Influences in the business environment

Business Studies Preliminary 2012 Course9.1 Nature of Business

Syllabus• EXTERNAL INFLUENCES

Economic,Financial, Geographic, Social, Legal,Political, Institutional, Technological,Competitive

Situation, Markets.

• INTERNAL INFLUENCES Products, Location, Resources, Management Business Culture

• STAKEHOLDERS

3.1 Introduction

The business world is an example of ‘an environment”

Another environment is “Your School”. It is an example of a learning environment

What factors do you have control over?

E.g. the subjects you study, extra curricular activities you participate in and interactions with teachers and other students.

What factors do you not have control over?

E.g. syllabus subject matter, the introduction of new technology and the changes in government

education policies.

3.2 Business Environment

The business environment refers to the surrounding conditions in which the business operates. It can be divided into two broad categories: internal and external.

The external environment includes those factors over which the business has very little control.

The internal environment includes those factors over which the business has some degree of control.

If the business responds positively to the external and internal environment it can achieve profit.

3.3 Lingo List External Influences

The main external influences on business:- Economic Financial Geographic Social Legal Political Institutional Technological Competitive Situation Markets

Economic influences

Economic cycles, or business cycles, are the periods of growth ‘boom’ and recession ‘bust’ that occur as a result of fluctuations in the general level of economic activity.

Boom Periods

Characteristics of a boom period: High levels of employment –

business sales and profits stable or increasing.

Inflation may increase – consumers more willing to spend so prices are increased to improve profits.

Wages increase – employees seek to keep wages rising at the rate of inflation.

The level of consumer spending increases – with increased confidence in the economy and secure employment.

Recession periods

Characteristics of a recession period: Unemployment levels rise –

decreased sales leads to reduced employment levels.

Inflation may remain stable or fall – reduced spending means businesses work harder for sales.

Wages are less likely to rise – employers concerned with business costs and employees with job stability.

The level of spending usually decreases – consumers save rather than spend.

Are all businesses affected?

No

Negatively affected can include: Businesses most susceptible to economic cycles ‘swings’ are those selling consumer or luxury goods.

Positively – discount warehouses e.g. Christmas warehouses etc.

Policies & trends

Policies implemented by the government aim to keep the economy growing steadily without putting pressure on inflation (prices) and wages.

Overseas trends including changes in trade, investment and currency levels affect Australia’s level of economic activity.

Impacts of spending

Reduced spending results in: falling profits cost cutting leading to retrenched

workers and the economy falling.

In a growing economy confidence returns: spending increases profits rise.

Financial influences

Deregulation is the removal of government regulation from industry, with the aim of increasing efficiency and improving competition.

In 1983 deregulation began in Australia’s financial system. This created a more flexible, market oriented financial sector with a number of new banking products and greater competition.

Globalisation meant finance can now be accessed from worldwide sources due to developments in communications technology.

Geographical influences

Three major geographical factors that affect business activity are: Australia’s geographical location Changing demographic factors The process of globalisation

Australia's Geographical Location

Within the Asia-Pacific region and the economic growth within a number of Asian nations especially China

Provides more challenging opportunities for business expansion, sales and profit.

Why might this be so?

Cost of labour?

Cost of raw materials?

More relaxed laws surrounding manufacturing

Changing Demography

Changes in demography leads to changes in demand levels and the nature of products and services: Demography is the study of

particular features of the population including the size of the population, age, sex, income, cultural background and family size.

Changes in the age structure of our population as baby boomers reach retirement will cause shortages in the workforce and increased demand for age-related services.

Globalisation

We now live in a world without borders – from a commercial sense

Globalisation is the process that sees people, goods, money and ideas moving around the world faster and more cheaply than before

This has been enabled particularly due to rapid telecommunications, information and transportation technology.

Social influences

Rapid identification and responses to changes in tastes, fashion and culture leads to sales, profit opportunities and business growth while no responses to social change means business stability and viability is threatened.

Two key social issues influencing businesses are:

1. Awareness that a number of practices can lead

to deterioration in the environment.

2. Employees particularly women require family

friendly programs

Legal influences Small, medium and large businesses are faced

with many time consuming and costly regulations that can be confusing and contradictory.

Business owners are expected to abide by the laws of the country hence need a sound working knowledge of the laws affecting their operations.

Laws on taxation, industrial relations, occupational health and safety, equal employment opportunity, anti-discrimination and protection of the environment.

Trade Practices Act 1974 (Commonwealth) is administered by the Australian Competition and Consumer Commission (ACCC). A breach of consumer protection provisions

allows courts to impose penalties of $1.1 million for companies and $220 000 for individuals.

Political influences

Political change can lead to business uncertainty or business confidence.

Political influences continued

Another significant political thrust is: Deregulation – the removal of

government regulation from industry to increase efficiency and improving competition.

Privatisation – the process of transferring the ownership of a government business to the private sector.

Institutional influences

The three main institutional influences on business are: Government – Federal, State and

Local Regulatory bodies – Department of

Environment and Conservation, Office of Fair Trading, ASIC, ACCC

Other – Employee trade associations, Trade Unions and ASX

Government

Federal Government: pay employee taxes, provision of employee superannuation, observe custom regulations, abide by business legislation.

State Government: provision of employee entitlements like workers

compensation pay payroll tax, abide by state legislation like trade practices, abide by pollution controls.

Local government: approve new development and alteration applications fire regulations parking regulations size, location and shape of business signs

Regulatory bodiesDOEC

A regulatory body is one that is set up to monitor and review the actions of businesses and consumers in relation to issues like advertising and the appropriate legislation. This is to ensure businesses conduct themselves fairly in relation to the consumer, the community and other businesses.

Regulatory bodies in New South Wales and Australia: The Department of Environment and

Conservation Governed by the Protection of the

Environment Administration Act 1991 Aims to reduce risks to human health and

prevent environmental degradation by promoting pollution prevention, reducing harmful levels of discharge and regulating transport, collection, treatment, storage and disposal of waste.

Regulatory bodies OFT/ASIC/ACCC

The Office of Fair Trading The NSW Consumer Protection Agency Provides information and assistance to consumers and

business owners on areas like business name registration Provides services to business like business license

information, business name registration, product safety standards, trade measurements

Australian Securities and Investments Commission (ASIC) Monitors market integrity and provides consumer

protection like financial services Aims to ensure businesses comply with industry

standards and codes of practice

Australian Competition and Consumer Commission (ACCC) Independent statutory authority that administers the

Trade Practices Act 1974 and the Prices Surveillance Act 1983 including monitoring anti-competitive and unfair market practices, mergers and acquisitions, product safety and liability, misleading and deceptive advertising

Other institutional influencesEmployers & trade

Employer associations Represent the interests of employers

by formulating policies in line with union activities, acting on behalf of employers in negotiating enterprise or collective agreements, promote industry, trade and commerce, provide submissions, advice and information to governments.

Trade and industry associations National bodies representing

employees including the National Farmers Federation.

Other institutional influences Trade unions & ASX

Trade Unions Aim to improve working conditions

and pay rates. Membership has declined due to new legislation outlawing compulsory unionism, changes in work patterns, workplace agreements, privatisation and industry restructure.

Australian Stock Exchange Operates a share market where

businesses can list themselves to become a public company and raise additional capital for expansion and development.

Technological influences

Global technological innovation allows increased efficiency and productivity, creation of new products and improvements in the quality and range of products and services.

Hi-tech robotics improve productivity, reduce operating costs and eliminate boring, repetitive tasks in manufacturing industries.

Technological influences continued

Advances in information technology ease communication between suppliers and customers over long distances.

The introduction of fibre optic cables and digital information transmission allowed reorganisation of the structure of workplace practices.

Businesses slow to use and exploit technology are likely to fail.

Competitive situation influences

Competition provides consumers with more choice, a range of qualities and variety of prices and means businesses can stimulate greater efficiency in production and have a better quality product or service at the lowest cost.

Businesses aim to achieve a sustainable competitive advantage, an ability to develop strategies that ensure it has an ‘edge’ over its competitors for a long time period.

Factors influencing a business’s competitiveness: Number of competitors Ease of entry to the market Local and foreign competition Marketing strategies employed

Number of competitors

The size and number of firms within an industry is termed market concentration.

The four main types of market concentration: Monopoly

Concentration by one firm in the industry Firm decides price, customer is price taker For example Australia Post, Railcorp

Oligopoly A small number of larger firms dominate the

market Control market because lots of money spent

on advertising which restricts entry of competitors

For example Banks, Oil companies, Car manufacturers

Types of market concentration continued

Monopolistic Competition Large number of buyers and sellers in a

particular market Goods and services differentiated from

competitors by packaging, advertising, brand names and quality.

For example Clothing manufacturers, Local retailers

Perfect Competition A large number of small firms that sell

similar products Market share increased not through

advertising but instead through price competition

For example fruit and vegetable growers

Ease of Entry

Ease of entry refers to the ability of a person to establish a business within a particular industry.

Entry is difficult when there are a few firms (oligopolies) dominating an industry and easier when there are many small firms (perfect competition and monopolistic competition).

When one firm (a monopoly) dominates an industry no competitors can enter the market.

Local and foreign competitors

Local competitors produce or sell a good or service in the same market. They deal with variables including labour and transport costs, the economy and cost of stock/raw materials

Foreign competitors are businesses located overseas or offshore.

Marketing strategies

Businesses are influenced by the type of marketing measures taken by a competitor.

The type and extent of marketing depend on: The size of the market – the number of

existing and potential customers The size of the business – larger businesses

use a range of activities and smaller businesses simple marketing methods

Number of competitors – the more competitors the greater the need for marketing to maintain or increase market share

The nature of the product – this refers to the type of product and whether it requires extensive marketing

Changes in markets

Changes in financial/capital markets The mobility and easy flow of finance

means the world capital market is more integrated than before.

Individuals and businesses can access overseas share markets and purchase equity in foreign companies.

The 2008/09 global financial crisis saw shockwaves being sent through global financial and stock markets creating changes in domestic and international financial markets.

Changes in labour markets

The labour market has become less global in the last 60 years due to political barriers resulting in restrictions being placed especially on the movement of low and unskilled workers.

Two trends have resulted in the movement of workers:

1. Movement of large numbers of temporary skilled migrant workers has been important in Australia, Europe and Asia. Australia increased the number of temporary work visas during the mid 2000s to support the expanding mining sector.

2. The growing demand for highly trained employees mean people are increasingly mobile.

Changes in consumer markets

From 1995 to 2005 global trade in goods and services increased by 150% but fell with the onset of the global financial crisis.

Countries achieve cost savings by specialising in products they produce efficiently. This results in cheaper prices on the world market, increased sales in existing markets and the emergence of new consumer markets.

The internet has enabled businesses to reach larger markets and take advantage of economies of scale.

Internal influences on the business

Internal influences relate to the specific factors within the business that affect its operations.

The internal influences on business are: Product Location Management Resource management Business culture

Product influences

The main product influences on a business are: The type of goods and services

produced affect the internal operations of a business. Physically large goods or those requiring raw material inputs need structures to organise and monitor processes in production. The larger the number of goods and services produced by the business the more internal structures required to accommodate changes.

Product influences continued

Different types of businesses (service, manufacturer or retailer) are structured differently as some goods and services require extensive preparation while others are just deliverers.

The size of the business affects the range and type of goods produced, the level of technology used and the volume of goods and services produced and hence the internal structures and operations of the business.

Location influences

Location can make the difference between success and failure.

The two most important considerations are summarised in the equation: Prime location = customer convenience and

visibility. Avoid low rental areas instead locate near

complementary businesses, one that sells a similar range of goods and services.

Location factors need to be considered separately for retail and non-retail businesses like (manufacturing or wholesale).

Retail businesses must be convenient for potential customers and have passing customer traffic.

Manufacturers need to be close to transport facilities for shipping goods to customers and receiving supplies.

Location factors

Visibility

Cost

Proximity to suppliers

Proximity to customers

Proximity to support services

Visibility and Cost

Visibility Businesses wanting high visibility locate in

a prime shopping area. Manufacturers can choose low visibility areas and advertise their location.

Cost Is unavoidable for businesses like coffee

shops relying on passing customer traffic and maximum exposure.

Mechanics, car yards, solicitors require large, low cost premises.

Communication through computers especially the internet allow telemarketers or businesses to sell via the web hence location becomes unimportant.

Proximity to suppliers and customers

Proximity to suppliers Businesses that rely on bulky raw

materials or finished goods locate near suppliers to reduce transport costs.

Proximity to customers Retail businesses need to locate

close to their customer base.

Proximity to support services

Proximity to support services Support services are activities

needed to assist the core operations or prime function of a business including accountants and solicitors.

Traditionally small businesses rely on external services and medium to large businesses provide internal support.

Technology has enabled businesses to access support services through computers, faxes, mobile phones, phone and video conferences.

Resource influences

The four main resources available to businesses are: Human resources – employees, most

important asset Information resources – knowledge

and data required by the business including market research, sales reports and economic forecasts.

Physical resources – equipment, buildings

Financial resources – funds the business uses to meet it obligations to creditors

Management influences

Technological advances and increased competition due to globalisation has meant flatter business structures.

Flatter structures mean fewer levels of management, greater responsibility for individuals, faster adaptation to changing consumer needs.

Copy figure 3.24 Traditional organisational structures vs.

new and emerging organisational structures

Business culture

Business (corporate) culture refers to the values, ideas, expectations and beliefs shared by members of the organisation.

Revealed officially in policies, goals or slogans of the business OR seen in unwritten or informal rules that guide how people behave.

Business culture continued

The four essential elements of a business culture:

1. Values – basic beliefs including honesty, hard work.

2. Symbols – events or objects used to represent the things the business believes are important for example competitive sport.

3. Rituals, rites and celebrations – routine behaviour patterns like social gatherings to develop a sense of belonging.

4. Heroes – successful employees who model business values.

Business culture continued

Culture and organisational structures A businesses culture is often evident in its

organisational structure. Formal businesses with emphasis on bureaucracy,

hierarchical management and defined job titles emphasise accountability, communication and cooperation and expect loyalty and respect for supervisors.

Less formal businesses with flatter management structures exhibit flexible, innovative and risk taking cultures.

Management’s role in developing a business culture Positive business structures once established need to

be kept alive. Staff members need sufficient training to reflect the

values of the business. Successful and sustainable change in a business

culture is achieved through staff being role models of important values.

Stakeholders

A stakeholder is any group or individual who has an interest in or is affected by the activities of a business.

Stakeholders in business Employees Shareholders Customers Environment Managers Society / general public

Responsibilities to Shareholders & Managers

Responsibilities to shareholders – maximise return on shareholders’ investment in a sustainable way. An annual general meeting needs to be held for questions of the Board, shareholders need to be allowed to buy and sell shares and surplus assets need to be divided upon company closure.

Responsibilities to managers – give an honest and accurate account of their management of the business’s resources. Senior managers need to provide managers with commitment and support, corporate policies, a code of conduct, extensive training and development and effective auditing programs.

Responsibilities to Employees & Consumers

Responsibilities to employees – provide a safe and psychologically rewarding work environment. This includes providing encouragement and professional development, respecting privacy of political, social and religious beliefs, eliminating discrimination, promoting equality and eliminating harassment.

Responsibilities to consumers – respect and satisfy them and do not exploit.

Responsibilities to Society & Environment

Responsibilities to society – be good corporate citizens and give back something to the community.

Responsibilities to the environment – adopt ecologically sustainable operating practices. Ecological sustainability occurs when economic growth meets the needs of the present population without endangering the ability of future generations to meet their needs.