
People are a key organisational resource and a fundamental part of the market for goods
and services. Accordingly, socio-cultural influences and developments have an impor-
tant effect on business operations, as do demographic changes (Chapters 7 and 8).
The technological environment

Technology is both an input and an output of business organisations as well as being an
environmental influence on them. Investment in technology and innovation is fre-
quently seen as a key to the success of an enterprise and has been used to explain differ-
ences in the relative competitiveness of different countries (Chapter 8). It has also been
responsible for significant developments in the internal organisation of businesses in the
markets for economic resources.

The immediate or operational environment 9
The legal environment

Businesses operate within a framework of law, which has a significant impact on various
aspects of their existence. Laws usually govern, among other things, the status of the
organisation (Chapter 11), its relationship with its customers and suppliers and certain
internal procedures and activities (Chapter 9). They may also influence market structures
and behaviour (e.g. Chapters 16 and 19). Since laws emanate from government (includ-
ing supranational governments) and from the judgments of the courts, some under-
standing of the relevant institutions and processes is desirable (e.g. Chapters 5 and 9).
The ethical and ecological environment

Ethical considerations have become an increasingly important influence on business
behaviour, particularly among the larger, more high-profile companies. One area where
this has been manifest is in the demand for firms to act in a more socially responsible way
and to consider the impact they might have on people, their communities and the natu-
ral environment (Chapter 10).
The immediate or operational environment

Resources and resource markets
An organisation’s need for resources makes it dependent to a large degree on the suppliers
of those resources, some of which operate in markets that are structured to a considerable
extent (e.g. Chapter 8). Some aspects of the operation of resource markets or indeed the
activities of an individual supplier can have a fundamental impact on an organisation’s
success and on the way in which it structures its internal procedures and processes. By
the same token, the success of suppliers is often intimately connected with the decisions
and/or fortunes of their customers. While some organisations may seek to gain an advan-
tage in price, quality or delivery by purchasing resources from overseas, such a decision
can engender a degree of uncertainty, particularly where exchange rates are free rather
than fixed (Chapter 17). Equally, organisations may face uncertainty and change in the
domestic markets 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 meet con-
sumer needs is seen as one of the keys to organisational survival and prosperity – a point
not overlooked by politicians, who are increasingly using business techniques to attract
the support of the electorate. This idea of consumer sovereignty – where resources are
allocated to produce output to satisfy customer demands – is a central tenet of the market
economy (Chapter 6) and is part of a capitalist ideology whose influence has become
all-pervasive in recent years, the idea being that companies competing is the most effi-
cient way to organise society. Understanding the many factors affecting both individual

and market demand, and the ways in which firms organise themselves to satisfy that
demand, is a vital component of a business environment that is increasingly market led.
Competitors
Competition – both direct and indirect – is an important part of the context in which
many firms operate and is a factor equally applicable to the input as well as the output
side of business. The effects of competition, whether from domestic organisations or
from overseas firms (see Chapter 17, for example), are significant at the macro as well as
the micro level and its influence can be seen in the changing structures of many advanced
industrial economies (Chapter 13). How firms respond to these competitive challenges
(e.g. Chapter 12) and the attitudes of governments to anti-competitive practices (Chap-
ter 19) is a legitimate area of concern for students of business.
Analysing the business environment

In a subject as all-encompassing as the business environment it is possible to identify
numerous approaches to the organisation of the material. One obvious solution would
be to examine the various factors mentioned above, devoting separate chapters to each
of the environmental influences and discussing their impact on business organisations.
While this solution has much to recommend it – not least of which is its simplicity – the
approach adopted below is based on the grouping of environmental influences into three
main areas, in the belief that this helps to focus attention on key aspects of the business
world, notably contexts, firms and their markets.
mini case Fresh but not so easy
A recurring theme in this and previous editions of providing a low-risk method of entry into a large
the book is the need for businesses to monitor and lucrative market, with the focus on providing
and, where necessary, respond to changes in the fresh produce at low prices in competition with
business environment. Equally important is the existing retailers such as Trader Joe’s and Walmart.
requirement for a firm to understand the needs of As a preliminary step, the company sent some of
the customers in the markets in which it currently its senior executives to the United States to live
operates or in which it wishes to expand its with American families for several months in order
operations as a means of growing the organisation. to understand their shopping habits and product
Even some of the world’s largest and most preferences. It also ran a high-profile promotional
sophisticated companies can sometimes get this campaign to support its plans to open up 1,000
wrong. stores in California and neighbouring states before
Take the very well documented case of Tesco launching the brand on the east coast.
PLC’s foray into the US grocery retailing market Tesco’s hope that it would be able to break even
with the launch of its Fresh & Easy stores in 2007– in two years quickly evaporated and the company
8. Initially established in a number of states on the was forced to pump hundreds of millions of
US west coast, the experiment was aimed at pounds into the venture to keep it afloat. Apart

Mini case: Fresh but not so easy 11
from the rather unfortunate coincidence of the high-quality produce. Some consumers also
launch of its brand with the sub-prime crisis and apparently complained that the name Fresh & Easy
subsequent recession in the United States, retail reminded them of a deodorant or a sanitary
analysts have pointed to some fundamental errors product.
in understanding the preferences of US By the time of its withdrawal from the US
consumers. Mistakes are said to have included an market in September 2013, Tesco had reputedly
unclear image; cold and antiseptic stores; the lost more than £1.8 billion. On the positive side,
introduction of self-pay checkouts; using cling film Tesco has made ventures into other markets. Trent
on fresh products; an over-emphasis on ready Hypermarket, owned jointly by Tesco and Tata was
meals; an unwillingness to embrace the ‘coupon formed in 2015 and after a mixed time during the
culture’ that is an important part of the US pandemic was making around £4 million a month
shopping experience; and problems in ensuring in profit by the second quarter of 2022.
web Tesco’s website address is: www.tesco.com

➚ link
Following a basic introduction to the idea of the ‘business environment’, in Part Two
consideration is given to the political, economic, social, cultural, demographic, legal,
ethical and ecological contexts within which businesses function. In addition to examin-
ing the influence of political and economic systems, institutions and processes on the
conduct of business, this section focuses on the macroeconomic environment and on
those broad social influences that affect both consumers and organisations alike. The
legal system and the influence of law in a number of critical areas of business activity are
also a primary concern and one which has links with Part Three.
In Part Three, attention is focused on three central structural aspects: legal structure,
size structure and industrial structure. The chapter on legal structure examines the impact
of different legal definitions on a firm’s operations and considers possible variations in
organisational goals based on legal and other influences. The focus then shifts to how
differences in size can affect the organisation (e.g. access to capital, economies of scale)
and to an examination of how changes in scale and/or direction can occur, including the
role of government in assisting small business development and growth. One of the con-
sequences of changes in the component elements of the economy is the effect on the
overall structure of industry and commerce – a subject which helps to highlight the impact
of international competition on the economic structure of many advanced industrial
economies. Since government is a key actor in the economy, the section concludes with
an analysis of government involvement in business and in particular its influence on the
supply as well as the demand side of the economy at both national and local levels.
In Part Four, the aim is to compare theory with practice by examining issues such as
pricing, market structure and foreign trade. The analysis of price theory illustrates the
degree to which the theoretical models of economists shed light on the operation of
business in the ‘real’ world. Similarly, by analysing basic models of market structure, it is
possible to gain an understanding of the effects of competition on a firm’s behaviour and
to appreciate the significance of both price and non-price decisions in the operation of
markets.

The analysis continues with an examination of external markets and the role of gov-
ernment in influencing both the structure and the operation of the marketplace. The
chapter on international markets looks at the theoretical basis of trade and the develop-
ment of overseas markets in practice, particularly in the context of recent institutional,
economic and financial developments (e.g. the Single Market, globalisation, the euro).
The section concludes with an investigation of the rationale for government interven-
tion in markets and a review of government action in three areas, namely privatisation
and deregulation, competition policy and the operation of the labour market.
To emphasise the international dimension of the study of the business environment,
each chapter of the book concludes with a relevant national and international cases
which draw together some of the key themes discussed in the previous chapters. By exam-
ining specific issues and/or organisations, the aim is to highlight linkages between the
material discussed in the text and to provide an appreciation of some of the ways in
which business activity reaches well beyond national boundaries.
The concluding chapter in the book stresses the continuing need for organisations to
monitor change in the business environment and examines a number of frameworks
through which such an analysis can take place. In seeking to make sense of their environ-
ment, businesses need access to a wide range of information, much of which is available
from published material, including government sources. Some of the major types of
information available to students of business and to business organisations – including
statistical and other forms of information – are considered in the final part of this
chapter.
Central themes
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 interaction with its
environment. Changes in the environment can cause changes in inputs, in the transfor-
mation process and in outputs, and these in turn may engender further changes in the
organisation’s environment. The internal and external environments 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, the vari-
ous external influences affecting business organisations are frequently interrelated.
Changes in interest rates, for example, may affect consumer confidence and this can have
an important bearing on business activity. Subsequent attempts by government to influ-
ence the level of demand could exacerbate the situation and this may lead to changes in
general economic conditions, causing further problems for firms. The combined effect
of these factors could be to create a turbulent environment which could result in

Central themes 13
uncertainty in the minds of managers. Failure to respond to the challenges (or opportuni-
ties) presented by such changes 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 variables faced
by all organisations. These external influences are almost infinite in number and variety
and no study could hope to consider them all. For students of business and for managers
alike, the requirement is to recognise the complexity of the external environment and
to pay greater attention to those influences which appear to be the most pertinent and
pressing for the organisation in question, rather than to attempt to consider all possible
contingencies.
Environmental volatility and change

The organisation’s external environment is further complicated by the tendency towards
environmental change. This volatility may be particularly prevalent in some areas (e.g.
technology) or in some markets or in some types of industry or organisation. As indicated
above, a highly volatile environment causes uncertainty for the organisation (or for its
sub-units) and this makes decision-making more difficult.
Environmental uniqueness
Implicit in the remarks above is the notion that each organisation has to some degree a
unique environment in which it operates and which will affect it in a unique way. Thus,
while it is possible to make generalisations about the impact of the external environment
on the firm, it is necessary to recognise the existence of this uniqueness and where appro-
priate to take into account exceptions to the general rule.
Different spatial levels of analysis

External influences operate at different spatial levels – local, regional, national, suprana-
tional, international/global – exemplified by the concept of LoNGPEST/LoNGPESTLE
(see Chapter 19). There are few businesses, if any, today that could justifiably claim to be
unaffected by influences outside their immediate market(s).
Two-way flow of influence

As a final point, it is important to recognise that the flow of influence between the organi-
sation and its environment operates in both directions. The external environment influ-
ences firms, but by the same token firms can influence their environment, and this is an
acceptable feature of business in a democratic society which is operating through a mar-
ket-based economic system. This idea of democracy and its relationship with the market
economy is considered in Chapters 5 and 6.

Synopsis
In the process of transforming inputs into output, business organisations operate in a
multifaceted environment which affects and is affected by their activities. This environ-
ment tends to be complex and volatile and comprises influences which are of both a
general and an immediate kind and which operate at different spatial levels.
Understanding this environment and its effects on business operations is vital to the
study and practice of business.
Summary of key points
● Business activity is essentially concerned with transforming inputs into outputs for
consumption purposes.
● All businesses operate within an external environment that shapes their operations and
decisions.
● This environment comprises influences that are both operational and general.
● The operational environment of business is concerned with such factors as customers,
suppliers, creditors and competitors.
● The general environment focuses on what are known as the PESTLE factors.
● In analysing a firm’s external environment attention needs to be paid to the interaction
between the different environmental variables, environmental complexity, volatility and
change, and to the spatial influences.
● While all firms are affected by the environment in which they exist and operate, at times
they help to shape that environment by their activities and behaviour.
case
study
Facing the unexpected
In previous editions of the book we have stressed The same is true when natural disasters occur, as
how the business environment can sometimes the following examples illustrate.
change dramatically and unexpectedly for the worse,
2010 – the eruption of an Icelandic volcano sent a
using the September 11, 2001 attack on the World
cloud of volcanic ash over large parts of Europe,
Trade Center in the United States as an example of
resulting in the grounding of aircraft and weeks of
what is known as an exogenous shock to the
disruption of air travel. Airlines in particular were
economic system.
badly affected and faced additional costs because
Mercifully, events of this kind tend to be relatively
of stranded passengers and cancelled flights.
rare, but when they occur they present a considerable
Beneficiaries included hoteliers who had to
challenge to the businesses and industries affected.

accommodate people unable to travel and had an impact on tourism across Europe, with
alternative transport businesses (e.g. ferry hotel occupancy in London down as a result.
operators). In 2017 the Manchester Arena was bombed during
2013 – sudden and devastating storms in the a concert which had local and national effects on
Burgundy and Bordeaux regions of France how show security was managed.
destroyed swathes of the French wine industry, In 2020–21 Covid-19 radically changed business
resulting in a loss of jobs and income in the across a wide range of sectors.
affected local communities, with a knock-on
impact on local businesses. In China, a heatwave While there is little a business can do to protect
across the central and eastern parts of the country itself totally against events of this kind, many larger
badly affected the farming industry and tempted firms, especially multinationals, tend to put in place
the government to spend millions on artificial steps contingency plans to manage unexpected crises,
to trigger rain. In some areas power failures whether they are caused by human or natural
occurred as the demand for electricity soared as events. A business continuity plan (BCP) can help
individuals and organisations turned on the air- an organisation to respond quickly and effectively to
conditioning. Much warmer conditions were also a negative situation and hopefully to survive the
experienced in parts of Northern Europe, including experience and learn from it. Smaller firms on the
the UK, resulting in increased sales of certain items whole tend to lack the financial and human
(e.g. barbecues, sunscreen) and tempting many resources needed to adopt such resilience
people to holiday at home. Other adverse natural measures and some may not survive an adverse
events in 2013–14 included a super typhoon in the change in the external environment. For other
Philippines, extensive fires in parts of Australia, a organisations such a change may bring with it
major drought in California and severe storms and business opportunities, an unexpected though
flooding in southern England, all of which had possibly welcome gain from an event that has a
major effects on businesses and communities in negative impact on other firms.
the affected areas.
2015–16 – in 2015 terrorists armed with assault Case study questions
rifles and hand grenades attacked a beach resort in
1 Can you think of any other examples of major unan-
Tunisia. The British Foreign Office issued travel
ticipated events in your own country (or areas of your
advice to avoid all but essential travel to the
own country) that have had a serious adverse effect
country, as did many other governments. The
on its firms and/or industries?
result was a 37 per cent fall in foreign spending in
Tunisia, whose economy is 8 per cent dependent 2 Can you think of any businesses that may have ben-
on tourism. In 2016 attacks on Brussels and Paris efited commercially from this event or these events?
Review and discussion questions

1 In what senses could a college or university be described as a business organisation?
How would you characterise its ‘inputs’ and ‘outputs’?
2 Taking examples from a range of quality newspapers, illustrate ways in which business
organisations are affected by their external environment.
3 Give examples of the ways in which business organisations can affect the external
environment in which they operate.

Assignments
1 Assume you are a trainee in a firm of management consultants. As part of your
induction process you have been asked to collect a file of information on an
organisation of your choice. This file should contain information not only on the
structure of the organisation and its products but also on the key external
influences that have affected its operations in recent years.
2 For a firm or industry of your choice, undertake a PESTLE analysis indicating the
likely major environmental influences to be faced by the firm/industry in the next
five to ten years.
Further reading
Daniels, J. D., Radebough, L. H. and Sullivan, D. P., International Business: Environments and
Operations, 14th edition, Prentice Hall, 2012.
Fernando, A. C., Business Environment, Dorling Kindersley/Pearson Education India, 2011.
Hamilton, L. and Webster, P., The International Business Environment, 3rd edition, Oxford University
Press, 2015.
Steiner, G. A. and Steiner, J. F., Business, Government and Society: A Managerial Perspective, 13th
edition, McGraw-Hill/Irwin, 2011.
Wetherly, P. and Otter, D. (eds) The Business Environment: Themes and Issues, 3rd edition, Oxford
University Press, 2014.
Worthington, I., Britton, C. and Rees, A., Economics for Business: Blending Theory and Practice,
2nd edition, Financial Times/Prentice Hall, 2004, Chapter 1.

2 Business organisations:
the internal environment
The systems approach to the study of business organisations stresses the

interaction between a firm’s internal and external environments. Key aspects of
the internal context of business include the organisation’s structure and
functions and the way they are configured in pursuit of specified organisational
objectives. If the enterprise is to remain successful, constant attention needs to
be paid to balancing the different influences on the organisation and to the
requirement to adapt to new external circumstances. This responsibility lies
essentially with the organisation’s management, which has the task of blending
people, technologies, structures and environments.

outcomes ● outline the broad approaches to organisation and management, paying
particular attention to the systems approach
● identify alternative organisational structures used by business organisations
● discuss major aspects of the functional management of firms
● illustrate the interaction between a firm’s internal and external environments
Key terms Bureaucracy Human relations approach Project team

Classical theories of Human resource Public sector
organisation management Re-engineering
Contingency approach Management Scientific management
Divisional structure Marketing Sub-systems
Downsizing Marketing concept Systems approach
Formal structures Marketing mix Theory X and Theory Y
Functional organisation Matrix structure Theory Z
Functional specialisation Organisation chart Virtual organisation
Hierarchy of needs Private sector Voluntary (or third) sector
Holding company Profit centre

18 Chapter 2 · Business organisations: the internal environment
Introduction
Under the systems approach to understanding business activity presented in Chapter 1, the
organisation lies at the heart of the transformation process and tends to be seen as a kind of
‘black box’ which contains a multitude of elements – including structures, processes, people,
resources and technologies – that brings about the transformation of inputs into outputs (see
below). While the study of the business environment rightly focuses on the external context
of business organisations, it is important to recognise that firms also have an internal environ-
ment that both shapes and is shaped by the external context in which they operate and make
decisions. This notion of the interplay between an organisation’s internal and external environ-
ments is a theme that runs through many of the chapters in this book.
As students of business and management will be aware, the internal features of busi-
ness organisations have received considerable attention from scholars researching these
fields, and a large number of texts have been devoted to this aspect of business studies.
In the discussion below, the aim is to focus on three areas of the internal organisation that
relate directly to a study of the business environment: approaches to understanding
organisations, organisational structures, and key functions within the enterprise. Further
insight into these aspects and into management and organisational behaviour generally
can be gained by consulting the many specialist books in this field, a number of which
are mentioned at the end of this chapter. Issues relating to a firm’s legal structure are
examined in detail in Chapter 11.
A central theme running through any analysis of the internal environment is the idea of
management, which has been subjected to a wide variety of definitions. As used in this
context, management is seen both as a system of roles fulfilled by individuals who man-
age the organisation (e.g. entrepreneur, resource manager, coordinator, leader, motivator,
organiser) and as a process that enables an organisation to achieve its objectives. The
essential point is that management should be seen as a function of organisations, rather
than as a controlling element, and its task is to enable the organisation to identify and
achieve its objectives and to adapt to change. Managers need to integrate the various
influences on the organisation – including people, technology, systems and the
environment – in a manner best designed to meet the needs of the enterprise at the time
in question and be prepared to institute change as and when circumstances dictate.
The concept of the organisation: an initial comment

According to Stoner and Freeman (1992: 4), an organisation can be defined as two or
more people who work together in a structured way to achieve a specific goal or set of
goals. Defined in this way, the term covers a vast array of structures in the:
● private sector – that part of the economy where ownership and control of the organ-
isation is in the hands of private individuals or groups and where profit-seeking is a
central goal;
● public sector – that part of the economy under the control of government and its
agencies and where the state establishes and runs the different types of organisation
on behalf of its citizens and for their general well-being;

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interfere with individual freedom. But in it they did vest whatever
ability of that kind, under the American doctrine of human liberty,
they thought a government of free men or citizens ought to have.
They did not, however, grant unlimited ability to make laws
interfering with individual freedom. When constituting their
government they named many matters in which no laws could be
made, such as laws abridging the right of free speech, laws
suspending the privilege of habeas corpus, etc. Outside these
named matters, they granted law-making ability of that kind to
whatever extent American principles of human liberty determined a
government ought to have. The extent of that ability, so to be
determined, they left to the legislature to ascertain in the first
instance. But to the judicial department they gave the right finally to
ascertain and decide whether, in any particular law, the legislative
department had exceeded its granted ability.
In living again the education days of the Americans, who later
created and constituted the republican nation which is America, we
have come now to the close of the eventful year 1776. We find
ourselves, at that time, viewing this status of the American human
being and his relation to all governments.
With his fellow Americans, he has declared that they are not the
subjects of any government or governments in the world. With his
fellow Americans, on many battlefields, he is fighting their former
Government, which still claims that they are its subjects. If he is a
Virginian, he and his fellow Virginians, with the consent of their fellow
Americans, have constituted themselves a free and independent
nation of human beings and have given to their law-making attorney
in fact, the legislature of Virginia, some ability to make laws in
restraint of the individual freedom of Virginians, in such matter and to
such extent, as the citizens of Virginia have deemed wise. In each of
the other twelve nations the situation is the same. In no nation, in
America, has any government servant and attorney in fact of the
people any ability whatever to interfere with human freedom in any
matter or to any extent, except such ability of that kind as has been
given to that government by direct grant from its citizens. Nowhere,
in America, has any government any power whatever, in any matter
or to any extent, to make a valid command restraining the human
freedom of the individual American as an American. All Americans
are fighting throughout America with the armies of the only
government in the world which claims such ability. All Americans
everywhere are determined to win that war and keep it the basic law
of America that no government ever shall have ability of that kind
unless the whole American people, by direct grant from themselves,
shall give it to a general American government. There is yet no
republic of America. There are yet no citizens of America. There are
only citizens of thirteen respective nations, which nations are allied in
an existing war. The affairs of the allied nations are being directed by
a committee of delegates from the different nations, called the
Congress. The first Committee or Congress of that kind, known in
history as the First Continental Congress, had met at Philadelphia
from September 5 to October 26, 1774, and “recommended peaceful
concerted action against British taxation and coercion.” The second
Committee, known as the Second Continental Congress, had
assembled, also at Philadelphia, on May 10, 1775, and had
assumed direction of the war.
CHAPTER II
THE STATE GOVERNMENTS FORM A UNION OF
STATES
We have now lived with the American of an earlier generation

through the days in which he ceased to be a subject of any
government, and in which he established forever in America the
basic law that no government can exercise or possess any ability to
interfere with his individual freedom except by direct grant from its
citizens. We have seen him, in each of the former colonies, create a
nation, become one of its citizens and, with his fellow citizens of that
nation, give to its government some ability of that kind.
When we recall it to be the tribute of history that these Americans
were better acquainted with the science of government than any
other people in the world, it is well to reflect for a moment upon the
significant exhibition of that knowledge during the days through
which we have just lived with them.
When the suggestion came from Philadelphia, in the summer of
1776, that the Americans in each former colony constitute a
government for their own nation and give to it a limited ability to
govern themselves in restraint of their individual freedom, it is
recorded history that Americans generally knew that a gift of that
kind to government could never be validly made by governments. It
“was felt and acknowledged by all” that only its own citizens ever
could grant ability of that kind to any government.
As the people of New England had been the most thoroughly
trained in the actual experience of self government, we naturally find
them acting upon and clearly stating the American legal principle that
legislatures never can give ability of that kind to government. The
records of Concord, Massachusetts, for October 21, 1776, show how
clearly this was understood by the Americans of that generation.
After the Philadelphia suggestion had been made, the
Massachusetts legislature framed a constitution and sent it to the
Massachusetts townships for approval. On that October 21, 1776,
the people of Concord refused to act upon it. Their reason was that
government ability to interfere with human freedom could never
come from legislatures but must always come directly from the
citizens themselves. Let the Americans of Concord, in their own
words, impart some of their knowledge to the Americans of this
generation.
“Resolved secondly, that the supreme Legislative, either in their
proper capacity or in joint committee, are by no means a body proper
to form and establish a Constitution or form of government for
reasons following, viz.: First, because we conceive that Constitution
in its proper idea intends a system of principles established to secure
the subject in the possession of and enjoyment of their Rights and
Privileges against any encroachment of the Governing Part.
Secondly, because the same body that forms a Constitution have of
consequence a power to alter it. Thirdly, because a Constitution
alterable by the Supreme Legislative is no security at all to the
subject against the encroachment of the Governing Part on any or
on all their Rights and Privileges.”
(See Constitutional Review, April, 1918, p. 97.)
The people of Concord or New England were not alone in this
knowledge. On this we have the later testimony of Marshall from the
Bench of the Supreme Court. Speaking of that day, a few years after
1776, when the whole American people created their nation and
gave enumerated powers of that kind to its government, he said:
But when, “in order to form a more perfect Union,” it was
deemed necessary to change this alliance into an effective
government, possessing great and sovereign powers, and
acting directly on the people, the necessity of referring it to
the people, and of deriving its powers directly from them, was
felt and acknowledged by all. (M’Culloch v. Maryland, 4
Wheat. 316.)
Fixing this knowledge of that day firmly in our mind, let us go on
with the remarkable Americans of that generation through the next
period in which the relation of government to government and of
nation to nation was changed, but in which the status of the citizen of
each nation and his relation to all governments remained exactly
what he and his fellow citizens of that nation had made it.
On November 15, 1777, there came from the Congress at
Philadelphia another suggestion, this time a proposal to the thirteen
nations that they, already allied in an existing war, should form a
permanent union or federation of nations. With that proposal went a
drafted set of constitutional Articles, having for their purpose the
establishment of a government (to be called a Congress) for the
proposed federation, some of which Articles would give to that
government ability to govern the members of the union, the thirteen
nations. The proposal and the constitutional Articles were sent, for
ratification or rejection, to the legislature of each nation as its proper
attorney in fact in creating a federal union of nations and in giving
federal ability to govern, which federal ability never directly interferes
with individual freedom.
Let us reflect upon the accurate knowledge of the science of
government again shown by the Americans of that generation in that
proposal. Only a few short months earlier there had come, from the
same men at Philadelphia, the proposal that national government be
established in each nation. These men at Philadelphia had been
subjects of the British Government until July, 1776. All government
ability to interfere with human freedom, then as now, under British
law, had its source in a legislature, the Westminster Parliament. And
yet these men at Philadelphia, in the summer of 1776, had
accurately known that, under basic American law, such government
ability could only have one valid source, direct action by the citizens
themselves assembled in conventions. Acting on this knowledge in
the summer of 1776, the suggestion that government in each state
be given national power to govern, namely, ability directly to interfere
with individual freedom, had come as a suggestion to the citizens of
each nation for their own direct action. That suggestion had been
followed, and thus had been exercised, for the first time since
Americans ceased to be subjects, the inherent and inalienable and
always existing ability of the citizens of a free nation to make any
kind of constitutional Articles of government, including the national
kind which give government any power to interfere with individual
freedom.
When, therefore, these same men at Philadelphia made their
proposal of November, 1777, that other constitutional Articles of
government be made in America, the proposed Articles of Union
between nations, it might have been natural that this proposal also
should have suggested ratification of these Articles by the people
themselves. It would have seemed all the more natural, when we
remember that one of the leaders at Philadelphia in that time was
Jefferson, the historic champion of human individual freedom against
all governments. But the Americans of that generation and their
leaders were not as the leaders of our own time. They knew very
accurately the difference between a national Article of government,
which gave ability to interfere with human freedom, and a federal
Article, which gave no ability of that kind but only ability to govern
nations or states, as political entities. With this accurate knowledge
of the vital distinction between a national and a federal Article, they
naturally knew that either the people themselves or the legislative
attorney in fact of the nation, which makes all agreements for the
nation with other nations, may validly make a federal Article.
Therefore, they sent the proposed Articles of Confederation between
nations (not one of which gave national power to the proposed
federal government) to the legislatures of the respective nations for
ratification or rejection on behalf of the nations. As Marshall later
summed up the knowledge which prompted that sending of those
federal articles to the legislatures:
To the formation of a league, such as was the
Confederation, the State sovereignties were certainly
competent. (M’Culloch v. Maryland, 4 Wheat. 316.)
Each state legislature acted favorably upon the proposed articles
and ratified them. By July 9, 1778, the legislatures of ten states had
ratified. The legislatures of New Jersey and Delaware followed
before the end of February, 1779. The legislature of Maryland did not
ratify until March 1, 1781.
It is well for the average American of the present generation, at
this point, to fix firmly in his mind that this legislative ratification of
these federal Articles was the important exercise of an existing and
recognized ability of state legislatures to make all constitutional
articles of a federal nature, which never confer any government
ability directly to interfere with human freedom. It is well for the same
American also to fix firmly in his mind that it was the exercise of an
ability to make constitutional articles entirely distinct from the other
existing ability to make them, which had been exercised, in each
nation, directly by the citizens themselves, in “conventions,” in the
preceding year of 1776. In that year, there had been exercised the
inherent and inalienable and always existing ability of citizens of a
nation, assembled in conventions of deputies chosen for that
express purpose, to make any kind of constitutional article, whether
it confers federal or national power on government. In the years
1777 to 1781, there had been exercised the recognized and existing
but limited ability of state legislatures to make federal articles, an
ability clearly then known not to include the ability to confer upon
government national power to interfere with individual freedom.
Living with those Americans through their great days, we have
now reached the day in 1781 when they were all citizens of some
nation but were not all citizens of the same nation. The great
Republic, America, had not yet been born. The legal status of the
American as an individual, and his relation to all governments was
exactly the same as it had been since 1776. Each American was the
citizen of some nation. His individual freedom could be directly
interfered with only by some law of the legislature of that single
nation under a valid grant, from him and his fellow citizens, of power
to enact that law on that subject. Neither the legislature of any other
nation in America, nor the legislatures of all other nations in America,
nor the government of nations which those legislatures had created
and endowed with federal powers, the Congress of the Federation,
could singly or collectively issue a single command to him, interfering
in any manner with his human freedom, or could give to any
government or governments a power to issue such a command.
There were existing and recognized by all in America two distinct
and different abilities—one limited and the other unlimited—to make
constitutional articles. One was the limited ability of state
legislatures. They could give federal power to a government, but
they could not give any national power or power directly to interfere
with human freedom. The other was the unlimited ability of the
citizens of any nation. They could give any kind of power, federal or
national, to their own government. Each ability, at a different time,
had been evoked to exercise by a distinct proposal from the same
Americans at Philadelphia, the Second Continental Congress, which
had under its direction the conduct of the Revolutionary War.
Dormant for the time being, but existing over all other ability in
America, was the supreme will of the collective people of America,
who had not yet created their own great Republic or become its
citizens or given to its government its enumerated powers to
interfere with their individual freedom.
This was the legal status of the American, and his relation to all
governments, and the relation of governments in America to one
another, when the Treaty of Peace was concluded with England on
September 3, 1783, and was later ratified by the Federal Congress
on January 14, 1784.
CHAPTER III
AMERICANS FIND THE NEED OF A SINGLE
NATION
Living over the great days of our forefathers, we now approach the
greatest of all. It comes four years after the end of the Revolution.
Not satisfied with a mere union of their states, the whole American
people, in 1787, proposed to form the great nation of men, America.
On June 21, 1788, it is created by them. On March 4, 1789, its only
government, now also the government of the continued union of
states, begins to function.
Between May 29, 1787, and March 4, 1789, the whole American
people did their greatest work for individual liberty. That was their
greatest day. Most Americans of this generation know nothing about
that period. Still more is it to be regretted that our leaders in public
life, even our most renowned lawyers, do not understand what was
achieved therein for human freedom. It is of vital importance to the
average American that he always know and understand and realize
that achievement. That he do so, it is not in the slightest degree
essential that he be learned in the law. It is only necessary that he
know and understand a few simple facts. The experience of five
years since 1917 teaches one lesson. It is that Americans, who have
not the conviction that they are great constitutional thinkers, far more
quickly than those who have that conviction, can grasp the full
meaning of the greatest event in American history.
The reason is plain. Back in the ages, there was a time when
scientific men “knew” that the earth was flat. Because they “knew” it,
the rest of men assumed that it was so. And, because they “knew” it,
it was most difficult to convince them that their “knowledge” was
false “knowledge.”
In a similar way, our statesmen and constitutional thinkers came to
the year 1917 with the “knowledge” that legislatures in America, if
enough of them combined, had exactly the omnipotence over the
individual freedom of the American which had been denied to the
British Parliament by the early Americans. Naturally, it is difficult for
them to understand that their “knowledge” is false “knowledge.” For
us who have no false knowledge to overcome, it is comparatively
simple to grasp what those other plain Americans of 1787 and 1788
meant to accomplish and did accomplish. Why should it not be
simple for us? With those other plain Americans, we have just been
through their strenuous years which immediately preceded their
greatest days of 1787 and 1788. They were a simple people as are
we average Americans of this generation. From living with them
through those earlier days, we have come to know their dominant
purpose. They sought to secure to themselves and to their posterity
the greatest measure of protected enjoyment of human life, liberty
and happiness against interference from outside America and
against usurpation of power by any governments in America.
Certainly, it ought not to be difficult for us to grasp accurately and
quickly what they meant to do and what they did do in their last and
greatest achievement in the quest of that protected enjoyment of
human freedom. But, with all our happy predisposition accurately to
understand the meaning of the facts in 1787 and 1788, that
understanding cannot come until we know the facts themselves. Let
us, therefore, live through those years with those other plain
Americans of whom we are the posterity. Only then can we
understand their legacy of secured liberty to us and keep it against
usurpation by those who do not understand.
So long as the former subjects continued their Revolution, it was
only natural that Americans should not realize how inadequately a
mere federation of states would serve really to secure the protected
enjoyment of individual human freedom. But, as soon as that war
had ended, discerning men began quickly to realize that fact.
Jealousies between nations, jealousies in abeyance while those
nations were fighting a common war for independence, quickly had
their marked effect upon the relations of these nations to one
another and upon the respect which they showed to the commands
of the government of the federation of which all those nations were
members. As a matter of fact, those commands, because the
governing powers of that government were wholly federal, were
tantamount to nothing but requisitions. Those requisitions were
honored largely by ignoring them. There was no way of enforcing
respect for them or compelling observance of them. The plan of a
purely federal union of nations permitted no method of enforcement
save that of war upon whatever nation or nations might refuse
obedience to a requisition. Such a war would have been repugnant
to the mind of every patriotic American.
This was only one of the many defects coming from the fact that
Americans, in spirit one people or nation, had no political existence
as one nation and had no general national government, with general
powers over all Americans, to command respect at home and
abroad for the individual freedom of the American.
There is neither time nor necessity for dwelling further upon the
fact, quickly brought home to the American people after the close of
their Revolution, that a purely federal government of the states was
no adequate security for their own freedom. Let the words of one of
themselves, apologizing for the inadequacy of that government,
attest their quick recognition that it was inadequate. They are the
words of Jay in The Federalist of 1787. This is what he said: “A
strong sense of the value and blessings of union induced the people,
at a very early period, to institute a federal government to preserve
and perpetuate it. They formed it almost as soon as they had a
political existence; nay, at a time when their habitations were in
flames, when many of their citizens were bleeding, and when the
progress of hostility and desolation left little room for those calm and
mature inquiries and reflections which must ever precede the
formation of a wise and well-balanced government for a free people.
It is not to be wondered at, that a government instituted in times so
inauspicious, should on experiment be found greatly deficient and
inadequate to the purpose it was intended to answer.” (Fed., No. 2.)
CHAPTER IV
THE BIRTH OF THE NATION
Living through those old days, immediately after the peace with
England of 1783, we find that public and official recognition of a fatal
defect in the federal form of union came from the inability of its
federal government, which had no power over commerce, to
establish a uniform regulation of trade among the thirteen American
nations themselves and between them and foreign nations.
Discerning men, such as Madison and Washington and others,
already recognized other incurable defects in any form of union
which was solely a union of nations and not a union of the American
people themselves, in one nation, with a government which should
have national, as well as federal, powers. Taking advantage of the
general recognition that some central power over commerce was
needed, the legislature of the nation of Virginia appointed James
Madison, Edmund Randolph and others, as commissioners to meet
similar commissioners to be appointed by the twelve other nations.
The instructions to these commissioners were to examine into the
trade situation and report to their respective nations as to how far a
uniform system of commerce regulations was necessary. The
meeting of these commissioners was at Annapolis in September,
1786. Only commissioners from the nations of Virginia, Delaware,
Pennsylvania, New Jersey and New York attended. The other eight
nations were not represented.
Madison and Hamilton were both present at Annapolis and figured
largely in what was done there. It is an interesting and important fact
that these two played a large part from its very inception in the
peaceful Revolution which brought to an end the independent
existence of thirteen nations—a Revolution which subordinated
these nations, their respective national governments, and their
federation to a new nation of the whole American People, and to the
Constitution and the government of that new nation.
At every stage of that Revolution, these two men were among its
foremost leaders. Recorded history has made it plain that Madison,
more than any other man in America, participated in planning what
was accomplished in that Revolution. He drafted the substance of
most of the Articles in what later became the Constitution of the new
nation. By the famous essays (nearly all of which were written by
himself or Hamilton) in The Federalist, explaining and showing the
necessity of each of those Articles, he contributed most effectively to
their making by the people of America, assembled in their
conventions. He actually drew, probably in conference with Hamilton,
what we know as the Fifth Article, which will later herein be largely
the subject of our exclusive interest.
The Annapolis commissioners made a written report of their
recommendations. This report was sent to the respective legislatures
of the five nations, which had commissioners at Annapolis. Copies
were also sent to the Federal Congress and to the Executives of the
other eight nations in the federation. The report explained that the
commissioners had become convinced that there were many
important defects in the federal system, in addition to its lack of any
power over commerce. The report recommended that the thirteen
nations appoint “commissioners, to meet at Philadelphia on the
second Monday in May next, to take into consideration the situation
of the United States; to devise such further provisions as shall seem
to them necessary to render the constitution of the federal
government adequate to the exigencies of the Union; and to report
such an act for that purpose, to the United States in Congress
assembled as, when agreed to by them, and afterwards confirmed
by the legislature of every state, will effectually provide for the
same.”
The Annapolis recommendation was acted upon by the
legislatures of twelve nations. Each nation, except Rhode Island,
appointed delegates to attend the Philadelphia Convention to begin
in May, 1787. Madison himself, in his introduction to his report of the
debates of the Philadelphia Convention, gives his own explanation of
why Rhode Island did not send delegates. “Rhode Island was the
only exception to a compliance with the recommendation from
Annapolis, well known to have been swayed by an obdurate
adherence to an advantage, which her position gave her, of taxing
her neighbors through their consumption of imported supplies—an
advantage which it was foreseen would be taken from her by a
revisal of the Articles of Confederation.” This is mentioned herein
merely to bring home to the minds of Americans of the present
generation the reality of the fact, now so difficult to realize, that there
were then actually in America thirteen independent nations, each
having its powerful jealousies of the other nations and particularly of
its own immediate neighbors. The actual reality of this fact is
something which the reader should not forget. It is important to a
correct understanding of much that is said later herein. It is often
mentioned in the arguments that accompanied the making of our
Constitution, that the nation of New Jersey was suffering from
exactly the same trouble as the nation of Rhode Island was causing
to its neighbors. Almost all imported supplies consumed by the
citizens of New Jersey came through the ports of New York and
Philadelphia and were taxed by the nations of New York and
Pennsylvania.
Interesting though it would be, it is impossible herein to give in
detail the remarkable story of the four months’ Convention at
Philadelphia in 1787. It began on May 14 and its last day was
September 17. It is recommended to every American, who desires
any real knowledge of what his nation really is, that he read, in
preference to any other story of that Convention, the actual report of
its debates by Madison, which he himself states were “written out
from my notes, aided by the freshness of my recollections.” It is
possible only to refer briefly but accurately to those actual facts, in
the history of those four months, which are pertinent to the object of
this book.
At the very outset, it is well for us Americans to know and to
remember the extraordinary nature of the recommendation which
had come from Annapolis and of the very assembling of that
Philadelphia Convention. The suggestion and the Convention were
entirely outside any written law in America. Every one of the thirteen
colonies was then an independent nation. These nations were united
in a federation. Each nation had its own constitution. The federation
had its federal constitution. In none of those constitutions was there
any provision whatever under which any such convention as that of
Philadelphia could be suggested or held. The federal Constitution
provided the specific mode in which ability to amend any of its
federal Articles could be exercised. Such provision neither
suggested nor contemplated any such convention as that to be held
at Philadelphia. For these reasons, Madison and Wilson of
Pennsylvania and other leading delegates at that Convention stoutly
insisted that the Philadelphia Convention had not exercised any
power whatever in making a proposal.
“The fact is, they have exercised no power at all; and, in point of
validity, this Constitution, proposed by them for the government of
the United States, claims no more than a production of the same
nature would claim, flowing from a private pen.” (Wilson,
Pennsylvania State Convention in 1787, 2 Ell. Deb. 470.)
“It is therefore essential that such changes [in government] be
instituted by some informal and unauthorized propositions, made by
some patriotic and respectable citizen or number of citizens.”
(Madison, Fed. No. 40.)
But there was a development even more remarkable on the
second day of this unauthorized Convention.
The Convention was presided over by Washington. Among the
other delegates were Hamilton of New York, Madison and Randolph
and Mason of Virginia, Franklin and Wilson and Robert Morris and
Gouverneur Morris of Pennsylvania, and the two Pinckneys of South
Carolina. Madison himself, speaking of the delegates in his
Introduction to his report of the Debates, says that they were
selected in each state “from the most experienced and highest
standing citizens.” The reader will not forget that each of these men
came under a commission from the independent government of a
sovereign and independent nation, twelve such independent
governments and nations being represented in that Convention. In
the face of this important fact, it is amazing to realize the startling
proposition offered for consideration, on May 30, 1787. On that day,
the Convention having gone into a Committee of the Whole,
Randolph, commissioned delegate from the independent
government and nation of Virginia, moved, on the suggestion of
Gouverneur Morris, commissioned delegate from another
independent government and nation, that the assembled delegates
consider the three following resolutions:
“1. That a union of the states merely federal will not accomplish
the objects proposed by the Articles of Confederation—namely,
common defense, security of liberty, and general welfare.
“2. That no treaty or treaties among the whole or part of the states,
as individual sovereignties, would be sufficient.
“3. That a national government ought to be established, consisting
of a supreme legislative, executive, and judiciary.” (5 Ell. Deb. 132.)
If we wish to realize the sensational nature of those resolutions, let
us assume for a moment a similar convention of delegates
assembled in the City of New York. Let us assume that the delegates
have been commissioned respectively by the governments of
America, Great Britain, Ireland, Canada, Australia, New Zealand,
France, Belgium and other nations. Let us assume that the
ostensible and proclaimed purpose of the convention, stated in the
commissions of the delegates, is that it frame a set of federal Articles
for a league or federation of the independent nations represented
and report the drafted Articles to the respective governments for
ratification or rejection. Let us then assume that, on the second day
of the convention, Lloyd George, on the suggestion of Charles E.
Hughes, calmly proposes that the convention, as a Committee of the
Whole, consider three resolutions, exactly similar to those proposed
by Randolph on May 30, 1787. Imagine the amazement of the world
when it found that the resolutions were to the effect that the
convention should draft and propose a constitution of government
which would create an entirely new nation out of the human beings
in all the assembled nations, and create a new national government
for the new nation, and destroy forever the independence and
sovereignty of each represented nation and its government and
subordinate them to the new national and supreme government.
This was exactly the nature of the startling resolutions of
Randolph. Moreover, before that one day closed, the Committee of
the Whole actually did resolve “that a national government ought to
be established consisting of a supreme legislative, executive and
judiciary.” The vote was six to one. Massachusetts, Pennsylvania,
Delaware, North Carolina, Virginia and South Carolina voted “aye.”
From that day on, the Convention continued to prepare a proposal
involving the destruction of the complete independence of the
existing nations and of the governments which respectively
commissioned the delegates to the Convention. From that day on,
the Convention concerned itself entirely with the drafting of
constitutional Articles which would create a new nation, America, the
members thereof to be all the American people, and would constitute
a national government for them, and give to it national powers over
them, and make it supreme, in its own sphere, over all the existing
nations and governments.
It is interesting and instructive to know that all this startling
purpose, later completely achieved by appeal to the existing ability of
the possessors of the supreme will in America, the people,
assembled in their conventions, had not been the conception of a
moment.
We find Madison, by many credited with the most logical mind of
his remarkable generation, carefully planning, long before the
meeting of the Convention, a quite detailed conception of the
startling proposal of Randolph. In a letter from Madison to Randolph,
dated April 8, 1787 (5 Ell. Deb. 107), he speaks of “the business of
May next,” and of the fact “that some leading propositions at least
would be expected from Virginia,” and says, “I will just hint the ideas
that have occurred, leaving explanations for our interview.” When we
remember the remarkable manner, entirely novel in the history of
political science, in which our Constitution creates a new nation and
its supreme national government and yet keeps alive the former
independent nations and their federation, the next sentence of that
letter is of absorbing interest. It reads, “I think, with you, that it will be
well to retain as much as possible of the old Confederation, though I
doubt whether it may not be best to work the valuable articles into
the new system, instead of engrafting the latter on the former.” When
we read the detailed story of the Philadelphia Convention and study
its product, our Constitution, there worded and later made by the
people, we realize that Madison’s idea, expressed in the quoted
sentence, was accurately carried out largely through his own efforts.
Turning now to a later paragraph in that same April letter, we
marvel at the foresight, the logical mind and the effective ability of
the writer in later securing almost the exact execution of his idea by
the entire people of a continent, even though that idea was the
destruction of the independence of their respective nations and of
their existing respective governments. That paragraph reads: “I hold
it for a fundamental point, that an individual independence of the
states is utterly irreconcilable with the idea of an aggregate
sovereignty. I think, at the same time, that a consolidation of the
states into one simple republic is not less unattainable than it would
be inexpedient. Let it be tried, then, whether any middle ground can
be taken, which will at once support a due supremacy of the national
authority, and leave in force the local authorities so far as they can
be subordinately useful.”
This remarkable letter then goes on, paragraph by paragraph, to
suggest that, in the new Articles, the principle of representation be
changed, so as not to be the same for every state; the new
government be given “positive and complete” national power “in all
cases where uniform measures are necessary”; the new government
keep all the federal powers already granted; the judicial department
of the new government be nationally supreme; the legislative
department be divided into two branches; the new government have
an executive department; there be an Article guaranteeing each
state against internal as well as external dangers. In other words, the
letter reads like a synopsis of the principal provisions of our present
Constitution, although the letter was written over a month before the
Philadelphia Convention began to draft that Constitution.
One paragraph in that remarkable letter is very important as the
first of many similar statements, with the reasons therefor, made by
Madison in the Philadelphia Convention, in the Virginia convention
which ratified the Constitution and in The Federalist which urged its
ratification. Madison was writing his letter within a few short years
after the American people had made their famous Statute of 1776.
He knew its basic law that every ability in government to interfere
with individual freedom must be derived directly by grant from those
to be governed. He knew that governments could give to
government federal power to prescribe rules of conduct for nations.
He also knew that governments could not give to government any
power to prescribe rules of personal conduct which interfered with
the exercise of individual human freedom. In other words, he knew
the existing and limited ability of legislatures to make federal Articles
and that such limited legislative ability was not and never could be, in
America, competent to make national Articles. He also knew the
existing ability of Americans themselves, assembled in their
conventions, to make any kind of constitutional Article, whether it
were federal or national. He knew that the limited ability had been
exercised in making the federal Articles of the existing federation and
that the unlimited ability had been exercised, in each existing nation,
in making its national Articles.
With this accurate knowledge always present in his mind and
repeatedly finding expression by him in the ensuing two years, it is
natural that we find in his remarkable letter of 1787, after his
summary of what Articles the new Constitution ought to contain and
nearly every one of which it does contain, the following significant
statement: “To give the new system its proper energy, it will be
desirable to have it ratified by the authority of the people, and not
merely by that of the legislatures.” From such a logical American, it is
expected that we should find accurate echo again and again of this
deference to basic American law in such later expressions as his
statement in The Federalist, Number 37, “The genius of republican
liberty seems to demand ... that all power should be derived from the
people.”
Having thus grown well aware of the tremendous part played by
Madison in shaping the substance of the Constitution of government
under which we Americans live, let us return to the Philadelphia
Convention in which he figured so prominently and which worded
and proposed the Articles of that Constitution.
In the seven Articles, which were finally worded by that
Convention, there are but three which concern themselves at all with
the vesting of national power in government. They are the First, the
Fifth and the Seventh.
The First Article purports to give, in relation to enumerated
matters, all the national power which the Constitution purports
anywhere to grant to its only donee of power to make laws interfering
with human freedom, the national Legislature or Congress. Indeed,
the opening words of that First Article explicitly state that, “All
legislative Powers herein granted shall be vested in a Congress of
the United States, which shall consist of a Senate and House of
Representatives.” Then the remaining sections of that Article go on
to enumerate all the powers of that kind, the national powers, which
are granted in the Constitution by the donors, the American people
or citizens, assembled in their conventions.
If there be any doubt in the mind of any American that the First
Article contains the enumeration of all national powers granted by
the Constitution, the statements of the Supreme Court, voiced by
Marshall, ought to dispel that doubt.
This instrument contains an enumeration of powers
expressly granted by the people to their government.... In the
last of the enumerated powers, that which grants, expressly,
the means for carrying all others into execution, Congress is
authorized “to make all laws which shall be necessary and
proper” for the purpose. (Gibbons v. Ogden, 9 Wheat. 1.)
This “last” of the enumerated powers, as Marshall accurately
terms it, is that granted in the last paragraph of Section 8 of the First
Article.
It is because the First Article IS the constitution of government of
the American citizen that his government has received its tribute as a
government of enumerated powers. This fact is clearly explained in
the Supreme Court in Kansas v. Colorado, 206 U. S. 46.

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The Business Environment: A Global

Perspective 9th Edition Ed Thompson

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We combine innovative learning technology with trusted

From classroom to boardroom, our curriculum materials, digital

Every day our work helps learning flourish, and

To learn more, please visit us at www.pearson.com/uk

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Ed Thompson, Ian Worthington and Chris Britton

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First published in Great Britain in 1994 (print)

British Library Cataloguing-in-Publication Data

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Cover design: Kelly Miller

Print edition typeset in 9.5/13pt Stone Serif ITCPro by Straive

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F01_The_Business_Environment-A_Global_Perspective_9e.indd 5 11/02/2023 09:16

Part One INTRODUCTION 1

Part Two CONTEXTS 69

Part Three FIRMS 233

Part Four MARKETS 325

Part Five CONCLUSION 441

F01_The_Business_Environment-A_Global_Perspective_9e.indd 7 11/02/2023 09:16

Part One INTRODUCTION

1 Business organisations: the external environment 3

2 Business organisations: the internal environment 17

F01_The_Business_Environment-A_Global_Perspective_9e.indd 9 11/02/2023 09:16

Case study: Reshuffle at Microsoft 36

3 The global context of business 39

4 De-globalising factors: sovereignty, conflicts and

Part Two CONTEXTS

5 The political environment (P) 71

F01_The_Business_Environment-A_Global_Perspective_9e.indd 10 11/02/2023 09:16

Government in democratic states 76

6 The macroeconomic environment (E) 103

7 The demographic, social and cultural context

Learning outcomes and key terms 141

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The demographic environment of business 142

8 The resource context: people, technology and

9 The legal environment (L) 189

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Codes of practice 209

10 The ethical and ecological environment (E) 215

Part Three FIRMS

11 Legal structures 235

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12 Size structure of firms 261

13 Industrial structure 285

14 Government and business 307

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Case study: Public sector procurement – the Royal Navy 323

Part Four MARKETS

15 The market system 327

16 Market structure 351

F01_The_Business_Environment-A_Global_Perspective_9e.indd 15 11/02/2023 09:16

17 International markets and trade 373

18 Pandemics and Covid-19 399

19 Governments and markets 419

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Case study: Who leads who? 437

Part Five CONCLUSION

20 Strategy and the changing environment 443