The Business Environment

The State of the Economy

Despite recent economic woes, America’s economy remains the world’s largest and most diverse.

Learning Objectives

Assess the connection between the increased presence of globalization and debt and the current state of the U.S. economy

Key Takeaways

Key Points

  • Since 1980, the United States has championed globalization of trade and finance by opening its doors wider to foreign products and investment.
  • However, consumers, businesses, home buyers, and the U.S. government itself borrowed heavily believing that the value of their investments would continue to grow.
  • The financial crash of 2008 brought a sudden, traumatic halt to U.S. economic growth due, in large part, to the housing bubble.
  • Large corporations and wealthy businesspeople were minimally affected by the recession, and were the first to recover.
  • On the other hand, wages and incomes of typical Americans are lower today than in over a decade.

Key Terms

  • free market: Any market in which trade is unregulated; an economic system free from government intervention.
  • foreclosure: The proceeding, by a creditor, to regain property or other collateral following a default on mortgage payments.

Since the election of Ronald Reagan as president in 1980, the United States had championed globalization of trade and finance. It opened its doors wider to foreign products and investment than any other major economy. “” America’s entrepreneurial culture was the world’s model. The synergy of U.S. political freedoms and free markets appeared vindicated by the Soviet Union’s collapse in 1991. At home, a bipartisan consensus emerged in favor of further economic deregulation, which, in turn, spurred a freewheeling expansion of new types of investments that helped fuel a vast increase in international finance and commerce. But America’s growth came to rely increasingly on debt. Consumers, businesses, home buyers, and the U.S. government itself borrowed heavily in the belief that the value of their investments—including, fatefully for many, their homes—would continue to grow. The ready availability of credit on easy terms drove home prices, in particular, ever higher.

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US Integration into the global economy: Imports and exports as a % of GDP, 1947-present

The financial crash of 2008 brought a sudden, traumatic halt to a quarter-century of U.S.-led global economic growth. When the housing boom finally collapsed in 2007, it exposed a fragile layer of high-risk home loans made over a decade to families that could not afford them, particularly if the economy weakened. Some borrowers had purchased homes they could not afford, trusting that in a rising market they could always sell their properties at a profit. As housing prices fell, homeowners who no longer could keep up with their mortgage payments were unable to pay their debt by selling their homes. These home loans thus were the unstable foundation for a massive but largely invisible speculation on mortgage securities and financial contracts sold around the world. Triggered by the housing collapse, this edifice toppled in 2008. Foreclosures grew, and panic followed. Giant Wall Street financial firms fell, reorganized, or were combined with larger competitors. Stock markets plunged, and the world’s economies headed into the worst crisis since the Great Depression of the 1930s.

However, large corporations and wealthy businesspeople were minimally affected by the recession, and were the first to recover. Shortly after the economic recovery began, many Fortune 500 corporations reported record profits and many billionaires saw their net worths hit new highs. The 2011 edition of the annual U.S. dollar billionaires ranking compiled by Forbes Magazine broke new records, both in terms of the number of billionaires (1,210) and their total wealth (US $4.5 trillion. )

On the other hand, wages and incomes of typical Americans are lower today than in over a decade. This “lost decade” of no wage and income growth began well before the Great Recession battered wages and incomes. In the historically weak expansion following the 2001 recession, hourly wages and compensation failed to grow for either high school or college-educated workers and, consequently, the median income of working-age families had not regained pre-2001 levels by the time the Great Recession hit in December 2007.

Incomes failed to grow over the 2000–2007 business cycle despite substantial productivity growth during that period. Although economic indicators are stronger today than they were two or three years ago, protracted high unemployment in the wake of the Great Recession has left millions of Americans with lower incomes and in economic distress.

Consensus forecasts predict that unemployment will remain high for many more years, suggesting that typical Americans are in for another lost decade of living standards growth as measured by key benchmarks such as median wages and incomes. For example, as a result of persistent high unemployment, some expect the incomes of families in the middle fifth of the income distribution in 2018 will still be below their 2007 and 2000 levels.

The State of Technology

The constant evolution of technology offers both considerable opportunity and risk to businesses across all industries.

Learning Objectives

Recognize the critical business impacts of keeping pace with the current technological environment

Key Takeaways

Key Points

  • Capturing opportunities in the current technological era is an enormous source of potential success for organizations.
  • Disruptive innovations, such as Netflix, can upset entire industries in a very short period of time. This can result in big gains for the innovators and serious consequences for those who fall behind.
  • In considering the current state of technology relative to businesses, it’s useful to consider how organizations commonly structure their IT department strategies.
  • Most modern IT departments consider both what internal capabilities modern technology offers, as well as what external technological forces will impact the business and industry.

Key Terms

  • IT strategies: The objectives, principles, and tactics involved in an organization’s approach to managing current and potential changes in technology.
  • disruptive innovation: An innovation which redefines an existing market and value network, often through the creation or utilization of new technologies or processes.

Why Technology Matters

Technology is always changing, offering new opportunities and risks for business every single day. Netflix captured huge opportunity through utilizing online streaming services and redefining the TV and movie industry (many organizations went out of business as a result, encountering the risks of technology). This type of technological opportunity is often referred to as a disruptive innovation.

Disruptive technology is illustrated in this image as a chart, with time being on the x-axis and performance on the y-axis. A line representing disruptive technology is shown increasing performance over a very short period of time, crossing over other lines representing use.

Disruptive Innovation: Disruptive innovations rapidly improve the overall performance (fulfillment of the user’s needs) in a fraction of the time normally required to improve organically through efficiency. Netflix disrupted the movie and TV market through rapidly improving the experience in a short amount of time. This is a great opportunity for business, as well as a great threat.

As a result, business are constantly monitoring current and emerging technologies to capture opportunities and avoid enormous risk to keep pace with the demands of the modern economy.

How Technology Impacts Business

By looking at how business IT strategies are structured, we can identify why technology matters through considering the state of technology from various perspectives. Without diving into too much detail, here are some key building blocks to integrating the state of technology into an organization’s strategy:

Internal Capabilities

Technology is the great enabler. Nowadays, integrating technological tools to execute complex tasks is the norm. These integrations impact every facet of the organization. On the manufacturing floor, smarter machines can reduce production time, increase efficiency, and lower costs. In marketing, online tools can enable rapid iterative testing of creative assets and utilization of social networks. Keeping pace with the latest technology for organizational efficiency is key to competitive success.

External Forces

Technology changes the expectations of consumers and as a result businesses must keep up to remain relevant. Having a presence on Facebook, for example, is an external technological force that companies have had to integrate into their process. Another example is the auto industry, where both consumers and governments expect (and sometime requires) businesses to adopt new, expensive technology to reduce carbon footprints.

Opportunities

Identifying technologies that could cut costs, improve productivity, capture new markets, or fulfill new needs for consumers is a constant focal point for technology specialists. Identifying opportunities before they become competitive risks is a key to survival in the modern business world.

Threats

Closely related to the opportunities above, there is always the threat of falling behind the current state of technology (such was the case with streaming media). Another threat in the modern digital age is security. Target was recently hacked, incurring a massive leak of customer data. This can be costly both from a legal perspective and from a branding perspective.

Conclusion

All and all, the current state of technology is always evolving. What’s most important to keep in mind is the general perspective a business owner or manager must take when considering technology. Technology can be an enormous source of competitive advantage, both for your organization and your competitors.

The State of Competition

Current competition can be examined through market dominance, mergers and acquisitions, public sector regulation, and intellectual property.

Learning Objectives

Describe how market dominance, mergers and acquisitions, public sector regulation, and intellectual property contribute to the current state of competition

Key Takeaways

Key Points

  • Competition occurs when different firms attempt to attract the same group of buyers by offering products with greater perceived benefit.
  • A firm is considered dominant if acts to an appreciable extent independently of its competitors; customers; and, ultimately, of its consumer.
  • Often, firms take advantage of their increase in market power, their increased market share, and decreased number of competitors after a merger or acquisition –which can adversely affect the deal that consumers get.
  • Public sector industries, or industries which are by their nature providing a public service, are involved in competition in many ways similar to private companies.
  • Competition has become increasingly present in intellectual property, such as copyright; trademarks; patents; industrial design rights; and, in some jurisdictions, trade secrets.

Key Terms

  • intellectual property: Any product of someone’s intellect that has commercial value: copyrights, patents, trademarks, and trade secrets.
  • product: Any tangible or intangible good or service that is a result of a process and that is intended for delivery to a customer or end user.

Competition occurs when competing firms attempt to attract buyers by offering products with greater perceived benefit. Common benefits include price, service, reputation, and image, but may include virtually anything else associated with a product that the buyer values. A buyer’s perceptions of what constitutes a benefit may vary widely based on the nature of the product. Since the actions taken by one competitor to attract buyers are likely to affect the performance of other competitors, competing firms are said to be interdependent. The current state of competition can be examined based on the following categories.

Dominance and Monopoly

When firms hold large market shares, consumers risk paying higher prices and getting lower quality products than when compared to competitive markets. However, the existence of a very high market share does not always mean consumers are paying excessive prices since the threat of new entrants to the market can restrain a high market share firm’s price increases. A firm is considered dominant if acts to an appreciable extent independently of its competitors; customers; and, ultimately, of its consumer.

This lack of competition can lead to abuses in today’s business environment. Forms of abuse relating directly to pricing include price exploitation. It is difficult to prove at what point a dominant firm’s prices become “exploitative” and this category of abuse is rarely found.

Mergers and Acquisitions

A merger or acquisition involves, from a competition perspective, the concentration of economic power in the hands of fewer than before. This usually means that one firm buys out the shares of another. Often, firms take advantage of their increase in market power, their increased market share, and decreased number of competitors–which can adversely affect the deal that consumers get. Since mergers and acquisitions can lead to market dominance, competition law attempts to deal with this problem before it arises.

Public Sector Regulation

Public sector industries, or industries which are by their nature providing a public service, are involved in competition in many ways similar to private companies. Many industries, such as railways, electricity, gas, water, and media have their own independent competitive concerns and sector regulators. These government agencies are charged with ensuring that private providers carry out certain public service duties in line with social welfare goals.

Intellectual Property and Innovation

Competition has become increasingly present in intellectual property, such as copyright; trademarks; patents; industrial design rights; and, in some jurisdictions, trade secrets. On the one hand, it is believed that promotion of innovation through enforcement of intellectual property rights promotes competitiveness, while on the other the contrary may be the consequence. The question rests on whether it is legal to acquire a monopoly through accumulation of intellectual property rights. In which case, the law must either give preference to intellectual property rights or towards promoting competitiveness. Concerns also arise over anti-competitive effects and consequences due to:

A message is written in red and blue on a black background. It says: WARNING! INTELLECTUAL PROPERTY ZONE. Have pennies for thoughts ready!

Intellectual Property: Competition in regard to intellectual property is a growing concern in today’s business environment.

  • Intellectual properties that are collaboratively designed with consequence of violating antitrust laws (intentionally or otherwise).
  • The further effects on competition when such properties are accepted into industry standards.
  • Cross-licensing of intellectual property.
  • Bundling of intellectual property rights to long term business transactions or agreements to extend the market exclusiveness of intellectual property rights beyond their statutory duration.
  • Trade secrets, if they remain a secret, having an eternal length of life.

The Social Environment

Businesses must consider their social environment, since their actions have repercussions that echo throughout society.

Learning Objectives

Express how materiality and sociality are accelerating the transformation of the global socio-business environment

Key Takeaways

Key Points

  • CSR policy functions as a built-in, self-regulating mechanism whereby a business monitors and ensures its active compliance with the spirit of the law, ethical standards, and international norms.
  • The goal of CSR is to embrace responsibility for the company’s actions and encourage a positive impact through its activities on the environment, consumers, employees, communities, and all other stakeholders.
  • A new global business environment is emerging from two accelerating shifts that are now transforming how we use natural systems and material resources (materiality), and how we coordinate human action (sociality).
  • Corporate social responsibility (CSR) is a form of corporate self- regulation integrated into a business model. CSR policy functions as a built-in, self-regulating mechanism whereby a business monitors and ensures its active compliance with the spirit of the law, ethical standards, and international norms.
  • The goal of CSR is to embrace responsibility for the company’s actions and encourage a positive impact through its activities on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere who may also be considered as stakeholders.

Key Terms

  • stakeholder: A person or organization with a legitimate interest in a given situation, action, or enterprise.
  • Scarcity: The condition of something being scarce or deficient.

The Social Environment of Business

Businesses do not operate in a vacuum. A firm’s actions have repercussions that echo throughout society. Corporate social responsibility (CSR) is a form of corporate self-regulation integrated into a business model. CSR policy functions as a built-in, self-regulating mechanism whereby a business monitors and ensures its active compliance with the spirit of the law, ethical standards, and international norms. The goal of CSR is to embrace responsibility for the company’s actions and encourage a positive impact through its activities on the environment, consumers, employees, communities, and all other members of the public sphere who may be considered stakeholders.

In the center of the circle is quality of management. The next layer is divided into marketplace, workplace, environment, and community. And further outside of that is consumers, shareholders, unions, employees, local communities, NGOs, and government.

CSR diagram : This diagram shows the different components of CSR.

The topics surrounding CSR have become more complex due to globalization and the issues that arise from companies competing in international markets. Companies are manufacturing goods, hiring local labor, and utilizing raw materials and resources extracted from the environment in international locations. This heightened awareness of CSR and sustainable development has been endorsed by an increased responsiveness to ethical, social, environmental, and other global issues. In recent years, companies have been the center of scandals regarding accounting practices, damages to the environment, inadequate treatment of employees and workers, and the effect of products on society. This new global business environment is emerging from two accelerating shifts that are transforming how we use natural systems and material resources (materiality), and how we coordinate human action (sociality).

Materiality

Continuing industrial development has brought us into contact with the one planet limit on material supply. Thus, material resource scarcity is increasing, raising supply costs and shifting us away from the old economic growth strategy based in continually increasing resource consumption (more with more), to a new growth strategy based in increasing resource performance (more with less).

Sociality

Global adoption of digital communications and information technology (CIT) has converged media, communications, and information processing onto the Internet. Thus, CIT resource abundance is increasing, lowering communication costs and shifting us from the old coordination strategy based in hierarchical messaging (chain of command) to a new coordination strategy based in networked conversation (peer teaming). Hundreds of millions have embraced new social media tools such as Facebook and Twitter. As a result, a new social business environment has emerged around our organizations in a rising crescendo of change–transforming our whole conduct of life, bringing new risks, new rules, and vast new opportunities for economic growth.

Financial Case for CSR

The business case for CSR within a company will likely rest on one or more of these arguments:

  1. Human resources: A CSR program can aid recruitment and retention. Potential recruits often ask about a firm’s CSR policy during an interview, and having a comprehensive policy can provide an advantage. CSR can also help improve the perception of a company among its staff, particularly when staff can become involved through payroll giving, fundraising activities, or community volunteering. CSR has been found to encourage customer orientation among frontline employees.
  2. Risk management: Managing risk is a central part of many corporate strategies. Reputations that take decades to build up can be ruined in hours through incidents such as corruption scandals or environmental accidents. These can also draw unwanted attention from regulators, courts, governments, and media. Building a genuine culture of “doing the right thing” within a corporation can offset these risks.
  3. Brand differentiation: In crowded marketplaces, companies strive for a unique selling proposition that can separate them from the competition in the minds of consumers. CSR can play a role in building customer loyalty based on distinctive ethical values.
  4. License to operate: Corporations are keen to avoid interference in their business through taxation or regulations. By taking substantive voluntary steps, they can persuade governments and the wider public that they are taking issues such as health and safety, diversity, or the environment seriously as good corporate citizens with respect to labor standards and impacts on the environment.

The State of Global Business

Global business is changing and evolving quickly due to demographic and technological trends.

Learning Objectives

Identify how the Internet, a swelling global middle class, and the tottering global finance system has generated a new global business environment

Key Takeaways

Key Points

  • In the last five years over 50% people in the developed world have used the internet as their preferred source for news and entertainment, banking, shopping, and communications. They also use the internet to conduct basic business processes. This has created a new social business environment.
  • Some two billion people have joined the ranks of the rising global middle class. This has placed material resources under increasing supply pressure. Furthermore, the global finance system has tottered to the brink of chaos with debt and employment issues, and rising global food and energy prices.
  • All of the recent economic and technological changes generated an entirely new global business environment, and an emerging new global economy, with new rules, new patterns of costs, new methods of work, new risks, new opportunities, and new horizons for growth, evolution and change.

Key Terms

  • employment: The work or occupation for which one is used, and often paid.
  • internet: The Internet, the largest global internet.
  • debt: Money that one person or entity owes or is required to pay to another, generally as a result of a loan or other financial transaction.
  • business environment: the system within which companies exist

In the last five years, over 50% of the general public throughout the developed world have begun to use the internet as their preferred source for news and entertainment, as well as their preferred support for the conduct of banking, shopping, and personal and business communications.

They are also increasingly coming to use the internet to conduct many more basic business processes such as filing taxes and regulatory compliance forms, locating and initiating key business connections, coordinating work teams, and telecommuting. This has, almost overnight, created a new social business environment.

At the same time, in the material domain of life almost two billion people have joined the ranks of the rising global middle class as the developing economies of India and China have come fully on-line. This has placed every key material resource – energy, food, water, shelter, and the regenerative ecosystem itself – under rapidly increasing supply pressure.

These make inflation rates in developing countries stay at high levels. And amplifying all these social and material pressures, the global finance system has tottered to the brink of chaos with both Europe and North America facing unprecedented and unresolved debt and employment issues, with global food and energy prices doubling since just 2008.

All this has generated an entirely new global business environment, and an emerging new global economy, with new rules, new patterns of costs, new methods of work, new risks, new opportunities, and new horizons for growth, evolution and change.

And the trends that have created this new environment are all accelerating.

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The Circular Flow of Business and the Economy: Refers to a simple economic model which describes the reciprocal circulation of business and the global economy.