Introduction: business and its environment

Transcription

1 Introduction: business and its environment Pau Wethery and Dorron Otter Contents The approach of this book themes and issues 2 What is business? 4 Business and the probem of scarcity 4 The private sector of business 5 The private sector on coser inspection 7 Other sectors of business the pubic sector and the third sector 10 A simpe mode of business in its environment transforming inputs into outputs 13 Conceptuaizing the environment of business 15 Interaction between business and the environment responding, infuencing and choosing 17 The nature of the interna environment 20 Types of organization structure 21 Environmenta anaysis 24 Summary 27 Case study: UK pc 28 Review and discussion questions 29 Assignments 30 Further reading 30 Onine resources 30 References 30 01

2 2 Introduction X Learning objectives When you have competed this chapter you wi abe to: Recognize different uses of the term business, and understand the different forms of business in terms of, for exampe, private, pubic and not-for-profit organizations Describe the compexity of the externa environment in which business operates and expain the idea of environmenta uniqueness Understand the nature of the interna environment of business Understand how businesses must respond to changing environmenta factors in order to operate successfuy, but aso how they seek to infuence the environment Use anaysis toos such as PEST or SWOT to examine the business environment Understand the approach to the business environment of this book and how to use it in your studies The approach of this book themes and issues Eight key themes that wi hep you to understand and anayse the business environment run through this book. You wi encounter these themes in this introduction and in each of the subsequent chapters as you examine a range of issues in the business environment. The themes wi be signposted by the use of markers in the margin: Diversity Diversity of business: business is a diverse category Interna/externa: the environment is both inside and outside organizations Compexity of the environment: the externa environment is muti-dimensiona or compex Variety of spatia eves: from the oca to the goba Dynamic environment: the environment of business does not stand sti Interaction between business and the environment: there is interaction between business organizations and their environments Stakehoders: individuas and groups that are affected by business decisions Vaues: business decisions invove ethica questions The themes are ways of conceptuaizing business and the environment in which it operates. You wi master these themes increasingy as you work through the book, but it is usefu to begin with a brief introduction to each one. Business is a diverse category. It does not refer ony to private sector, profit-making companies. Pubic and vountary sector organizations may aso be regarded as businesses. The boundaries between these sectors are contested and shift over time, for exampe as a resut of the poicy of privatization initiated by Conservative governments in the UK in the 1980s. Within the dominant private sector, businesses vary in a number of ways, such as ega structure, industry, size and market power, and geographica reach. This diversity aso means that, athough there are common eements in the business environment, each business operates in an environment that is, to some extent, unique.

3 Business and its environment 3 This book mainy deas with the externa environment, the surrounding conditions and processes in the word outside the organization. However it is usefu to think of the environment as aso having an interna dimension. This is because a business organization is not reay a singe, unified entity but is internay differentiated. In other words, it is a compex system. Managers within business, to be effective, have to dea with this interna environment as we as the externa one. In addition, the abiity of an organization to operate successfuy within its externa environment depends, in arge part, on the effectiveness of interna systems and procedures. The interna environment has to be managed and adapted to the demands and opportunities of the externa environment. We might think of the externa environment primariy in terms of economic conditions and trends, to do with the behaviour of competitors and customers. The economy is, of course, of major importance. However, a moment s thought makes it cear that the externa environment in which business operates is more compex and needs to be anaysed aso in terms of its poitica-ega, socia-cutura, and technoogica aspects. These aspects are interreated, as we can see if we think of the roe that poitica decisions made in government have in shaping the economic environment. We wi aso see that many issues facing business have economic, socia, poitica and technoogica aspects. Spatia eve refers to the geographica or territoria unit of anaysis that we use to conceptuaize the business environment. As citizens we ive within the territory of a nation-state, such as the UK, and we tend to think of our identities at east party in terms of nationaity. Simiary the business environment tends to be discussed primariy at nationa eve. For exampe, in the media we come across references to British business, the British economy, British society and the British government. However sometimes it is more appropriate to think of business and its environment at a more oca eve, perhaps in terms of an urban area or region. On the other hand it has become increasingy important to think of business and the environment on a much arger spatia eve, such as European or goba. There is much debate about the nature, extent and impications of gobaization. Gobaization refers, roughy, to the tendency of business and other economic, socia and poitica processes and reationships to move across or beyond the borders of nation-states. One of the most important manifestations of this is the growth of mutinationa businesses. We ive in a fast-changing word, especiay in the advanced or rich societies such as in western Europe. We have come to expect that the society in which we ive and the way we ive our ives wi change over time, even within fairy short periods. This can be seen most ceary in reation to technoogica innovation and its impact in a areas of our ives. Equay, the environment of business is dynamic. Because of this businesses have to respond and adapt to changes in their environment, and dea with uncertainty about the future. But, at the same time, business organizations are powerfu agents of change. This can be seen very ceary from the exampe of technoogica innovation which is driven argey by business. Indeed the dynamism of western societies is deepy rooted in basic features of their market economies competition and the profit motive. This is often discussed in terms of entrepreneuria behaviour, which invoves risk-taking and innovation, rather than reying on tried and tested approaches. Competitive markets pace emphasis on innovation as the means of keeping up or getting ahead. There is two-way interaction between business organizations and their environment. Businesses infuence and are infuenced by their environments. Business organizations are not passive but seek to shape environmenta factors to their own advantage. For exampe, business is an important actor in the poitica arena. Business decisions have to be made in a context of mutipe stakehoder interests and demands. A stakehoder is any individua or group that is affected by, and thus has a stake in, business decisions. More than before business has to work to retain pubic trust. There are competing perspectives and vaues concerning the nature and purpose of business in society reating to its power, responsibiities, performance and ethics. These are not just Interna/ externa Compexity Spatia eves Dynamic Interaction Stakehoders Vaues

4 4 Introduction debates that take pace in universities on degree courses, but are part of everyday poitica discussion and diaogue in which business must engage. What is business? This is a book about the business environment. The purpose of this introduction is to hep you to get to grips with what the business environment is, why it is important to study and understand it, and the particuar approach taken in this book. In simpe terms, the importance of studying the business environment is that a businesses operate in a changing and, in some ways, unique environment that is the source of both threats and opportunities. Business decisions are concerned with operating successfuy in this environment by countering threats and expoiting opportunities. For exampe, businesses may have to respond to changing market conditions affecting the demand for their products, the behaviour of competitors, or changes in government poicy. We begin by ooking more cosey at the meaning of the two words in the tite: business and environment. What do we mean by business, and how might we think about the environment in which it operates? Business and the probem of scarcity One way to think about the meaning of business is in terms of what economists ca the basic economic probem that, it can be argued, confronts a societies, rich and poor. This is a probem of scarcity, which means that there is not enough to go round. (This probem wi be discussed in more detai in Chapter 2.) We are a used to the probem of scarcity in our daiy ives as individuas or househods, in not having enough money to do (or buy) a that we woud ike to and therefore having to make choices between aternative activities or forms of spending. The same probem faces society as a whoe. In each case the probem is one of imited resources against the arge, and even open-ended, set of wants, needs and goas that make demands on those resources. Scarcity creates the probem of how to aocate avaiabe resources of a kinds between competing wants which can t a be satisfied at once. Business is a way of deaing with this probem. Business can be defined in terms of the activity of production the transformation of various inputs (or factors of production ) into diverse outputs in the form of goods and services to meet particuar wants or needs of peope in society. This invoves a series of activities and chain of reationships between a number of organizations, from the initia procurement or acquisition of the factors of production (raw materias, abour, machinery) to the suppy of the finished good or service to a consumer, buyer or user. Business is a mechanism for deciding the aocation of the resources avaiabe to society between various possibe uses (or competing wants), the methods of production and the distribution of the output, in a situation of scarcity where not a wants can be satisfied. We can add to this that businesses produce outputs for consumers (customers, users or cients) and in response to their requirements, wants or needs. For exampe a professiona footba cub paying for an audience is a business whereas an amateur cub, invoved in the same activity, is not. Thus the reationship with consumers is an intrinsic aspect of business. This does not mean that the consumers have to be paying customers ike those who go to watch Liverpoo FC at Anfied, for they coud be users of a pubic service for which there is no charge. The important point is that

5 Business and its environment 5 businesses aways produce goods and services for consumers of one kind or another, and that the success of the business is aways bound up to some degree with consumers requirements and expectations. We commony think of businesses in terms of companies, firms or enterprises in the private sector of the economy. This is a good pace to start since the private sector dominates the economic and business ife of societies ike the UK. However, as we wi see, business aso takes pace outside of the private sector. Diversity The private sector of business The private sector is made up of business organizations that are owned and controed as forms of private property. The argest businesses take the form of pubic imited companies (PLCs) which are owned by their sharehoders. These sharehoders can be private individuas, athough a majority of shares is owned by financia institutions such as pension funds and insurance companies. Private sector businesses can take other ega forms, such as soe traders, partnerships and private imited companies (see Chapter 13). Private ownership is the thread connecting a these types. However, the private sector is characterized by further specific features: production of goods and services for sae the profit motive competition. Private sector businesses produce goods and services for sae to customers in a context of competition with other firms in the market and with the prime purpose of making a profit. We wi examine in more detai how markets operate in Chapter 2, but here we can see in a fairy simpe way how private business in a market system is a specific way of soving the basic economic probem. Firms interact with househods in a way that is depicted in Figure 1.1. Househods act both as consumers and as suppiers of abour or empoyees. Firms purchase the inputs needed for production from househods (here we assume for simpicity that abour is the ony factor of production ) and suppy goods and services to them. The profit motive means that private businesses produce ony those goods and services that househods are wiing and abe to buy at prices that generate a profit for the business. Profit is the difference between the tota costs incurred by the business in the production process and the tota revenue generated by saes of the products. The profit motive makes businesses highy responsive to consumer demand or customerfocused. They want to be customer-focused, since this is the best way to make a profit. But they aso have to be, for if they produce goods or services that peope do not want or at unattractive prices they wi not stay in business very ong. Competition means that businesses cannot easiy get away with products that consumers are not satisfied with, since they can shop around. Thus both profit and competition keep businesses customer-focused. The eve of consumption that househods enjoy depends on their abiity to pay, and this is determined by their income in the form of earnings from empoyment. This, in turn, depends on the prices that the skis and knowedge that househod members possess command in the abour market (wages and saaries). A higher standard of iving can be obtained through the possession of skis that are in short suppy and hence command a premium in the abour market (see Chapter 5). Thus the composition of output and its distribution are soved by the interaction of firms and househods through the distribution of earnings from empoyment and the preferences of consumers in househods with different income eves. Looked at in another way, businesses act as mediators between househods who suppy abour for production and share out the resuting goods and services.

6 6 Introduction Figure 1.1 The interaction between firms and househods the circuar fow of income. D Suppy of goods & services A Suppy of abour Househods B Payment of wages & saaries C Househod spending on goods & services There is another dimension to add deciding the methods of production. Profit provides a motive, and competition a pressure, for continua improvements in efficiency. This is because greater efficiency means ower costs of production and cheaper products. It is rationa for profit-seeking firms to strive to improve efficiency to keep up with or get ahead of their rivas. Firms that fa behind in the efficiency race end up pricing themseves out of the market. It is this continua pressure to increase efficiency that is buit in to the market through profit and competition that drives the process of economic growth and rising iving standards. Firms Notes: Househods suppy abour to firms (A) in return for payments of wages and saaries (B) (In this simpe mode abour is assumed to be the ony input or factor of production ). Househod income, derived from wages and saaries, finances spending on goods and services (C). Firms produce and suppy goods and services to meet demand from househods (D). 5 Stop and Think Can you expain how profit and competition in the private sector of business sove the components of the basic economic probem? Can you identify any shortcomings in this soution? This is a very simpe mode of how private business operates in the market to sove the economic probem. However, we wi see in Chapter 2 and in subsequent chapters that things are more compicated and more controversia than is suggested here. There are strong disagreements about the advantages and disadvantages of the private sector mode of business. These disagreements are an important eement of the business environment. Let s try a taste of controversy. The ogic of the profit motive suggests that it doesn t reay matter to business who the consumers are or what their wants are so ong as a profit can be made. The customer is aways right! This seems to be a good thing since businesses ought to treat everyone in the same way, and the market provides for a vast array of tastes. Yet, in practice, not everyone is treated in the same way and there are continuing probems of discrimination on grounds of race or sex in business (see Chapter 5). Of course this is not a probem that is specific to business, and it coud be argued that business tends to refect the vaues of the wider society of which it is part. Are there reativey few women in management positions because of discriminatory attitudes within business, or because of sexism within the wider society? The idea that markets produce whatever customers want ooks rather different when we consider the effort that goes into persuasive advertising. Businesses may be abe to get away with producing goods and services that are of poor quaity or even harmfu. For exampe, food manufacturers and supermarkets have come in for criticism for producing and marketing unheathy products, high in sat, fat and sugar, contributing to the obesity epidemic (see Chapter 4). Gerad Ratner was forced to step down as chief executive of Ratners jeweery business in 1992 having described one of its products as tota crap. Athough it is possibe that this remark was meant as a joke, it seems to iustrate the point that private sector companies are not averse to seing products of dubious quaity as ong as they are profitabe. Is it fair to criticize businesses for seing unheathy foods or jeweery that isn t very good, or is it a reasonabe defence to say that it is up to consumers what they buy? Are consumers reay abe to make these decisions for themseves, or are they manipuated by sophisticated marketing techniques? 5 Stop and Think Do you agree that the ogic of the profit motive goes against discrimination? Is the customer aways right?

7 Business and its environment The private sector on coser inspection 7 On coser inspection, common characteristics of the private sector of business private ownership, competition and profit are not as straightforward as they first appear. Diversity Free market vs. reguation? Firms exist as ega entities, which means that they are defined by aw, but the private ownership abe covers businesses with different types of ega status. These incude soe traders, partnerships, imited companies and cooperatives. The basic idea of private business is that firms are free to manage their own affairs and use their own resources as they choose. In this way private ownership of business may be ikened to other forms of private property where the whoe point of owning our own property is to use it as we pease and for our own benefit or sef-interest. In business terms this means that businesses shoud be managed in the interests of their owners, and this means making a profit. It might be added to this that businesses are best abe to judge for themseves how to manage their affairs efficienty, and that by being eft to do this there is benefit for the wider pubic through the resuting innovation and economic growth. However, in reaity there is no such thing as a free market in the sense of businesses being eft entirey free to make decisions for themseves. In a market systems the aw is used extensivey to reguate various aspects of business decisions and behaviour. As we wi see in Chapter 4 the aw is made and enforced by government and so constitutes a key eement of the poitica environment of business. One of the prime reasons for using the aw to reguate business is recognition that a free market woud have undesirabe consequences for certain groups in society. Consumers and empoyees woud be at a disadvantage in their deaings with business without various protections afforded by aw. In other words, athough business pursuing its sef-interest produces substantia pubic benefit such as greater prosperity, there are many ways in which business sef-interest and the pubic interest cash. For exampe, the Minimum Wage Act, requiring a businesses in the UK to pay a minimum wage, ensures that profit-seeking businesses facing competitive pressures do not harm vunerabe groups of empoyees by forcing wages down beow a decent eve. This means that athough we refer to private ownership of business, decisions about managing those businesses are never purey private ones since they invove certain restrictions and obigations defined by aw. Of course, there are different views about how far the aw shoud be used to reguate business, and the roe of aw varies both between different societies and between different governments within each market system. Chapter 13 wi examine the difficuty of baancing the authority of the aw with the freedom of business. Vaues Mini-Case 1.1 Guiding the hidden hand the minimum wage The idea of the hidden hand is a metaphor for the way the market system, though based on miions of independent decisions and not subject to overa pan or contro by any actua hand, does not degenerate into chaos but operates in a highy coordinated way. It is as if a hidden hand is guiding it. Adam Smith pointed out in the 18th century that even though businesses may be concerned ony with their sef-interest (profit) they woud be guided, by and arge, to serve the pubic good. This seems ike a paradox promoting the common good by acting sefishy. Smith s insight was that it woud ony be by serving the needs of others (customers) that businesses woud be abe to make a profit. When businesses throughout the economy act in this way the resut is that the suppy of goods and services matches consumer demand. The hidden hand of the market operates through the price mechanism. The price adjusts unti baance is achieved between

8 _001_030_CH01.qxd 8 11/1/07 15:15 Page 8 Introduction suppy and demand. For exampe if suppy exceeds demand the price wi tend to fa, and vice versa. However, the hidden hand can produce outcomes that are not sociay desirabe. In a market system profit-seeking businesses respond to abiity to pay it is not their purpose to act ike charities. The probem is that the price determined by the hidden hand might be one that not everyone can afford to pay because of differences in eves of househod income. Perhaps it doesn t matter that not everyone can afford a BMW, but it is more serious if some peope cannot afford heathcare when they need it. In abour markets price is the wage or saary that peope receive for the jobs they perform. In this case the probem is that for some ow paid occupations this price might not be sufficient to enabe peope to have a decent standard of ife. One soution to this probem is to use the aw to guide the hidden hand through price contros. The Labour government introduced a Nationa Minimum Wage (NMW) in The Department for Trade and Industry expains the rationae of the NMW as foows: The nationa minimum wage is an important cornerstone of government strategy aimed at providing empoyees with decent minimum standards and fairness in the workpace. It appies to neary a workers and sets houry rates beow which pay must not be aowed to fa. It heps business by ensuring companies wi be abe to compete on the basis of quaity of the goods and services they provide and not on ow prices based predominanty on ow rates of pay. index.htm/ Since 1999 the NMW has been increased at a faster rate than average earnings, thus improving the position of ow paid workers. As the NMW has increased it has embraced a arger share of the workforce, rising from 1 miion in 1999 to 2 miion in In October 2006 the NMW for adut workers was increased to 5.35 per hour. The point of the NMW is that ow paid workers are better off as a resut of the visibe hand of government than they woud have been if wages were eft entirey to be determined by the hidden hand of the market. 2 How does the NMW affect the private ownership of business? 2 If you were an empoyer, woud you support the NMW? Since 1999 the Nationa Minimum Wage has been increased at a faster rate than average earnings thus improving the position of ow paid workers. istockphoto.com/sivia Jansen

9 Business and its environment 9 Competition vs. market power? So private ownership turns out not to be a straightforward idea. The same can be said of competition and profit. Competition is a key aspect of the environment in which businesses in a market system operate, and we wi ook at it more cosey in Chapters 2 and 14. It is competition that keeps businesses responsive to consumers since they have the option of going esewhere if they are not satisfied. However it seems cear that firms do not a face the same amount of competitive pressure and that some firms exercise more market power than others. If consumers reay are sovereign this suggests that firms have to respond to their preferences and have itte or no power in the market themseves. Yet firms are often fet to be powerfu entities, particuary in the case of big business. In recent years there has been much pubic debate about the power and impact of vast goba businesses in the form of mutinationa corporations (MNCs) that operate in severa different countries (Chapter 12). It seems cear that firms have more power when they face no or few competitors and ess power when they face a arge number of rivas. When there are many firms in a market competitive pressure is increased and consumers can more easiy shop around. In economic anaysis these issues are examined in terms of distinctive market structures principay monopoy, oigopoy and perfect competition. The prediction of economic theory is that market structure infuences a firm s conduct or behaviour and performance so it is an important eement of the business environment. Vaues Spatia eves Profit vs. socia responsibiity? The performance of business is conventionay measured in terms of profitabiity, because profit is seen as the prime motive of business in the private sector. However the notion of business success is not quite so straightforward. This is because businesses may themseves have other non-profit objectives and because, in any case, other groups in society increasingy demand or expect business performance and success to be measured by criteria other than just profit. In the modern word businesses have come increasingy under pressure to egitimize their activities and roe in society with reference to a wider range of socia benefits. This is sometimes referred to as maintaining the icence to operate. As we wi see in Chapter 7, business has to engage in pubic diaogue in matters of business ethics and respond to the concerns and demands of a range of stakehoder groups. This area of debate is often expressed in terms of corporate socia responsibiity. A crucia question, discussed in Chapter 15, concerns the threat of cimate change and the responsibiity of business to demonstrate an ethic of care towards the natura environment. The private sector of business has certain common characteristics private ownership, competition and profit that are important for an understanding of its decisions and behaviour and how it soves the basic economic probem. However we have seen that the private sector is highy diverse, and the principa aspects of this diversity are summarized beow: type of good or service produced (the industry in which the firm is ocated) ega status of the firm (e.g. soe trader, partnership, imited company) ega reguation of business (the variabe use of aw to pace restrictions and obigations on private business) size (e.g. measured in terms of number of empoyees or saes revenue) geographica reach (i.e. the geographica spread of the firm s activities within and between countries) degree of competitive pressure (market structure) objectives (profit and corporate socia responsibiity) Vaues Stakehoders Diversity

10 10 Introduction 5 Stop and Think Do you think that the soe purpose of business is or shoud be to make as much profit as possibe? If your answer is no, woud you think differenty if you were a sharehoder? If your answer is yes, do you think that the pursuit of profit eads business to serve the pubic interest or common good? Other sectors of business the pubic sector and the third sector Diversity Dynamic There is a good reason why peope tend to think first of private sector firms when asked to think of an exampe of business, and this is that the private sector is the dominant eement within the UK and other capitaist or market economies. In other words, most of the goods and services that we consume on a daiy basis are purchased from private sector businesses, and most empoyees work in the private sector. Another reason is that the term business is often associated specificay with the profit motive. Yet this is a narrow conception of business. If we think in terms of our broad definition transforming inputs into outputs of goods and services to meet the needs and wants of consumers it is cear that other types of organization are aso invoved in business. These are not-for-profit organizations operating in both: the pubic sector, and the third sector of vountary organizations. Athough these organizations make up a reativey sma part of the business or economic ife of the country, they are invoved in the production of some key services, such as heathcare and education services. It is aso important to note that the boundaries between these sectors are not fixed but can, and do, shift, argey as a resut of poitica decisions. For exampe, in the recent past in the UK, mainy under Conservative governments in the 1980s and 90s, a programme of privatization transferred businesses that had operated for many years as parts of the pubic sector such as British Teecommunications, British Gas and British Rai into the private sector. The point is that the pubic and third sectors aso provide mechanisms for soving the basic economic probem, and societies have to choose how to baance these different sectors of business. Therefore, in addition to the private sector, we shoud aso think of business in terms of not-for-profit organizations operating in the pubic sector and the vountary (or third ) sector. Within these sectors business organizations are aso diverse when considered, for exampe, in terms of the type of output they produce, their ega status and size. Differences between the private and pubic sectors Pubic and private sector organizations differ in important respects. Revenue. Pubic sector organizations ike schoos and NHS hospitas are argey financed through taxation rather than saes revenue generated by customers paying a price in a market.

11 _001_030_CH01.qxd 11/1/07 15:15 Page 11 Business and its environment Supermarkets are an exampe of an oigopoy. Brigitte Bott/Robert Harding Word Imagery/Corbis Accountabiity. Private sector organizations are accountabe to customers and sharehoders. If they are not responsive to their customers they risk osing business to their more customerfocused competitors, and pubic imited companies (PLCs) are egay required to safeguard the interests of their sharehoders. Pubic sector organizations do not have sharehoders. Some of them do have users who may be thought of (and think of themseves as) customers (such as students), and they are expected to be more responsive to them than perhaps they were in the past. But some parts of the pubic sector dea with peope who do not choose to be users of the service and are therefore not customers in this sense, for exampe the prison service. In genera, poitica rather than market-based forms of accountabiity are more important in the pubic sector, meaning accountabiity to poiticians or pubic officias (civi servants or oca government officers). Competition. Finay, a characteristic of the private sector is that consumers can shop around because firms operate in competitive markets. It is this that keeps businesses customer-focused and is the basis of consumer sovereignty. Of course, the amount of competition and consumer choice varies between markets and an important question concerns the operation of markets dominated by a sma number of arge businesses, 11

12 12 Introduction known as oigopoies (e.g. supermarkets). Some pubic sector organizations aso face competition in interna markets where customers have some abiity to exercise choice (i.e. to shop around ) between aternative service providers such as schoos, universities or hospitas. However in genera such choices are constrained and these organizations operate in ess voatie, if not captive, markets. Mini-Case 1.2 Is a schoo a business? Some peope might describe a schoo as a business on the basis that it provides a service it Vaues is in the business of providing education for chidren. A schoo might we have a business pan, and we might expect the headteacher and governors to run the schoo in a business-ike way. The chidren, or their parents, might be referred to (and might think of themseves) as customers, just as they might be customers of McDonads. In Britain, under the Labour government s poicy of estabishing City Academies, it became possibe for individuas from the word of business to invest their own money in a schoo and pay a eading roe in its management and in determining its ethos. These a ook ike good reasons for thinking of schoos as businesses. Yet other peope woud reject the idea that a schoo can be thought of as a business, and prefer instead a term ike pubic service. They might think that a business is primariy concerned with making money, whereas a schoo has other vaues and objectives such as ensuring that a chidren have the same opportunities regardess of their parents income, and the chance to reaize their potentia. This exampe iustrates the dispute over where the boundaries of business ie, but aso shows that important issues can be at stake in what seems ike a quibbe over mere words. For the debate about whether a schoo shoud be thought of as a business is reay a dispute about the purpose of schoos and the ways they are managed. Those who reject the term business beieve that making a schoo more business-ike threatens its pubic service mission or ethos, whereas those who think of schoos as businesses wi see this in positive terms of improving the efficiency of management and the performance of the schoo as measured by academic performance. The dispute aso iustrates, in a more genera way, the debate about the roe and purpose of business in society and whether, as in this case, there are certain areas of ife that shoud be kept separate from business or business shoud be aowed to extend its roe without imit. It shows, in other words, that the roe of business in modern society remains controversia. What do you think? 2 Do you think of yoursef as a customer of your university? How does this differ, if at a, from the traditiona idea of a student? 2 Do you have the same expectations and the same idea of your rights in reation to the university as you do in reation to a high-street business? Is a schoo a business? Photo by Christopher Furong/Getty Images 2 Do you think it woud be a good thing for universities to be run more on business ines? Woud there be any disadvantages?

13 Business and its environment 13 A simpe mode of business in its environment transforming inputs into outputs Business organizations are systems that interact with the externa environment in which they operate. Business, in its broad sense, is the activity of transforming inputs into outputs or, in other words, the activity of producing goods and services to meet the wants and needs of consumers. The inputs come from, and the outputs are sent into, the environment. To be successfu, businesses have to produce outputs that meet the expectations of consumers, and to do this they have to be abe to acquire the necessary inputs at the right time, price, quantity and quaity. Thus businesses have to understand the surrounding conditions and circumstances at both the input and output ends of their operations. And in between they have to manage the process of transformation of inputs into outputs (production) within the organization (the interna environment). This understanding of business interacting with its environment through three stages of activity is shown in Figure 1.2. There are two other ways of picturing this transformation process: Interaction as part of a onger chain as a cyce. The onger chain is the suppy chain of which the individua business is normay ony one ink. The suppy chain is the whoe series of organizations, reationships and processes that ink the consumer or end-user of the fina or finished product back to the origina raw materias which have been converted or transformed into that product. Thus in Figure 1.2 the inputs might not be raw materias but semi-manufactured products or components, and the outputs might not be fina products for end-users but parts that enter into the next stage of the production process carried out by another firm. The transformation process may be thought of as a cyce because for each organization the suppy of outputs to consumers is not reay the end of the process but eads back to the procurement of inputs to start the cyce again, as iustrated in Figure 1.3. Thus revenue earned from the suppy of outputs is poughed back into the business to procure further inputs in order to carry on production of further outputs, and so on. In the private sector the profit motive means that firms aim to earn more from tota saes revenue than was aid out as costs of production. Earning profit aows firms to expand the scae of production and grow the business and/or pay out part of the profits to the owners of the business (e.g. payment of dividends to sharehoders). There is ceary a potentia tension or trade-off between these two purposes or functions of profit, and between short-term and ong-term objectives. Sharehoders may expect short-term profits, but managers may wish to invest profits back into the business to secure ong-term competitiveness and growth. In the private sector inputs and outputs generay invove market reationships of exchange buying Figure 1.2 Business interaction with the environment the transformation of inputs into outputs Inputs Stage 1 Procurement of inputs Production Stage 2 Transformation of inputs into outputs Outputs Stage 3 Suppy of outputs to customers

14 14 Introduction Figure 1.3 The transformation process as a cyce Profit can be used to grow the business (b) or taken out of the business as income for the owners (a). SALES REVENUE (INCLUDING PROFIT) (X + x) a b FINANCE FOR BUSINESS (X) Stage 1 Firm incurs costs to procure inputs of raw materias, abour, and toos & equipment. INPUTS Stage 3 Stage 2 Firm generates revenue from sae of goods and services. The eement of profit is the difference between tota revenue and tota costs. GOODS & SERVICES Firm organizes the process of production. Managing empoyees to use toos and equipment to transform raw materias into goods & services. Notes: Profit (x) is what is eft from tota saes revenue after the tota costs incurred by the business have been repaced (X). There is a tension or trade-off between two functions or purposes of profit: it may be taken out of the business as income for the owners (a) or used as retained earnings to grow the business (b). and seing but pubic sector organizations produce services, such as heath and education, which are suppied to end-users free of charge (or mainy so). However, the inputs used by pubic sector organizations, such as drugs and medica equipment in the heath service, generay have to be purchased in a market. The private sector does not operate entirey as depicted by the simpe mode, for businesses rey on some crucia inputs provided by government. For exampe the skis and knowedge of empoyees are deveoped argey through the state education system. Understanding the environment of business in this way mainy invoves understanding the market conditions that the firm faces in reation to procurement of inputs and sae of outputs, particuary how competitive these markets are. We can say that as buyers of inputs firms benefit (as do buyers generay) from competitive market conditions (though there can be a downside if, for exampe, your current suppier goes out of business), whie as seers of outputs competitive markets are sources of threat (though a competitive or contestabe market may be an opportunity if, for exampe, the firm is a new entrant). Porter s we-known five forces mode identifies five sources of competitive pressures (Porter, 1980). Porter s five forces mode Current competitors The most immediate and obvious threat comes from rivas in the market producing or seing the same product and trying to attract the same customers. In genera markets are considered to be

15 Business and its environment 15 more competitive the greater the number of firms operating in them because it is easier for consumers to shop around. However even when a sma number of firms dominate a market, as with the major supermarkets, competition between them may be intense. As we as current competitors firms have to be aware of: the possibiity of new entrants into the market Entry may come from new start-ups or from existing businesses pursuing diversification strategies. Through diversification supermarkets have entered other markets such as for books and CDs, making it harder for existing businesses to survive. Entry may be deterred by barriers such as the abiity of estabished firms to use advertising and branding to buid up customer oyaty. Competition exists in a ess direct form through. the avaiabiity of substitute products A substitute is a different product which provides the same service or function, such as different modes of transport. Finay, firms have to dea with suppiers and customers at each end of the transformation process, in procuring inputs for the production process and seing their products. But these reationships of exchange aso invove a dimension of power. Thus firms have to dea with the power of buyers, and the power of seers It is cear that a business wi benefit if market conditions are reversed in reation to inputs and outputs so that there is buyer power in the former and seer power in the atter. For exampe, supermarkets are often accused of squeezing their suppiers by demanding price reductions and more stringent quaity criteria. In this case farmers, as seers, have itte power and supermarkets, as buyers, have much power. In effect, it can be argued, supermarkets are abe to compete by offering ow prices to their customers at the expense of farmers iveihoods. Conceptuaizing the environment of business Just as the term business in reaity refers not to a singe type of organization but to a diverse range, so the environment of business is simiary diverse. Different types of business organization operate in different environmenta settings or contexts. Spatia eve oca to goba The environment is usuay thought of as the word out there, the externa context, comprised of the wider socia, cutura, economic, poitica, ega, technoogica and other systems in which businesses operate. In the context of debates about gobaization we may think of this externa environment in terms of the word in the sense that businesses may be affected by, and in turn infuence, events on a goba scae. This is particuary true in the case of companies that have a goba reach or span of operations, especiay mutinationa corporations (MNCs) that undertake production in more than one country. However, we can think of the environment in terms of different eves of anaysis ranging from the sma scae and oca environment at one end of a spectrum through to goba systems and events at the other. We might think of sma and medium-sized enterprises (SMEs) as operating Spatia eves

16 16 Introduction in a more ocaized environment, such as within the oca economy of a town or city, and giant corporations operating in a more nationa or goba environment. However, even sma businesses may be affected by events at a nationa or goba eve because of the way they are often inked in with suppy chains spanning severa countries. For exampe, they may depend on imported raw materias or components. At the other end of the spectrum even the argest companies aso have to dea with oca issues and concerns. Indeed the term gocaization has been coined to draw attention to the need for goba businesses to remain sensitive to the pecuiarities of the oca contexts in which they operate. Externa and interna environments Interna/ externa Interaction Athough the environment of business mainy suggests the externa word out there, it aso has a critica interna dimension concerned with reations and processes within the organization. We have aready seen that the transformation of inputs into outputs invoves the stage of production within the organization. But we can get further with the idea of an interna environment if we think of the organization not as a singe unified entity but more as an internay differentiated system made up of different parts or sub-systems. For exampe, firms typicay are made up of speciaized sub-systems or departments deaing with particuar aspects or functions of the business such as production, marketing, finance, human resources (HR) and research. This may be seen as a division of abour within the organization which aows it to draw on the highy speciaized knowedge of empoyees in these distinct functiona areas. The other side of this differentiation is, of course, the need to ensure coordination so that individuas and departments are working together effectivey to achieve the organization s goas. That is a key task of managers at the senior eve of the organization. Now we can see that a director of human resources, for exampe, has to operate within an interna environment, deaing with issues such as training and deveopment of the existing workforce and, in the process, having to manage reationships with other departments. These are the surrounding conditions in which the director of human resources has to operate. For exampe, faced with scarcity the organization has to depoy its avaiabe resources carefuy to achieve its objectives. It has to make decisions about the aocation of these resources between different possibe uses, weighing up how each might contribute to its success. In this situation the director of human resources might have to win the case for more investment in the human capita of the organization in the form of staff deveopment against competing caims on those resources from other departments. Consideration of the interna environment raises the issue of the interna poitics of organizations (or office poitics ). This is because we can see that businesses are arenas in which different views are put forward about the aocation of resources and questions of business strategy more generay. In other words there is scope for disagreement about the best way forward for the organization and this means that it has to be abe to manage and resove these disagreements in a positive way that contributes to the success of the business. This process of resoving disagreements is at the heart of what poitics is about, and we wi return to this question in Chapter 4. The interna and externa dimensions of the business environment are cosey reated since many business decisions cross over this boundary they have interna and externa aspects. For exampe, product innovation may invove not ony internay managed research and deveopment activity but aso coaboration with externa partners. Businesses have to ensure recruitment of the right peope from the externa abour market, but they aso have to manage the interna abour market within the organization to depoy human resources effectivey. It is aso important to note that the character of interna processes may infuence the speed and effectiveness with which organizations respond to externa opportunities or threats. Indeed the interna environment may be shaped by the way the organization responds to its externa environment.

17 Business and its environment 17 Immediate and genera environments The immediate environment invoves those aspects which may require day-to-day or reguar decisions and actions (e.g. reations with suppiers), whie the genera environment is concerned with more distant or remote, but nevertheess consequentia, issues (e.g. macroeconomic trends). On the whoe, the genera environment concerns events and systems that operate on a arge scae and form a backdrop to day-to-day business decisions. The genera environment aso contains issues and events which are more beyond the capacity of individua organizations to infuence or contro. For exampe, the rate of growth of the economy, the eve of unempoyment and rate of infation, and centra bank (Bank of Engand) decisions on interest rates a form important eements of the genera environment or backdrop of business decisions in the UK. These are macroeconomic phenomena and decisions (operating at the eve of the economy as a whoe), affecting a businesses in the economy, and over which no individua business has much (if any) infuence or contro. On the other hand the decision by a particuar components manufacturer to raise its prices is part of the immediate environment ony directy affecting other businesses which it suppies. This wi affect day-to-day decisions by those businesses (e.g. to switch suppiers) and they may have some abiity to infuence the price change through negotiation. Environmenta uniqueness The idea of environmenta uniqueness tes us that each business organization operates within an environment that is, to some extent, unique to it, and no two organizations operate in exacty the same environment. This idea warns against over-generaization in anaysing the business environment. It reminds us that for environmenta anaysis to be usefu to an organization it must be sensitive to the particuar aspects of the environment that affect it and to which it must respond. But we shoudn t take this idea too far at its extreme it woud suggest that a business environment textbook is required for every business organization in the economy! The absurdity of that idea shows us that generaization meaning to make a statement with genera appication, about how things are in genera terms, or that is intended to be true in most cases is a necessary and usefu approach in business and management. There are, in other words, genera aspects of the environment that affect most businesses, so a firm shoud find environmenta anaysis usefu that deas both with the genera and the particuar. Interaction between business and the environment responding, infuencing and choosing Responsiveness In order to operate successfuy businesses must be abe to respond effectivey to factors in their environment that affect them. The environment may be seen as presenting a range of threats and opportunities. A successfu business wi be one that is abe to dea effectivey with threats and take advantage of opportunities or, at east, is abe to do so as we as or better than its competitors. Interaction

18 18 Introduction Infuence However, success may aso depend on the abiity of business to infuence the environment in which it operates to its own advantage. Advertising is a cear exampe of business activity that is intended to infuence the environment. Shifts in consumer preferences and spending patterns may pose threats or opportunities to which businesses must respond. Such shifts may occur for a variety of reasons, such as Vaues changes in vaues and ifestyes in society greater affuence resuting from economic growth, and changes in the age structure of the popuation. Some of these shifts resut from arge-scae socia changes over which business has itte or no infuence, and which constitute aspects of the genera environment. For exampe, the ageing of the popuation has impications for the pattern of consumer spending as oder peope have wants and needs that differ from those of younger peope. However, businesses do not simpy respond to shifts in preferences and spending patterns among consumers but are active in seeking to infuence these shifts to their own advantage. Through advertising and branding strategies businesses may be abe to create new tastes and fashions in society to which they then apparenty respond. Ageing is a good exampe of this. As peope get oder their wants and needs change, but the ifestyes of oder peope today have aso changed compared to previous generations. Oder peope now want to have a more active ifestye than in the past. This is in part due to higher incomes and improved heath, but we can aso see how business may pay a powerfu roe in infuencing these changing ifestyes as they deveop and promote new types of goods and services, such as in the fied of eisure and tourism. This exampe of interaction between business and the environment responding to and seeking to infuence consumer preferences has impications for how we understand the working of a market system. The idea of consumer sovereignty expresses the idea that consumers are utimatey in charge of the economic system because it is their preferences which drive business decisions about what to produce. On the other hand the power of advertising eads us to question how far consumers reay are in charge. The purpose of advertising is, after a, not merey to inform but to persuade. How far do we as consumers make decisions for ourseves, and how far are our decisions infuenced by sophisticated advertising methods? 5 Stop and Think You make choices about the music you isten to and the cothes you wear. We a ike to think of ourseves as making our own decisions. But what factors in your environment have infuenced your choices? How far has business shaped your ifestye choices? Choice of environment Beyond responding to or infuencing the environment, businesses may be abe to choose a favourabe environment in which to operate. For exampe, businesses may be abe to shift the geographica basis of their operations moving into more favourabe environments and away from unfavourabe ones. When businesses expand into new markets, for exampe exporting to new countries, they are searching for favourabe geographica areas in which to se their products. The phenomenon of internationa trade is driven by the geographica expansion of business searching for opportunities for saes in new markets overseas. Whether these new markets wi provide favourabe trading environments wi depend on factors such as cuture, consumer tastes and income eves within the society. Thus as countries deveop they may offer favourabe environ-

19 Business and its environment 19 ments for companies from Europe to increase their saes as consumers incomes increase and, cruciay, as western ifestyes spread. An exampe of this is the way western tobacco companies have been seeking to increase saes of cigarettes in deveoping countries. These countries offer favourabe environments as more peope can afford to smoke and, to some extent, desire to emuate affuent western ifestyes. (Again, these ifestye associations of cigarettes are promoted by the companies in their advertising.) At the same time the trading environment in western societies has become ess favourabe due to increased awareness of the heath hazards of smoking among consumers and moves to imit smoking by governments, as in the UK. Businesses can aso choose the environment in which they operate by deciding the ocation of their production activities. In searching for favourabe environments in which to carry on production firms are said to seek ocationa advantage. This appies to the estabishment of new businesses or new offices or factories on the part of existing firms, but it can aso invove transferring operations from one ocation to another. Locationa advantage may derive from factors such as: the avaiabiity of skied abour the cost of abour a favourabe tax or reguatory environment the proximity of suppiers or consumers the quaity of infrastructure such as transport. The type of business that we most associate with this capacity to seek ocationa advantage, and particuary to transfer production between ocations, is the mutinationa corporation (MNC). These are companies that contro production faciities in more than one country. Athough not a MNCs are arge, MNCs incude the argest businesses in the word, and the argest of them are bigger (measured by saes revenue) than a except the biggest countries (measured by GDP). These companies are often truy goba in the sense that the production faciities they contro are spread throughout the word, and they are the originators of readiy identifiabe goba brands. It Mini-Case 1.3 Dyson: champion of British manufacturing? James Dyson has been regarded as a champion of British manufacturing because of the success of his company manufacturing vacuum ceaners in Mamesbury, Witshire and because of his pubic statements supporting the need to retain manufacturing in the UK. However in 2002 Dyson announced his decision to shift production to Maaysia with the oss of 800 jobs at the company s Witshire pant. The company had opened its first pant in Maaysia in The reason for the shift of production out of the UK were indicated by Dyson as foows: By moving to the Far East where many suppiers are based and where production is more cost effective, we woud be abe to continue to grow, invest heaviy in new technoogies and aunch more products faster. ( Dyson to shift manufacturing operations to Asia, Guardian, 5 February 2002) Labour costs in Maaysia were reported to be around one-third of those in the UK. Other factors infuencing the decision were panning restrictions at the UK pant and the high vaue of the pound. In 2003 Dyson announced pans to shift production of washing machines to Maaysia. The Mamesbury site woud cease to function as a manufacturing faciity. However the company retained research and deveopment activity at Mamesbury and announced that it was recruiting more empoyees at the site in high vaue-added and high-paid positions. The decision to shift manufacturing to Maaysia and retain R&D in the UK shows the abiity of Dyson to choose favourabe environments for these activities. Maaysia offers advantages for ow ski manufacturing operations particuary due to much ower abour costs than the UK. The UK offers advantages for R&D and design operations because of the avaiabiity of highy skied workers with reevant scientific quaifications. These decisions were taken by Dyson on commercia grounds. This case shows the vunerabiity of UK manufacturing jobs in the face of ow wage competition overseas. For critics it aso shows the ack of commitment of a successfu British company to its country of origin. Thus Dyson was accused by some of betraying British manufacturing. 2 In moving production to Asia do you think that Dyson did the right thing?

20 20 Introduction is sometimes argued that these companies are increasingy footoose in the pursuit of their goba business strategies. This means that they have no particuar attachment to any country in which they operate but wi shift production in search of favourabe environments for their business. 5 Stop and Think Can you think of other exampes of how business is abe to respond to, infuence or choose its externa environment? The nature of the interna environment Interaction The interna environment concerns a those activities and reationships within the organization that are invoved in the transformation of inputs into outputs. The interna activities and reationships add vaue to the inputs. A successfu business has to manage the interna environment effectivey as we as interact with the externa environment. Of course, the interna environment is not seaed off from the externa one, rather there is an interface or reationship between the two. Businesses are, in other words, open systems that interact with their environments, not cosed systems. Some interna activities invove reationships with externa peope and organizations, most obviousy suppiers and customers. For exampe, in a retai business and other services the interface with the externa environment in the guise of customers is the core activity of the business. Therefore, managing the interna environment is, in part, concerned with managing this reationship or interface. Further, the interna environment may need to be adapted to suit the particuar characteristics of the externa environment if the business is to be successfu. This means that there might not be just one way of organizing and managing the interna environment, but a variety of possibe ways, depending on what works best in the particuar situation of the firm. For exampe, if the externa environment is characterized by rapid change or voatiity it may be important to ensure fexibiity of staffing or tasks within the business. On the other hand in a stabe and predictabe environment a more rigid, bureaucratic and rue-based approach might work we. Just as the externa environment of each business is, in some degree, unique, the same can be said of the interna environment. Anaysing the interna environment invoves ooking at businesses as particuar types of organizations. An organization can be defined as a group of peope that comes together for the purpose of achieving a specific goa or objective, and which invoves a series of activities and reationships undertaken within a framework of some kind of rues or procedures. The essentia purpose of management, as an indispensabe function of the organization, is to faciitate and ensure that cear organizationa objectives are formuated and achieved. What is an organization? objectives peope/reationships tasks/functions technoogies rues We have aready seen that the objectives of business may not be straightforward, but for our purpose here they can be stated quite simpy, as foows:

21 Business and its environment 21 to produce certain types of output of goods and/or services to meet the wants and needs of customers to reaize a profit (in the private sector). Profit is the utimate objective the decision about the product mix and the aim to satisfy consumers are reay means to this end. The interna environment, in contrast to the externa one, is much more within the contro of the organization so much so that we can think of the interna environment in terms of organizationa design. Design invoves the deiberate shaping of the organization structure and cuture so that it supports effectivey the achievement of organizationa goas, rather than getting in the way of these goas. It invoves the idea of manageria choice. Designing and impementing organization structure can take up a great dea of management time and energy, and there are aways transitiona costs in impementing change in the organization. For exampe, change can be experienced as demotivating when it invoves changes to peope s responsibiities. Existing working patterns and reationships may be discontinued and new ones need time to bed down. It is probaby true that there is no such thing as the perfect organization structure every structure has its probems as we as its advantages. However, there is no doubt that organization structure can be an important factor in the success of a business. Types of organization structure There is a arge iterature on organization structure. Here we wi ony indicate some of the principa types. We can think of organization structure in terms of two key issues or probems that a organizations have to sove: the probem of division of abour a organizations have to decide how to divide up the various tasks or functions that must be undertaken in transforming inputs into outputs the probem of management a organizations have to decide how to arrange ines of authority and accountabiity. Each of these probems invoves an intrinsic tension or diemma: the diemma of the division of abour is between the fragmentation of tasks/functions and their effective coordination the diemma of management is between the centraization and decentraization of authority and decision-making. Functiona structure We referred earier to the idea of an organization as a system interacting with its environment. This eads on to ooking at the interna environment in terms of sub-systems or parts that make up the whoe. In other words, organizations are internay differentiated. Typicay, the design of business organizations invoves a functiona structure in which the sub-systems are speciaized departments or units deaing with speciaist tasks or functions that contribute to the transformation process. Cassicay these functions incude production, finance, personne (or human resources), marketing, saes, and research and deveopment. The chief advantage of this structure is efficiency, and this derives from the fact that staff in each department or section speciaize in specific tasks in which they may have expert knowedge, often based on academic and/or professiona quaifications. It aso means that there is a cear career path for staff within each department.

22 22 Introduction Figure 1.4 Functiona structure Human Resources Board of Directors Marketing Production Finance The chief disadvantage is the probem of coordinating the work of these various departments and making sure that they are a contributing effectivey to organization goas. There is a risk that departments become parochia or inward-ooking, or that rivaries between departments can hinder organizationa effectiveness. Matrix structure A functiona structure invoves a vertica principe of organization design, with each department seen as a coumn usuay with its own interna hierarchica eves of management and decision-making, as shown in Figure 1.4. A matrix structure introduces a horizonta principe cutting across the vertica departmenta coumns, often on the basis of project teams invoving staff from many or a departments, as shown in Figure 1.5. This means that individuas operate within a two-way fow of authority and responsibiity verticay within their department and, at the same time, horizontay within the project team. The chief advantage of a matrix structure is the focus it provides on projects or programmes and the abiity to bring together reevant functiona expertise. This ensures more of an externa focus and can combat the parochiaism of departments. The chief disadvantage is the confusion that can be created over who s in charge? Individuas can fee pued in two directions and unsure of who they are accountabe to. Departmenta managers and team eaders can fee unsure about the scope of their authority. Figure 1.5 Matrix structure University Facuty of Business Facuty Management Team SUBJECT GROUPS Accounting Marketing Strategy Economics Human Resources Business Studies COURSES Internationa Business Management & Administration Marketing Academic staff are members of subject groups and course teams.

23 Business and its environment 23 Divisions and operationa units The functiona and matrix structures may operate across the whoe organization. This may be best suited to singe-product firms. On the other hand, there may be benefit in dividing up the organization into operationa units on the basis of distinct products or services. Divisiona structures are best suited to arge companies with diverse product portfoios. In a divisiona structure each division operates as a semi-independent business run as a separate profit centre, but within the parameters of the overa corporate strategy determined by the company s headquarters, as depicted in Figure 1.6. Within each division there may be a functiona or matrix structure, athough some functions, such as research and deveopment, may be undertaken centray. The chief advantage of a divisiona structure is that it overcomes the imitations of centraized coordination and contro of a arge and diverse business. It aows each division to respond to its own market conditions. However there can be tensions between the semiindependence of divisions and the formuation and impementation of a corporate strategy for the company as a whoe. The aocation of the centra overhead costs to each division can be a source of confict. Hierarchica structure Figure 1.6 PRODUCT/SERVICE A FUNCTIONAL DEPARTMENTS Divisiona structure DIVISIONS Board of Directors PRODUCT/SERVICE B Research & Deveopment PRODUCT/SERVICE C Figure 1.7 Hierarchica structure (ta pyramid) AUTHORITY FLOWS DOWNWARDS (TOP DOWN) SENIOR MANAGERS MIDDLE MANAGERS SUPERVISORS SHOP FLOOR WORKERS DIRECTORS Business organizations are typicay hierarchica, which means that authority is concentrated at the top of the organization and fows downwards. This usuay invoves a number of ayers of authority. Those at the bottom of the hierarchy may have itte or no authority and contro their roe is to carry out instructions from above. This type of structure can be represented as a pyramid, as shown in Figure 1.7, with authority concentrated at the pinnace. In a bureaucratic structure positions of authority are aocated on the basis of expertise. The chief benefit of the hierarchica structure is that the few at the top of the company are experts and best abe to make decisions about corporate poicies and strategy. It can aso be argued that decision-making is more streamined and decisions are authoritative. A major disadvantage is that hierarchies are not very good at drawing on the knowedge that exists in the ower ayers of the organization, and that those at the bottom may not fee a strong sense of commitment to the organization. Having many ayers of management within the hierarchy is aso very costy for the business. These probems may be aeviated by moving to a fatter structure. Deayering fat structure Businesses are never fat structures, but they may become fatter by reducing the number of ayers or eves of management. In this way they become ess-steep pyramids. The motivation for deayering may be to strip out manageria costs from the business to enhance competitiveness.

24 24 Introduction There may aso be a desire to streamine decision-making further and bring senior management coser to those at the bottom of the hierarchy. This may improve empoyee motivation and commitment. An obvious drawback of a fatter structure can be an excessive workoad on managers there is a danger that the organization reay needs those ayers of management that are being removed. 5 Stop and Think It is sometimes said that there is no perfect organization structure. Do you agree? Environmenta anaysis Dynamic As we have seen, businesses have to understand the surrounding conditions and circumstances in which they operate in order to be successfu. Environmenta anaysis is needed because the environment does not the stay the same it is dynamic. If the environment were static it woud be possibe to pan for the future on the basis of what was done in the past to carry on in the same way. But because the environment is dynamic, businesses must operate under a genera assumption that the future wi be different from the past. Therefore it is necessary to know how it wi change in order to respond to or infuence this change in a way that wi aow the organization to achieve its goas. Of course, remembering the point about environmenta uniqueness, some firms operate in a more voatie environment than others, and there are some periods of reative environmenta stabiity and others of greater dynamism. However the genera point about change sti stands, and business success depends on deaing with change effectivey. Uncertainty and bounded rationaity Businesses can never have compete knowedge of how the environment wi change. There are aways imitations on knowedge, and therefore businesses must operate in a somewhat uncertain environment. Athough businesses may strive to act rationay in monitoring the environment and responding to change in the most effective way, their rationaity is aways bounded by imited knowedge. It is sometimes said that by the time firms have monitored environmenta change, anaysed their findings and formuated a response it is too ate to do anything. If this were true then environmenta anaysis woud be a waste of time. Certainy businesses have to make judgements about the resources and energy they invest in environmenta anaysis in terms of ikey benefits of the exercise. However, we return to the point that some eve of understanding of the environment is essentia to business. The question then is not so much whether but how. In this section we wi outine briefy some of the more famiiar methods. PEST (and its variants) Compexity Thinking about the externa environment in terms of inputs and outputs is usefu but not sufficient. It focuses attention on reationships with seers or suppiers, competitors, and buyers or consumers. But there are other important types of organizations, processes and reationships in the externa environment. The externa environment is not just made up of markets but aso incudes poitica, ega, socia, cutura, technoogica and other factors and infuences. It is, in other words, muti-faceted and compex. PEST is a simpe framework for environmenta anaysis that distinguishes four categories or areas: poitica economic

25 Business and its environment 25 socia technoogica. Variations on this basic type are set out beow. In each case the order of the factors is not intended to indicate their reative importance but rather to produce a memorabe acronym. PEST (Poitica, Economic, Socia, Technoogica) SLEPT (Socia, Lega, Economic, Poitica, Technoogica) PESTLE (Poitica, Economic, Socia, Technoogica, Lega, Ethica) STEEPLE (Socia, Technoogica, Economic, Educationa, Poitica, Lega, Environmenta) SPECTACLES (Socia, Poitica, Economic, Cutura, Technoogica, Aesthetic, Customers, Lega, Environmenta, Sectora) (Sutherand and Canwe, 2004: ; Cartwright, 2001) The purpose of the more eaborate frameworks is to aow a more comprehensive coverage of environmenta factors, but this may be at the expense of becoming rather unwiedy. SWOT (strengths, weaknesses, opportunities, threats) SWOT anaysis combines interna and externa anayses the strengths and weaknesses of the organization couped with the opportunities and threats in the externa environment. The capacity of a business to take advantage of opportunities and resist threats wi depend on its interna strengths and weaknesses. An opportunity ony reay exists if an organization has the necessary skis or resources. Thus an opportunity is not simpy a feature of the externa environment. Like PEST, SWOT is a simpe framework, but its sophistication depends on the quaity of the anaysis under each heading. Strengths Opportunities Weaknesses Threats Aternative scenarios A scenario is an imagined sequence of future events. It might be highy specuative or based on forms of expert knowedge or data. The idea of aternative scenarios is that there are different possibe futures to imagine and be prepared for. These aternatives might be assessed in terms of whether they are more or ess ikey, but the point is that being aware of ess ikey outcomes aows for the preparation of contingency pans just in case. It is aso common to think in terms of best case and worst case scenarios. Trend extrapoation Extrapoation invoves using known variabes and data as a guide to unknown ones, or to estimate data beyond the existing range. Trend extrapoation invoves using the past as a guide to the future by projecting estabished trends. For exampe, if saes of a product have been growing at a steady annua rate and over a reasonaby ong period we might fee confident in projecting that

26 26 Introduction saes growth in years to come. The basic probem is that we cannot assume that everything ese stays the same. There might be wider factors that expain the growth of saes in the past and these factors might ater. Expert opinion Expert opinion invoves just what it says: reying on expert sources of opinion to provide understanding of the environment and guide the company s thinking. Often these wi be experts outside the company, such as consutancy firms. These firms, or other experts, may have knowedge that it is difficut to sustain within the company. The Dephi method draws on the opinions of a range of experts with each one offering advice independenty. There wi be a round of consutations with questions being refined at each stage with the aim of arriving at a measure of convergence or consensus among the expert opinions. Stakehoder anaysis Stakehoders Vaues A stakehoder is any individua, group or organization that is affected by and therefore has an interest in the decisions and behaviour of the business. This might not be a direct effect as some stakehoders have pubic interest motivations. For exampe, an environmenta pressure group has an interest in a business on account of the perceived harm its actions cause to the environment rather than the direct effect on the group s members. Other stakehoders have a direct interest because of the benefits or harm of the firm s actions to them. A the interna members of a business are stakehoders, incuding empoyees, directors and sharehoders. Externa stakehoders incude customers, suppiers, competitors, poiticians and poicy-makers, and the community or genera pubic. As we as being affected by a business stakehoders may seek to infuence business decisions in their own interests. There is a debate about how far businesses ought to be accountabe to a wide range of stakehoders, and a stakehoder mode of business may be contrasted with the traditiona view of the firm as primariy or soey concerned with profit. Firms may themseves have different views about the desirabiity of stakehoder engagement. In terms of environmenta anaysis, businesses need to have an understanding of: who their stakehoders are the nature and eve of their interest in the business their power to exert infuence. A stakehoder map is shown in Figure 1.8. For each of the interna and externa stakehoders shown: a) identify the nature of their interests (e.g. the interests of students might incude high quaity teaching) b) consider whether there are any conficts between the interests of different stakehoders (e.g. do students and academics have the same interests?) c) consider in what way and to what extent each stakehoder exercises power or infuence (e.g. do you have any infuence over university decisions? Shoud you have?) 5 Stop and Think Can you expain what is meant by each of the four terms that constitute the PEST framework: poitica, economic, socia, technoogica?

27 Business and its environment 27 Figure 1.8 Stakehoder anaysis key university stakehoders PARENTS EMPLOYERS STUDENTS ADMIN. & TECHNICAL STAFF SUPPLIERS RESEARCH COUNCILS GOVERNORS SENIOR MANAGERS SCHOOLS & COLLEGES HIGHER EDUCATION FUNDING COUNCIL ACADEMIC STAFF INTERNAL PARTNER ORGANIZATIONS EXTERNAL LOCAL COMMUNITY v Summary Business can be defined broady as the transformation of inputs (or factors of production) into diverse outputs (goods and services) to meet the needs and wants of consumers. Business is a mechanism for deciding the aocation of the scarce resources avaiabe to society between various possibe uses (or competing wants) in a situation of scarcity where not a wants can be satisfied In a narrow sense business is often used to refer to the private sector and the key characteristics of private ownership, competition and profit. The broad meaning of business incudes organizations in the pubic and third sectors Market or capitaist economic systems, such as the UK, are dominated by the private sector. However, the boundary between the private, pubic and third sectors is not fixed. The private sector is very diverse The environment of business does not consist just of the word out there, or the externa environment, but aso has an interna dimension. The externa environment can be thought of in terms of the immediate environment and the genera environment Businesses can be understood as open systems interacting with their environments. Each business operates within an environment that is, to some extent, unique The externa environment is compex or muti-faceted, dynamic, and must be anaysed in terms of a variety of spatia eves or scaes, from the oca to the goba The interna environment of business can be understood in terms of the design of organization structure so that it supports effectivey the achievement of organization goas. There is a range of types of organization structure. Each has its advantages and disadvantages none is perfect It is important for business to engage in monitoring and anaysis of the environment. A variety of techniques is avaiabe. However, business can never have compete knowedge of the environment or how it wi change

28 28 Introduction Case study: UK pc This case study identifies some key aspects of contemporary Britain using the PEST framework. Poitica Democratic system of government in which the peope as a whoe exercise poitica power through the right to vote for members of pariament (MPs) to represent their interests Two-party system in which just two main poitica parties Labour and Conservative have dominated eections and government office for the ast hundred years Civi Society Organizations (CSOs) or pressure groups represent specific groups or causes within the poitica process, e.g. Greenpeace. Pressure groups aso target businesses directy to try to get them to ater their behaviour, e.g. to reduce carbon emissions Business is a key poitica actor with distinctive interests, exercising a degree of power and infuence arguaby unrivaed by any other group One of the basic issues in poitica debate concerns the purpose of poitics and government, especiay in reation to the operation of private sector business and the market system. Left Right poitics can be characterized in terms of a state versus the market debate Government pays an important roe in economic and socia ife, for exampe making and enforcing aws, providing a range of pubic services and managing the economy. Pubic spending (spending by government) accounted for 41.1% of GDP (or the vaue of tota economic output) in 2003/4 The EU has become, in defined areas of competence, the supreme source of aw and poitica authority. The UK aso participates in a range of inter-governmenta organizations (IGOs) and operates within a framework of internationa decisions and aws created by treaty, such as the Kyoto protoco on cimate change Economic Capitaist economic system in which business activity is organized primariy by private sector profit-seeking businesses producing goods and services for sae in a competitive environment Most peope earn their iving from the wages or saaries they receive as empoyees, and most empoyees work in the private sector. In spring miion peope were economicay active in the UK, of which 28.3 miion were in empoyment and 1.4 miion were unempoyed The UK is one of the richest deveoped countries in the word. In 2002 the UK was ranked sixth out of the EU countries in terms of GDP per head (i.e. income per person). The average annua rate of growth of the UK economy (GDP) was 2.6% between 1950 and 2004 The UK has undergone a ong-term process of deindustriaization invoving a decine in the importance of manufacturing within the economy, couped with expansion of the service sector. In 2003 the service sector accounted for 72.7% of UK output (up from 66.9% in 1993), whie manufacturing accounted for 15.7% (down from 21% in 1993) (Office for Nationa Statistics, UK 2005, p. 351) Large firms (with 250 or more empoyees) dominate the economy, accounting for 42% of private sector empoyment in The argest firms operating in the UK are mutinationa corporations (MNCs) with production faciities in more than one country, many of which are foreign-owned. However the vast majority of firms are sma and mediumsized enterprises (SMEs). In 2003 arge firms accounted for ess than 0.2% of enterprises in the UK (approximatey 6,000 from 4 miion) The UK is one of the word s eading trading nations. In 2003 exports of goods and services accounted for 25% of GDP. Through trade and other inkages the UK has become increasingy integrated in the EU economy. The UK is aso affected by processes of economic gobaization, invoving the stretching of economic reationships, such as trade and investment, across nationa borders Socia The UK has a growing popuation. In 2004 the tota UK popuation reached 59.8 miion, and is forecast to reach 67 miion by 2031 There has been a ong-term upward trend of average ife expectancy. Couped with a decining birth rate, this has resuted in ageing of the popuation In recent years net inward migration has been the main contributor to popuation growth As a resut of immigration since the 1950s Britain has become a muti-ethnic and muticutura society. In 2001 peope from other than a White British ethnic background made up 11.8% of the popuation of Great Britain. British cuture is diverse and fuid, due to immigration and other processes of socia and economic change. However Britain can be seen as marked by certain characteristic western vaues and attitudes such as individuaism, consumerism and secuarism Linked with its economic deveopment, Britain is overwhemingy an urban society

29 Business and its environment 29 The economic participation rate of femaes has increased and narrowed the gap with men. In spring % of working-age women were in empoyment (compared to 79% for working-age men), up from 56% in However there remains a marked pattern of occupationa segregation between maes and femaes, and women are ower paid and more ikey to work part-time than men The occupationa order constitutes the basis for important cass divisions in British society, e.g. between the best- and worst-paid occupations There are disparities in income eves and other socia and economic measures of we-being between the UK regions, refecting different rates and eves of economic deveopment or decine. These disparities are sometimes referred to as constituting a North South divide Technoogica Britain s economic weath and position as one of the word s richest economies can be attributed in arge part to its eve of technoogica advancement. Technoogica progress drives the process of economic growth through improvements in productivity, or output per worker Technoogy is a key determinant of competitiveness, at the eve of firms, industries and nations. Technoogy is at the heart of price competitiveness gained through productivity improvement, but aso boosts competitiveness through quaity enhancement and product innovation Technoogica change is a disruptive force in business, destroying od skis, occupations and industries and creating new ones. The characteristic experience of modern ife as subject to continua and speeded-up change is attributabe argey to technoogica innovation The 20th-century Fordist mode of economic deveopment was based on assemby ine technoogy and mass production of standardized commodities, exempified by the car industry and pioneered by the Ford motor company. This type of technoogica system has increasingy given way to a post-fordist mode utiizing information and communication technoogies (ICT) to enabe fexibe speciaization Technoogica change has ushered in what some have referred to as a knowedge economy in which the skis and knowedge of the workforce are seen as the most important assets of business and the nation. Hence education, ifeong earning and upskiing are seen as key to the abiity of the UK economy to respond to new goba competitive chaenges Technoogica change especiay in the fieds of transport and communication is at the heart of the process of gobaization affecting a aspects of modern ife. Gobaization isn t a phenomenon just affecting economic and business ife through trade, production and financia fows but aso affects socia, cutura and poitica ife Growth of the word economy since the 19th century has been driven by the use of oi and other fossi fues as energy sources. A switch to aternative sources of energy is now being compeed by the depetion of fossis fues and concern over energy security, and by the damaging environmenta impact of carbon emissions in the form of goba warming 2 Can you think of any other aspects of modern Britain under any of the PEST headings that have not been incuded above? 2 In what ways do the aspects of modern Britain isted above impact upon business decisions and behaviour? Review and discussion questions 1 Expain the nature of the basic economic probem facing society, and show how business activity provides a soution to this probem 2 Describe and give exampes of the eements that make up the externa environment of business, and expain the idea of environmenta uniqueness 3 Give exampes of the ways in which the externa environment affects business decisions and behaviour, and the ways in which businesses may infuence their environments 4 What is meant by the interna environment of business? Assess the advantages and disadvantages of the main types of organization structure

30 30 Introduction Assignments 1 You are asked to give a brief presentation to the director of a sma business on whether to undertake some form of environmenta anaysis. Summarize the main points that you woud make in the form of six buet points 2 Use the Internet to identify four recent newspaper reports that reate to factors in the externa business environment under the PEST headings. Use a PEST grid to show the sources of the reports and to provide a brief buet-pointed summary of each. Further reading Sutherand and Canwe (2004) provides a very usefu source for understanding key concepts in business. Onine resources Test your understanding of this chapter with onine questions and answers, expore the subject further through web exercises, and use the webinks to provide a quick resource for further research. Go to the Onine Resource Centre at wethery_otter/ Intute: socia sciences is a gateway to resources on the web for education and research in the socia sciences, incuding business and management. References Cartwright, R. (2001) Mastering the Business Environment (Basingstoke: Pagrave Macmian). Porter, M. (1980) Competitive Strategy (London: Free Press). Sutherand, J. and Canwe, D. (2004) Key Concepts in Business Practice (Basingstoke: Pagrave Macmian).