1 The Contemporary Business World

Business
Essentials
6e
Ronald J.
Ebert
Ricky W.
Griffin
1

THE U.S. BUSINESS ENVIRONMENT

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All rights reserved. The University of West Alabama
 Basic Business Concepts

Business
An organization that
provides goods or
services that are then sold
to earn profits.

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 Basic Business Concepts (cont’d)

The Benefits of Business

1. Provision of goods and services
2. Employment of workers
3. Innovation and opportunities
4. Increased quality of life and standard of living
5. Enhance personal incomes of owners and
stockholders
6. Tax payments support government
7. Support for charities and community leadership
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 The External Environments of Business

External Environment
 Everything outside an organization’s
boundaries that might affect it
1. the domestic business environment
2. the global business environment
3. the technological environment
4. the political-legal environment
5. the sociocultural environment
6. the economic environment
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 The External Environment (cont’d)
1. Domestic Business Environment
• The environment in which a firm
conducts its operations and derives
its revenues by:
Seeking to be close to its customers
Establishing strong relationships with its
suppliers
Distinguishing itself from its competitors

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 The External Environment (cont’d)
2. Global Business Environment
The international forces that affect a business:
 International trade agreements

 International economic conditions

 Political unrest

 International market opportunities

 Suppliers

 Cultures

 Competitors

 Currency values

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 The External Environment (cont’d)
3. Technological Environment
All the ways by which firms create
value for their constituents:
Human knowledge
Work methods
Physical equipment
Electronics and telecommunications
Various business activity processing
systems
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 The External Environment (cont’d)

4. Political-Legal Environment
 The regulatory relationship between business
and the government (legal system) and its
agencies that define what organizations can
and can’t do:
 Product identification laws
 Local zoning requirements
 Advertising practices
 Safety and health considerations
 Acceptable standards of business conduct
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 The External Environment (cont’d)

4. Political-Legal Environment
Pro- or anti-business sentiment in
government and political stability
are also important considerations,
especially for international firms.

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 The External Environment (cont’d)
5. Sociocultural Environment
The customs, mores, values, and
demographic characteristics of the
society in which an organization
functions
Sociocultural processes determine the
goods and services and standards of
business conduct a society is likely to
accept
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 The External Environment (cont’d)

vi. Economic Environment

The relevant conditions that exist in the
economic system in which a company
operates
 Example:
 If an economy is doing well enough that most people have
jobs, a growing company may find it necessary to pay higher
wages and offer more benefits in order to attract workers from
other companies.
 If many people in an economy are looking for jobs, a firm may
be able to pay less and offer fewer benefits.

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 Economic Systems
Economic System
 A nation’s system for allocating its resources among
its citizens, both individuals and organizations
Factors of Production
 Labor: Human resources
 Capital: Financial resources
 Entrepreneurs: Persons who risk starting a business
 Physical resources: Tangible things used to conduct
business
 Information resources: Data and other information
used by businesses

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 Types of Economic Systems
Planned Economy
 A centralized government controls all or most factors
of production and makes all or most production and
allocation decisions for the economy.
Market Economy
 Individual producers and consumers control
production and allocation by creating combinations
of supply and demand.
Market
 A mechanism of exchange between buyers and
sellers of a good or service.

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 Planned Economies
Communism
 A system Karl Marx envisioned in which individuals
would contribute according to their abilities and
receive benefits according to their needs.
 The government owns and operates all factors of
production.
 The government assigns people to jobs and owns all
businesses and controls business decisions.

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 Market Economies
Capitalism
 The government supports private ownership and encourages
entrepreneurship.
 Individuals choose where to work, what to buy, and how much to
pay.
 Producers choose who to hire, what to produce, and how much
to charge.
Mixed Market Economy
 Features characteristics of both planned and market economies
 Privatization: The process of converting government enterprises
into privately owned companies.
 Socialism: The government owns and operates select major
industries such as banking and transportation. Smaller
businesses are privately owned.

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 Private Enterprise in a Market Economy
Private Enterprise System
 Allows individuals to pursue their own interests with
minimal government restriction.
Elements of a Private Enterprise System
 Private property rights
 Freedom of choice
 Profits
 Competition

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 Growth in the Economic System (cont’d)
Stability
 A condition in which the amount of money available
in an economic system and the quantity of goods
and services produced in it are growing at about the
same rate.
Inflation
 Inflation occurs when the amount of money injected
into an economy exceeds the increase in actual
output, resulting in price increases exceeding
purchasing power increases.
 Inflation rate: The percentage change in a price index such
as the CPI.

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 Growth in the Economic System (cont’d)
Unemployment
 The level of joblessness among people actively
seeking work in an economic system
 Low unemployment—a shortage of labor available for
businesses to hire; results in higher wages.
 Higher wages reduce hiring, which increases
unemployment; results in lower wages.

Cyclical Unemployment
 Businesses continuing to eliminate jobs during a
business cycle downturn cause more reduced
revenues and further job losses.

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 Growth in the Economic System (cont’d)
Recession
 A period during which aggregate output, as
measured by real GDP, declines
Depression
 A prolonged and deep recession

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 Managing the U.S. Economy
Fiscal Policy
 The ways in which a government collects and spends revenues
 Tax rates can play an important role in fiscal policy

Monetary Policy
 The manner in which a government controls its money supply
 Working mainly through the Federal Reserve System, the
government can influence banks’ willingness to lend money
and prompt interest rates to go up or down.
Stabilization Policy
 Coordinating fiscal and monetary policies to smooth
fluctuations in output and unemployment and to stabilize prices.

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 End of Chapter 1

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