ECONOMICAL

ENVIRONMENT
Elements of the Environment of Management

Mgt 203
Judy Ann R. Prof. Roli
Balbanero Talampas
 INTRODUCTION

THE BUSINESS
ENVIRONMENT
 The Business Environment
- It refers to the place, time and culture in which the company
operates.

1.)External environment:
a set of forces and conditions outside the organization that can influence its
performance
 Task environment: forces that have a high potential of affecting the
organization on a immediate basis
 General environment: forces that typically influence the organization’s
external task environment and through them, the organization itself
2.) Internal environment:
key factors and forces inside the organization affecting its operation
 The Business Environment

 External Environment Te
mic c hn
 General Environment o no olo
Ec gy

Economics deals with

Soci al
General
cultu
conditions and laws

y
o-

og
affecting human needs and Environment
r

Ecol
how these needs are
satisfied.

Political-
Legal
PART 1 : THE GENERAL
CONCEPT
 Economical Environment

- Type of economic system and

economic conditions

- Sometimes called the macro-

environment.

- Are external factors, such as

economic growth, inflation and
interest rates, that usually affect
indirectly all or most organizations.
2 Types of Analysis:

1. Microeconomic analysis,
which is concerned with the study of economic decision taking
by both individuals and firms

2. Macroeconomic analysis,
focuses on the national economy as a whole and provides a
basic knowledge of how things work in the business world.
Market Paradigm - Macroeconomic Analysis

Exogenous Factors: events that stimulate investors to act, e.g.

news, economic theories/models, actions of monetary authorities
Market Participants: investors influenced by all stimulus events
subject to emotions of fear, greed, hope, rage (optimism vs.
pessimism)
Response: actions taken in the market, i.e. BUYING or SELLING
Price: subsequent change in price as a result of responses, most
important element of behavioral process
 Macroeconomic Forces Affecting
Business Environment
A. Economic Growth/ Activity
refers to the level of buying and selling activities happening in an
economy over a time period.
Changes could happen due to the ff. reasons:
 Changes in income levels
 Future prospect of individuals
 Future of the economy
 The level of economic activity in the world as a whole
 Political activities around the world
 Changes in prices of raw materials – oil, metals, fuels,
energy
 Changes in world stock market
Gross Domestic Product

monetary value measure of all goods and services

produced in a country during a specified time period

Gross National Product (GNP)

Monetary value measure of all goods and services

produced in and outside the country during a specified
time period

For example, the OFW Remittances are produced outside

the country
Gross Domestic Product

Significant Relationships:

healthy good Employment

levels of GDP economic stable
activity in the
country
 Gross Domestic Product

Significant Relationships:

Too High tendency for the a need to

levels of economy to increase
GDP overheat interest
rates
Gross Domestic Product

Significant Relationships:

Too Low not enough a need to

levels of economic lower
GDP activity interest
rates
B. Consumer Price Index
is an indicator of the general level of prices by measuring changes
in the prices of a fixed basket of selected consumer goods and
services, using some specified year as the base rate.
Inflation
increase in the general prices in the economy
C. Interest Rate
is the price of money and is the result of a choice between
spending the money today or postponing the spending until later
date.
Very High interest rate
regime can dampen economic activity because it makes the cost of
doing business very expensive

Low interest rate

there will be a sudden increase in the demand for the products offered
by such businesses

D. The Economic Cycle

reflects the relative changes with respect to output, production,
employment, and interest rates which occur over time.
 Prosperity
 Recession
 Recovery
 Economic Cycles

Good
economic
conditions

Poor
economic
conditions
Time
 Intermarket Links - Short Term Impact

Economic News
Imm Affected
Economic Activity Market Impact Link Inter-Market Impact

GDP rises int. rate higher strong econ. FX - LCY strngr

GDP falls int. rate lower weak econ. FX - LCY
wkn
Per. Cons. Rise int. rate higher strong econ. FX - LCY strgr
Housing Starts rise int. rate higher strong econ. FX - LCY stmgr
Ind. Prod. rise int. rate higher strong econ. FX - LCY stmgr
Retail Sales rise int. rate higher strong econ. FX - LCY strngr
Lead Indicators rise int. rate higher strong econ. FX - LCY stmgr
Inventories rise int. rate lower weak econ FX - LCY wkn
Budget Surplus int. rate lower less yield FX - LCY wkn
Budget Deficit int. rate higher higher yield FX - LCY strngr
Unemployment rise int. rate lower weak econ FX - LCY wkn
General Environment of Coca-Cola

Environmental Factor Description

Economic  Slow economy reduces per person
consumption due to fewer social
occasions at which soft drinks might be
served
 Like end of economic downturn and
prospects of economic recovery
 Stricter liability for illness caused by
beverage contamination
Government Policy Direction
Monetary Authorities

A. Central Banks
-Primary Goal: price stability ("fight inflation")
Other role: currency stability
-Policy Watch: Money Supply vs. Int. rate targets
-Direct Actions
- Bank Reserve Requirements
- Open Market Operations
- Discount Rate / Overnight Lending Rates
- Market Intervention - BUY Local Currency
Monetary Authorities

B. Finance Department / Ministry

-Primary goal: prudent government finances("fight budget deficit")
-Policy Watch: Monetary vs. Fiscal Policies

-Tool: direct fiscal control

- Tax Collections
- Government Borrowings
Monetary Authorities Multilateral
Agencies

C. IMF / World Bank

- sets specific monetary and fiscal targets that may

limit actions of national monetary authorities /
finance ministries
- increasing role in emerging markets crises:
Thailand, Indonesia, Korea
Federal Open Market Committee (FOMC)

 The Federal Open Market Committee consists of 12

members: the seven members of the Board of
Governors of the Federal System: the president of the
Federal Reserve Bank of New York: and, for the
remaining four memberships, which carry a one-year
term, a rotating selection of the presidents of the
eleven other Reserve Banks.
Federal Open Market Committee (FOMC)

 The FOMC holds eight regularly scheduled meetings

per year to direct the conduct of open market
operations by the Federal Reserve Bank of New York
in a manner designed to foster the long-run objectives
of price stability and sustainable growth.

 Meetings: Usually every Tuesday

 Minutes: Available every three weeks after the

meeting
GDP AND STOCKS
 Task Environment
Competitors

 Organization’s most immediate

ers

Su
m

pp
sto

lie
rs
Cu
external environment Task

ors
 Consists of Environment

La

lat
bo

gu
r

Re
 Competitors - Strategic partners Strategic Partners

 Customers - Labor
 Suppliers - Regulators
• Typically largest influence on the organization
Task Environment:
Competitors

ers
Potential Competitors

Su
m

pp
sto

lie
rs
Cu
Task
 Importance and Effect of Competitors

s
tor
Environment

La

ul a
bo

g
 competitors are an important day-to-day

Re
Strategic Partners
environmental force facing organizations
 rivalry among competitors leads to
 price cutting
 Leads to lower profits
 enhanced customer service or warranties
 improvements in product or service quality
Task Environment:
Competitors
Substitutes

ers

Su
m

pp
sto

lie
rs
Cu
 To what extent can alternative Task

ors
Environment

La

lat
products or services can substitute for

bo

gu
r

Re
existing product or service Strategic Partners

 The fewer the available substitutes, the

greater the profits
 I.e. Starbucks introduced a new drink
called Frappuccino. It is a cold drink that
can substitute for the more traditional hot
coffee drink
Customers
Potential Effects of Customers Competitors

ers

Su
m

pp
sto

lie
 They may drive down prices

rs
Cu
Task

ors
Environment
When there are fewer and united customers,

La

lat
bo

gu
r

Re
they have more power to demand Strategic Partners

 Lower prices
 Customized products or services
 Attractive financing terms from producers
 Push for more or higher-quality products
 These demands reduce profits
Labor
 The balance between supply and demand for types of
workers significantly affects a firm’s performance
 When demand exceeds supply, the imbalance can
lead to high labor costs
 Labor unions can exert pressure on managers to
increase wages and offer other costly benefits,
decreasing performance
PART 2 : THE SCHOOL OF
THOUGHTS
 ECONOMICS

 Is the social science that is concerned with the

production, distribution, and consumption of goods &
services.

 The term comes from the Ancient Greek (oikonomia

,management of a household, administration) from
“oikos” (house) & “nomos” (custom or law), hence rules
of household.
HISTORY OF ECONOMIC THOUGHTS

1. Classical Political economy

2. Marxism
3. Neoclassical economics
4. Keynesian economics
5. Chicago School of Economics
PART 3 : CRITIQUES
 CLASSICAL POLITICAL ECONOMY

 Karl Marx argued that classical political

economy had been guilty of category
mistake. Labour is a human activity, not a
commodity. It is not bought or sold, &
therefore has no value, since the category
“value” refers only to commodity.
 MARXISM
 Marxist economists have been criticized for a number of reasons.
Some critics point to the Marxist analysis of capitalism while other
argue that the economic system proposed by communisms is
unworkable.
 John Maynard Kaynes – referred to Das Kapital as an “obsolete
textbook which I know to be not only scientifically erroneous but
without interest or application for the modern world”
 Friedrich Hayek in The Road to Serfdom argued that centrally –
planned socialist economy would inevitably function poorly due to
factors such as the economic calculation problems. Economic theory
maintains that an economic system based upon individual choice
allows for technological and social advance through
entrepreneurship and trial and error. It is argued that the economic
systems based upon central planning towards stagnation as
individual enterprise is stifled.
 NEO CLASSICAL ECONOMICS
 Neoclassical economics is sometimes criticized for
having a normative bias. In this view, it does not focus on
explaining actual economies, but instead on describing a
“utopia” in which Pareto optimality applies.
 The assumption that individuals act rationally may be
viewed as ignoring important aspects of human
behavior. Many see the “economic man” as being quite
different from other people.
 Large corporations might perhaps come closer to the
idea of neo classical ideal of profit maximization , but this
is not necessarily viewed as desirable if this comes at the
expense of neglect of wider social issues.
 KEYNESIAN ECONOMICS

 New classical macroeconomic criticism - Lucas & others

argued that Keynesian economics required remarkably
foolish & short sighted behavior from the people, which
totally contradicted the economic understanding of their
behavior at the micro level.
 Austrian school of criticism – Austrian economist
Friedrich Hayek criticized Keynesian economic policies
for what he called their fundamentally collectivist
approach , arguing that such theories encourage
centralized planning which leads to the malinvestment of
capital, which is the cause of business cycle.
 KEYNESIAN ECONOMICS

 Methodological disagreements and different results that

emerge – Beginning in the late 1950s neoclassical
economists began to disagree with the methodology
employed by Keynes and his successors. Keynesians
emphasized the dependence of consumption on
disposable income and also, of investment on current
profits and current cash flow.
PART 4 : SAMPLE CASE
A case study on the Global Financial
Meltdown
 situation in which financial institutions suddenly lose a
large part of their value
 arose in the mortgage market after a sharp increase in
mortgage foreclosures, mainly subprime.

Subprime mortgage
payment FINANCIAL CRISIS
delinquency rates
 
CAUSE OF THE FINANCIAL CRISIS
“The proximate cause of the crisis was the
turn of the housing cycle in the United States
and the associated rise in delinquencies on
subprime mortgages, which imposed
substantial losses on many financial
institutions and shook investor confidence in
credit markets” Fed Chairman Ben Bernanke
THE FALL OF SUBPRIME
MORTGAGES

HIGH INTEREST
RATE
Subprime
mortgage
payment
DECLINE IN delinquency rates
HOUSE PRICES
 HIGH INTEREST RATE + DECLINING HOUSE PRICES

High interest rate means

mortgages were reset to
much higher monthly
payments
Falling house prices provides
financial incentive to enter
foreclosure
 US GOVERNMENT TO THE
RESCUE
1. Economic stimulus
2. Bailout
3. Capital injection for banks in the form of
purchase of partial ownership in banks by
the federal government.
4. Assuming full control in some failed banks.
 FINANCIAL CRISIS: ECONOMIC
ENVIRONMENT
Economic Environment Management
(economic factors) Action
a. Low Interest Rate Bank’s decision to
b. Liquidity (large funds) increase subprime
c. Securitisation lending

Economic Environment Management

(economic factors) Action
a. High return
Bank’s decision to
b. Large investible
invest in mortgage-
funds
backed securities
c. Securitisation