BBM-ME-I

MODULE – A
Business & Economics-
Business Environment and
Business (Managerial) Economics
Prof. (Dr.) D N Panigrahi
PhD (Finance), MBA (Fin-FMS, DU), CFA & MS-Finance, CAIIB & DFS, M.Sc. (Physics)
 Business & Economic Environment: Business
Environment
Business issues covered in this session
What is meant by the ‘business environment’?
How are businesses influenced by their national and
global market environment?
How are different types of industry classified in the
official statistics?
What things influence a firm’s behaviour and
performance?
 Business & Economics: The Role of Economics in Business
Businesses play a key role in all our lives. Whatever their size, and whatever the goods or
services they provide, they depend on us as consumers to buy their products.
But just as businesses rely on us for their income, many of us also rely on them for our
income. The wages we earn depend on our employer’s success, and that success in turn
depends on us as suppliers of labour.
And it is not just as customers and workers that we are affected by business. The success of
business in general affects the health of the whole economy and thus the lives of us all.
The extract from the Financial Times takes the case of Deliveroo. To be successful, firms
must be capable of responding to changes in the market environment in which they operate.
This requires a thorough understanding of economics. Developing a business strategy that
simultaneously responds to technological changes, changes in consumer tastes and the
activities of rival companies is not an easy task.
 Fortunately, economics provides frameworks for thinking about these issues, and many
more.
 Business Environment
• The world economy has experienced many changes in recent decades, including the global
financial crisis in 2008/9 and subsequent recession, the vote in Britain to leave the
European Union (EU) (popularly known as Brexit), ongoing terrorist attacks, a growing
environmental agenda, political tensions of the US with Russia and China, the effects of
the COVID-19 pandemic, Russia Ukraine war started on Feb 24-2022 and still continuing,
ongoing interest rate hikes by central banks all over the world to tame inflation caused by
easy monetary policy during the Corona pandemic and subsequent threat of economic
slowdown/recession in many developed economies including the US, and the changes in
key emerging economies, such as China and India, to name but a few. All of these events
have had profound effects on businesses across the world, creating an uncertain and
challenging business environment for the firms to operate. Because, these uncertainties
affect business confidence and business plans.
• Business economists examine firms: the hyper-competitive and ever-changing environment
in which they operate, the decisions they make, and the effects of these decisions – on
themselves, on their customers, on their employees, on their business rivals, on the public
at large and on the domestic and international economy.
 Business Environment
• All firms are different, but they are all essentially concerned with using inputs to make
output. Inputs cost money and output earns money. The difference between the revenue
earned and the costs incurred constitutes the firm’s profit. Firms will normally want to
make as much profit as possible, or at the very least to make satisfactory profits and
certainly to avoid a decline in profits.
• In order to meet these and other objectives, managers will need to make effective choices:
choices of what types of output to produce, how much to produce and at what price;
choices of what techniques of production to use, how many workers to employ and of what
type, what suppliers to use for raw materials, equipment, etc. In each case, when weighing
up alternatives, managers will want to make the best choices.
• Business economists study these choices. All these choices will be affected by the
environment in which the firm operates. If the firm is in a stable market with a well-
established customer base, the choices may be relatively simple. The choices will be very
different if firms are in a rapidly changing market, with lots of competition and new
products and processes being developed.
 Business Environment
• The decisions of the firm are also affected by the much broader national and international
environment. Is the economy expanding or contracting? What is happening to interest rates
and taxes? Are other countries more or less open to trade? Is there competition from other
countries? Are there opportunities for expanding abroad? Demand from China for many
products is declining due to an economic slowdown and the eurozone economy continues
to struggle. The local, national and international economic and political environments all
crucially influence a firm’s decisions. We will be looking at these influences as the course
progresses.
• They study economic decision making by firms. The study of decision making can be
broken down into three stages:
• The external influences on the firm (the ‘business environment’). Here we are referring to
the various factors that affect the firm that are largely outside its direct control. Examples
are the competition it faces, the prices its suppliers charge for raw materials, the state of the
economy (e.g. whether growing or in recession) and the level of interest rates. Businesses
need a clear understanding of their environment before they can set about making the right
decisions.
 Business Environment
• Internal decisions of the firm. Given a firm’s knowledge of these external factors, how will
it then decide on prices, output, inputs, marketing, investment, etc.? Here the business
economist can play a major role in helping firms achieve their business objectives.
• The external effects of business decision making. When the firm has made its decisions and
acted on them, how do the results affect the firm’s rivals, its customers and the wider
public? In other words, what is the impact of a firm’s decision making on people outside
the firm? Are firms’ actions in the public interest, or is there a case for government
intervention?
 Business Environment
• What do business economists do?
• Our study of business will involve three types of activity:
• Description. We will describe the objectives of businesses (e.g. making profit or increasing
market share), the types of market in which firms operate (e.g. competitive or non-
competitive) and the constraints on decision making (e.g. the costs of production, the level
of consumer demand and the state of the economy).
• Analysis We will analyse how a firm’s costs might vary with the amount of output it
produces and how its revenues will be affected by a change in consumer demand or a
change in the price charged by rivals. We will also analyse the upswings and downswings
in the economy: something that will have a crucial bearing on the profitability of many
companies.
 Business Environment
• Recommendations. Given the objectives of a firm, the business economist can help to show
how those objectives can best be met. For example, if a firm wants to maximise its profits,
the business economist can advise on what prices to charge, how much to invest, how
much to advertise, etc. Of course, any such recommendations will only be as good as the
data on which they are based. In an uncertain environment, recommendations will
necessarily be more tentative.
• In this session, as an introduction to the subject of business economics, we shall consider
the place of the firm within its business environment, and assess how these external
influences are likely to shape and determine its actions. In order to discuss the relationship
between a business’s actions and its environment, we first need todefine what the business
environment is.
 What is Business Environment
 The term business environment means:
“The aggregate of all the forces, factors and institutions which are external to and beyond
the control of an individual business enterprise but which exercise a significant influence
on the functioning and growth of individual enterprises.”
Business environment encompasses the climate or set of conditions, economic, social,
political, or institutional in which business operations are conducted.
The environment includes factors outside the firm which can lead to opportunities for or
threats to the firm. Although there are many factors, the most important of the factors are
socio-economic, technological, supplier, competitors, and government.
What is Business Environment
 Importance of Business Environment
 The survival and success of any enterprise depends upon its inherent capabilities (physical,
financial, human and other resources) and its ability to adapt to the changing environment. It
is very important for business firms to understand their environment and changes occurring in
it.
Business enterprises which know their environment and are ready to adapt to environmental
changes would be successful.
On the other hand, firms which fail to adapt to their environment are unlikely to survive in the
long run.
The extent to which the business thrives, depends on the manner in which it interacts with its
environment.
If a business desires to be successful, it should recognize all the various elements of the
environment so that it may mange its affairs to manage and adopt them in their better interest
to survive and prosper.
A successful business has to identify, appraise, and respond to the various opportunities and
threats in its environment.
 Importance of Business Environment
The Business functions as a part of broader environment. All the organizations differ in
terms of their inputs, processes, outputs, etc.
The environment influences the business as organizations depend on the external
environment for:
the inputs required by them and
for disposing of their outputs in a mutually beneficial manner.
It is important to note that this input-output exchange activity is a continuous process that
prevails over the long term.
Thus, the environment influences the business and there should be an active interaction
with the external environment.
 Environmental Analysis

 Environmental Analysis is a process of identifying the relevant factors that have a direct
or indirect impact on the effective and efficient functioning of the business. In other words,
Environmental analysis is a strategic tool. It is a process to identify all the external and
internal elements, which can affect the organization’s performance.
 The analysis entails assessing the level of threat or opportunity the factors might present.
These evaluations are later translated into the decision-making process. The analysis helps
align strategies with the firm’s environment.
Steps: The steps in environmental analysis are:
 Scanning
 Monitoring
 Forecasting and
 Assessment.
 Utility of Environmental Analysis

In the present hyper-competitive, ever-changing and unpredictable business environment,

forget about growth, the basic challenge before any company is its survival. For long term
survival, a company must have at least the following two capabilities:
(a) The ability to prosper and
(b) The ability to change (Adaptability)
It is not the strongest of the species that survive, not the most intelligent, but it is the
one that is most responsive to change. - Charles Darwin [Proponent of the Theory of
Natural Selection: Struggle for Existence & Survival of the Fittest]
Environmental analysis helps the strategists in the following manner:
 In anticipation of opportunities
 In planning or taking optimal responses to these opportunities.
 In developing an early warning system to prevent threats or in developing the strategies
which can turn a threat to the firm’s advantage.
 Goals of Environmental Analysis

The three basic goals of Environmental analysis are as follows:

 (a) To provide an understanding of current and potential changes taking place in the
environment.

 (b) To provide inputs for strategic decision making.

 (c) To facilitate and foster strategic thinking in organisations

 Environmental Scanning

An organisational environment consists of both external and internal factors. The success
of the organisation depends upon these factors. Knowledge of environmental changes is
very helpful in the formulation and implementation of business plans. A business can
obtain this knowledge through environmental scanning. The development and forecasts of
these influencing factors should be scanned by the entities.
Environmental scanning is the ongoing tracking of trends and occurrences in an
organisation’s internal and external environment that bear on its success, currently and in
the future. The results are extremely useful in shaping goals and strategies.
Environmental scanning can be defined as the process by which organisations monitor
their relevant environment to identify opportunities and threats affecting their business for
the purpose of taking strategic decisions.
In other words, it is the process of gathering information regarding company’s
environment, analysing it and forecasting the impact of all predictable environmental
changes. It helps the managers to decide the future path of the organisation.
 Importance of Environmental Scanning

With the help of environmental scanning, an enterprise can consider the impact of different
events, trends, issues and expectations on its business operations.
Firms which systematically analyse and diagnose the environment are more effective than
those which do not. For example, some Indian firms suffered considerably because they
failed to appreciate the tightening regulations against environmental pollution
 Components of Business Environment

The components of business environment are Internal and external. Further, the external
component consists of Micro environment and Macro environment.
Internal Environment: Internal environment is composed of various elements present
inside the organisation, that can affect or can be affected with, the choices, activities and
decisions of the organisation. It encompasses the climate, culture, machines/equipment,
work and work processes, staff members, management and management practices. It has the
ability to influence the decisions of the organisation, especially the behaviour of its human
resource.
The factors which are under the control of the organisation, but can influence business
strategy and other decisions are termed as internal factors. It includes:
 Value System/Corporate or Organisational Culture
 Vision, Mission and Objectives
 Organisational Structure
 Human Resources
 Physical Resources and Technological Capabilities
 Components of Business Environment

External Environment: A business does not operate in a vacuum. The business operates
in a complex business environment and is duly affected by it. These factors that happen
outside the business are known as external factors or influences.
The external factors or the environment not only affect the business’s internal functions but
also create pressure on the organisation to revisit and redefine, if necessary, its objectives
and strategies.
There are two major types of external environment:
 Micro Environment
 Macro Environment
 SWOT Analysis: Environmental Scanning

SWOT (strengths, weaknesses, opportunities, and threats) analysis is a framework used to

evaluate a company’s competitive position and to develop strategic planning.
SWOT analysis assesses internal and external factors, as well as current and future
potential.
A SWOT analysis is designed to facilitate a realistic, fact-based, data-driven look at the
strengths and weaknesses of an organisation, initiatives, and within its industry.
The organisation needs to keep the analysis accurate by avoiding pre-conceived beliefs or
gray areas and instead focusing on real-life contexts.
Companies should use it as a guide and not necessarily as a prescription
 SWOT Analysis: Environmental
Scanning
Strengths A skill, resource, or other advantage that a firm has relative to its
competitors
that is important to serving the needs of customers in its marketplace.
Weaknesses A limitation or lack of skills, resources, or capabilities that impedes a
firm’s effective performance
Opportunities Opportunities are any feature of the external environment which
creates conditions that a business can exploit to its advantage. If the
business is successful in exploiting opportunities, then it will be better
placed to achieve its objectives.

Threats Threats are any aspect of the external environment which cause

problems and which may prevent/hinder achievement of objectives.
Almost by definition, what presents a threat to one business offers an
opportunity to other businesses.
 The PESTLE Framework: Dimensions of the
External Business Environment

• The decisions and performance of a firm are affected not just by its
internal organisation and aims;
• they are also affected by the external environment in which the firm
operates.
 The PESTLE Framework:
Dimensions of External Business Environment

For use with Business Economics 3e ISBN: 978-1-4737-6277-0

By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
Chapter 3 Slide 24
Internal Process, External Environment
 Firms have some control over the internal process –
they can decide what factor inputs to buy and how to
process them.
 But – businesses are affected by the external
environment.
 Represented by the acronym PESTLE:
P olitical
E conomic
S ocial
T echnological
L egal
E nvironmental

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Chapter Slide 25
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
 The External Environment
Political Economic Social Technological Legal Environment

Factor inputs Processed into… Outputs

Consumer

Land, labour, capital,

enterprise costs Revenue

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Chapter Slide 26
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
 The PESTLE Framework: Political
– Political factors
• government policies affecting business
 Power can be wielded by local governments, state governments
and national governments.

 Firms are directly affected by the actions of government

and other political events. These might be major events
affecting the whole business community, such as
 the effects of the Russian invasion of Ukraine, Britain
leaving the EU, COVID-19 restrictions or a change of
government.

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Chapter Slide 27
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
 The PESTLE Framework: Political
– Political factors
• government policies affecting business
 Alternatively, they may be actions affecting just one
part of the economy.
 For example, the charge on plastic bags affects the
retail sector and
 the ban on smoking in public places affects the tobacco
industry.

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Chapter Slide 28
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
 The PESTLE Framework: Economic
 Economic factors: Local, regional, national and international economies.
 Businesses are affected by a range of economic factors, including the changing costs
of raw materials, the entry of a new rival into the market, the current availability
of investment funds, the change in the cost of investment funds or interest rates,
the economic performance of the domestic and world economy (fluctuations in
economic activity: contracting or expanding, stage of the business cycle), the
changes in domestic and foreign economic policy, change in the weather and also
the geopolitics.
 It is normal to divide the economic environment in which the firm operates into two
levels: the microeconomic environment and the macroeconomic environment.

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Chapter Slide 29
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
 The PESTLE Framework: Economic
 the microeconomic environment: This includes all the economic factors that are
specific to and affect a particular firm/industry/sector operating in its own
particular market.
 Thus one firm may be operating in a highly competitive market, whereas another
may not;
 one firm may be faced with rapidly changing consumer tastes (e.g. a designer
clothing manufacturer), while another may be faced with a virtually constant
consumer demand (e.g. a potato merchant);
 one firm may face rapidly rising costs, whereas another may find that costs are
constant or falling.

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Chapter Slide 30
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
 The PESTLE Framework: Economic
 the macroeconomic environment: This is the national and international
economic environment within which the business operates.
 Business in general will fare much better when the economy is growing, as
opposed to when it is in recession, as we saw during the COVID-19 pandemic.
 In examining the macroeconomic environment, we will also be looking at the
policies that governments adopt in their attempt to steer the economy, since these
policies, by affecting things such as taxation, regulations, interest rates and
exchange rates, will have a major impact on firms.

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Chapter Slide 31
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
 The PESTLE Framework: Social
 Social/cultural factors: This aspect concerns social attitudes and values.
These include attitudes towards working conditions and the length of the
working day,
equal opportunities for different groups of people (whether by ethnicity,
gender, physical attributes, etc.),
the nature and purity of products,
the use and abuse of animals, and images portrayed in advertising.
 The social/cultural environment also includes trends and fashions in society
which affect business, e.g. green issues.

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Chapter Slide 32
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
 The PESTLE Framework: Social
 Changes in the age distribution/average age of the population and their
incomes provide opportunities for business activity.
 Culture and religion and changing attitudes to the environment (especially
concerning the protection of the environment) are also having a growing
impact on the actions of business and the image that many firms seek to
present and can influence demand.
 or changes in attitudes towards seeking paid employment while bringing up
small children.
 The growth of social networks with viral messaging offers business both
opportunities and threats.

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Chapter Slide 33
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
 The PESTLE Framework: Technological
 Technology: The application or use of knowledge in some way, which enables
individuals or businesses to have greater control over their environment.
 There has been an explosion in technological developments providing both
opportunities and threats to business.
 Technological factors: Over the past 2-3 decades or so there has been significant
technological change, which has had a huge impact on how firms produce,
advertise and sell their products.
 Online shopping (E-commerce) has continued to grow, creating a global market
place for firms, while causing problems for high street retailers. It has also
changed how business is organised, providing more opportunities for smaller
online retailers and changing the structure of many markets.

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Chapter Slide 34
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
 The PESTLE Framework: Technological
 The use of robots and other forms of computer-controlled production e.g. AI has
changed the nature of work for many workers.
 The information-technology revolution has enabled much more rapid
communication, making it possible for firms across the world to work together
more effectively.
 The working environment has become more flexible and efficient, with many
workers able to work while travelling, from another country or from home – a
particular help during the COVID-19 pandemic.

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Chapter Slide 35
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
 The PESTLE Framework: Legal
 Local, national and supranational legal framework.
 Associated with good governance.
 Legal framework likely to increase costs for compliance.
 Balance between confidence in support of legal process and being able to conduct
business freely.
 Legal factors: Businesses are affected by the legal framework in which they
operate.
 Examples include industrial relations legislation, product safety standards,
regulations governing pricing in the privatised industries and laws preventing
collusion between firms.

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Chapter Slide 36
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
 The PESTLE Framework: Environmental
 Economic growth and therefore business activity has an impact on the
environment.
• On ecosystems.
• Climate change and global warming.
• Resource endowments (non-renewable resources).

 Businesses need to look at their impact on the environment. They need to assess
the costs and benefits of reviewing effects of business activity.
• What can be done to improve recycling, or for supermarkets to reduce food
waste?
• If changes were made will benefits be greater than costs?

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Chapter Slide 37
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
 The PESTLE Framework: Environmental
 Environmental (ecological) factors. This has become an increasingly important
issue in politics and business, with many firms aiming, and even being forced by
government policy changes, to take a greener approach to business.
 Consumers are more environmentally aware and a green image can be useful in
generating finance from investors and government.

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Chapter Slide 38
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
 Additional Factor to The PESTLE Framework:
Ethical
 We can add one additional factor (Ethical) to create STEEPLE analysis.
 Ethical factors: Firms are increasingly under pressure to adopt a more socially
responsible attitude towards business, with concerns over working conditions, product
safety and quality and truthful advertising.
 With various companies finding themselves in difficulties over suspect business
practices and with consumers’ increasing awareness of these issues, many firms have
been forced to adapt their business practices.
 Examples include Volkswagen and its ‘defeat device’, which gave more favourable
emissions readings under test conditions; sexual harassment allegations affecting
Weinstein Co.; United Airlines, which faced outrage as security officers forcibly
dragged a passenger off an overbooked flight; and a whole host of scandals affecting
Uber in its treatment of workers.
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Chapter Slide 39
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
The External Business Environment
 Using PESTLE/ STEEPLE analysis
 used by organisations for auditing their business environment
 helps in developing future business strategy
 relations between the 6/7 sets of factors
 importance of the economic factors
 It is nevertheless important to recognise that there is a great overlap and interaction
among these sets of factors. Laws and government policies reflect social attitudes;
technological factors determine economic ones, such as costs and productivity;
technological progress often reflects the desire of researchers to meet social or
environmental needs; and so on.

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 Globalisation and the Changing
Business Environment
 The changing business environment: We must also be aware of the fact that the
business environment is constantly changing. Some of these changes are gradual,
some are revolutionary.
To be successful, a business will need to adapt to these changes and, wherever
possible, take advantage of them.
Ultimately, the better business managers understand the environment in which they
operate, the more likely they are to be successful, either in exploiting ever-changing
opportunities or in avoiding potential disasters.
 Globalisation of business environment: The business environment has become
more global, with many firms competing in a world market and this has added both
opportunities and threats to each aspect of the business environment.

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 The Structure of Industry
 Classifying industries: One of the most important and influential elements of the business
environment of a firm is the nature of the industry in which it operates and the amount of
competition it faces.
Knowledge of the structure of an industry is therefore crucial if we are to understand
business behaviour and its likely outcomes.
In this section we will consider how the production of different types of goods and services
is classified and how firms are located in different industrial groups.
 Classifying Production: It is common to distinguish three broad categories when
classifying production.
Primary production: The production and extraction of natural resources such as minerals and
sources of energy, plus agriculture.
Secondary production: The production from manufacturing and construction sectors of the
economy.
Tertiary production: The production from the service sector of the economy, such as finance,
the leisure industry, retailing and transport. 42 of 38
 The Structure of Industry
 Classifying firms into Industries: An industry refers to a group of firms that produce
a particular category of product or service, such as the electrical goods industry, the
holiday industry or the insurance industry.
 Industrial Sectors: Industries can then be grouped together into broad industrial
sectors producing similar products or services, such as manufacturing, construction or
transport.
 Why classify firms into Industries & Industrial Sectors/Sub-sectors?
 It helps to analyse trends in the economy & identify areas of growth and decline
 It helps to identify part of the economy with specific needs, such as training or
transport infrastructure.

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 The Structure of Industry
 To understand the relationships between firms, most importantly, it helps
economists and business people to understand and predict the behaviour of firms
that are in direct competition with each other. In such cases, however, it may be
necessary to draw the boundaries of an industry quite narrowly.
 Example of Vehicle Industry: If we are to group together products that are genuine
competitors for each other, we will want to divide vehicle industry into more
narrow categories, e.g. family cars, sports cars, etc.
 Standard Industrial Classification (SIC): The formal system under which firms are
grouped into industries by the government in order to collect data on business and
industry trends is known as the Standard Industrial Classification (SIC).
 It is divided into 21 sections, such as manufacturing, transport and storage, real
estate activities and education and each section has its own divisions, such as
manufacturing being divided into manufacture of food products, of textiles or basic
metals. 44 of 38
Standard industrial classification (SIC 2007)

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The Determinants of Business Performance
 It should be apparent from our analysis thus far that business performance is strongly
influenced by the market (industry) structure within which the firm operates. This is
known as the structure–conduct–performance paradigm.
 Structure  conduct  performance
 relationship between business structure and business conduct (behaviour)
competitive markets and competitive behaviour
limited competition and collusion
Importance of (a) consumer tastes (b) technology & availability of resources
 relationship between business conduct and business performance
indicators for measuring performance: profitability, market share, growth in
market share, and and changes in share prices, especially relative to those of other
firms in the industry etc.
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 The structure–conduct–performance paradigm

Basic conditions Structure Conduct Performance

Supply Number of sellers Pricing Efficiency
Availability of inputs and buyers behaviour Profitability
Technology Barriers to entry Output Market share
Product specifications
Cost structures Product strategy Share price
Demand and advertising
Tastes Product Meeting social
differentiation Mergers goals
Substitutes

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 Determinants of Industry Structure And
Firm Behaviour & Business Performance
 The structure of an industry depends on a number of basic factors.
 Some concern consumer demand, such as consumer tastes and whether there are
close substitute products.
 Others concern production (supply), such as technology and the availability of
resources.
 Such conditions determine the competitiveness of an industry and influence firms’
behaviour, i.e., these factors will influence whether the market structure is highly
competitive or dominated by just a few producers who are able to erect various
barriers to the entry of competitors into the market.
 A business operating in a highly competitive market structure will conduct its
activities differently from a business in a market with relatively few competitors.
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 For example, the more competitive the market, the more aggressive the business
may have to be in order to sell its product and remain competitive.
 The less competitive the market structure, the greater the power that a firm may
have to increase prices and the greater is the chance that collusion between
producers might be the preferred strategy, as a means of reducing the uncertainty
and costs of any degree of competition that outright competition might produce.
 Such conduct will, in turn. influence how well businesses perform. Performance
can be measured by several different indicators, such as efficiency in terms of cost
per unit of output, current or long-term profitability, market share or growth in
market share, changes in share prices or share prices relative to those of other firms
in the industry or to other firms in general, to name some of the most commonly
used.
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 It would be wrong, however, to argue that business performance is entirely shaped
by external factors such as market structure. In fact, the internal aims, organisation
and strategy of business may be very influential in determining success.
 The aims of the firm: Economists have traditionally assumed that firms want to
maximise profits. The ‘traditional theory of the firm’, as it is called, shows how
much output firms should produce and at what price in order to make as much
profit as possible. But do firms necessarily want to maximise profits?
 One question arises over the time period in which they may want to maximise
profits. For example, if a business adopts a strategy of growth, more must be spent
on investment in machinery and advertising to increase both production and sales.
These large expenditures will reduce the profit in the short run, but profits in the
long run may be maximised. In this case, what is inconsistent with short-run profit
maximisation may be wholly consistent with long-run profit maximisation.
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 A more fundamental criticism of the assumption of profit maximisation, however,
is that in large companies it is the managers and not the owners that make the
decisions about how much to produce and at what price. In such cases, other
objectives may be pursued by these decision makers. The problem is that the
objectives of managers and owners may well differ and are often in conflict.
Understanding these possible conflicts is crucial when trying to establish the
objectives of a business.
 It is not only the aims of a business that affect its performance. Performance also
depends on the following:
 Internal structure. The way in which the firm is organised (e.g. into departments
or specialised units) will affect its costs, its aggressiveness in the market, its
willingness to innovate, etc.

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 Information. The better informed a business is about its markets, about its costs of
production, about alternative techniques and about alternative products it could
make, the better will it be able to fulfil its goals.
 The competence of management. The performance of a business will depend on
the skills, experience, motivation, dedication and sensitivity of its managers.
 The quality of the workforce. The more skilled and the better motivated is a
company’s workforce, the better will be its results.
 Systems. The functioning of any organisation will depend on the systems in place:
information systems, systems for motivation (rewards, penalties, team spirit, etc.),
technical systems (for sequencing production, for quality control, for setting
specifications), distributional systems (transport, ordering and supply), financial
systems (for accounting and auditing), and so on.
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