Business Environment 2q1y5g

Business Environment Introductory lecture: The concept and context of BE 1. What is Business Environment and why is it important? All those factors external to business that either inhibit or favour their development. It's important because it greatly affects business performance. 2. How does business environment affect business performance? The environment can be regarded as the source of both threats and opportunities. Business decisions are concerned with countering threats and exploiting opportunities. 3. What is the scope of business environment- what shall you learn about business environment? Scope of the business environment is enormous because it takes into all external factors which can affect business and its performance.

Lecture 1: Introduction to Business and its Environment 4. How White defines business environment? BE usually refers to: “All those factors external to businesses that either inhibit or favour their development.” 5. How Richman and Copen define/perceive business environment- what is it that they emphasize as an important distinct feature of business environment? “Environment factors of constraints are largely if not totally external and beyond the control of individual industrial enterprises and their arrangements. These are essentially the ‘givers’ within which firms and their managements must operate in a specific country and they vary, often greatly from country to country.” Richman/Copen define BE as a phenomenon which can’t be changed by a single company. It’s emphasized that BEs are quite diverse from country to country. Therefore, every company must adjust itself for the specific business environment conditions in a country where the company is making business arrangements. 6. What are the main characteristics/features of business environment? • •

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Diversity – business is a diverse category which refers to all kinds of business entities and organizations. External/Internal – BE mainly focuses on the external environment. It's also useful to take into internal factors which represent organizations as a highly differentiated and complex systems. Complexity – economic conditions are of primary importance (competitors and customers), but business operates in more complex environment including political-legal, social-cultural, environmental and technological aspects. 1

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Spatial Levels – refers to the geographical or territorial unit of analysis that's used for BE conceptualization (local, regional, international etc.) Dynamic – BE is a volatile, fast changing environment which is directly in relation to globalization forces including technological progress and innovation. Interaction – there is a two way interaction between business organizations and their BE. Business org. are not ive entities but seek to affect BE Stakeholder – public and business decisions are increasingly made in a context of multiple stakeholder interests and demands- public trust is at stake. Stakeholder is an individual/group that is affected by the decision. Values – there are competing perspectives and values concerning the nature and purpose of business, public sector or the government. These debates mostly relate to power, responsibilities, performance and ethics. Business should serve for the greater good, not for the self-interest of individuals.

7. What is business - how it may be defined or perceived? What are the principal objectives of business? Business is considered as those human activities which involves production or purchase of goods with the object of selling them at a profit margin. Principal objectives are: stability, survival, efficiency, profitability and growth. 8. What do we mean ‘market efficiency’? Discuss how profit motive and competition underpin economic efficiency! Market efficiency and the profit motive are often in collision with wider societal interests. Profit motive may result in a low quality or even harmful products, child labour, exploitation, environmental degradation, overpricing etc. 9. Profit motive underpins economic efficiency. However, does profit motive always leads to customer satisfaction via better quality and cheaper products? Profit motive and competition could end up bringing greater product diversity, lower costs of production, higher quality and cheaper products. Firms that fall behind in the efficiency race end up pricing themselves out of the market. 10. Does profit motive serves wider social interest, are there exceptions you could think off? Profit motive should serve wider social interest in a society, however, reality is different. Profit motive is mainly used for the sake of profit as the very first and primary cause, while everything else (including social interest) is secondary and not so important in the eyes of today’s capitalist leaders. 11. What is the economic rationale for government intervention and explicit regulation of business activities? Market efficiency and the profit motive are often at odds with wider societal interests. Profit motive may result in a low quality or even harmful products, child labour, exploitation, environmental degradation, overpricing etc. Government should intervene because of the social responsibility and protection of the consumers, but the producers as well. Besides these responsibilities, government should also direct business perspectives and development prospects since BEs are getting more complex as the time es.

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12. What do we mean by ‘environmental influences on businesses - how business and the environment interact? It’s a fact that environment affects every firm to a greater or lower extent, depending on the type of business and the corresponding environment where the firm is doing business. Business interacts with environment in two ways: 

Exchange of information – information is exchanged between business and its internal/external environment. This process consists of 4 steps: 1. Firms scan their internal/external environment and generate proper information in order to make right decisions and plans for the business. 2. Firms’ organization structure is adjusted towards external environment information. 3. Generation of external environment information is demanding, involves uncertainty and it’s one of the major problems for the businesses. 4. A business project will look for the current and future information which are relevant to demography, competition, and technical, legal, political and Gov. policies/procedures.

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Exchange of resources – resources are exchanged between business and its internal/external environment. This process consists of 2 steps: 1. Firm receives inputs like finance, materials, manpower, equipment and labor force from the external and internal environment via contracts and other agreements. 2. Forces of external environment shape availability and disposal of resources, products and services. Business, taking into these things, tries to satisfy the demands of the s which pay for their goods and/or services.

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13. What is the purpose of assessing environment impact on business - why is it important? The purpose is to see how and how much BE affects businesses, depending on the type of business and the corresponding environment where the firm is doing business. It’s important to assess to which extent environment affects businesses in order to develop a proper strategy for firms’ adjusting on the market and business environment. 14. What is ‘environmental analysis’ and what purpose does it serve? Environmental analysis is the process of analyzing and evaluating micro (immediate) and macro (general) environment of business to determine opportunities and threats. 15. What does the microeconomic (immediate environment) vs. macroeconomic environment (general environment) of business refers to and what is it composed of? Micro (immediate environment) involves/refers to those aspects which may require regular/day-today decisions or actions (customers, competitors, market, suppliers etc). Macro (general environment) is concerned with more distant or remote, but nevertheless consequential issues (economic, social, political and natural environment, technology etc). 16. (Slično pitanje kao 12.) In comprehending the relationship between business and its environment we often refer to the concepts of ‘exchange of information’ and ‘exchange of resources’. What is meant by these two concepts? It’s a fact that environment affects every firm to a greater or lower extent, depending on the type of business and the corresponding environment where the firm is doing business. Business interacts with environment in two ways: 

Exchange of information – information is exchanged between business and its internal/external environment. This process consists of 4 steps: 1. Firms scan their internal/external environment and generate proper information in order to make proper decisions and plans for the business. 2. Firms’ organization structure is adjusted towards external environment information. 3. Generation of external environment information is demanding, involves uncertainty and it’s one of the major problems for the businesses. 4. A business project will look for the current and future information which are relevant to demography, competition, and technical, legal, political and Gov. policies/procedures.

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Exchange of resources – resources are exchanged between business and its internal/external environment. The process consists of 4 steps: 1. Firm receives inputs like finance, materials, manpower, equipment and labor force from the external and internal environment via contracts and other agreements. 2. Forces of external environment shape availability and disposal of resources, products and services. Business, taking into these things, tries to satisfy the demands of the s which pay for their goods and/or services.

17. What is Business environment from the international institutions (donors) perspective - what is meant by ‘locational quality’? Donors and governments in developing and transition countries (started to pay attention in order to improve BE as a mean of promoting enterprise development, economic growth, increasing employment and reducing poverty. However, locational quality isn't really promising because of 4

burdensome regulations, poor service delivery, corruption and a weak entrepreneurial culture in less developed countries, thus making the eventual progress even more complicated.

Questions reflecting critical reasoning   

What implications does ‘dynamic’ business environment has on business (think about drivers of changes in the business environment such as rapid technological progress, shorter product lifecycles and competitive advantage in face of increasing globalization discussed)? What is your opinion: should business be regulated or be left entirely free to make decisions for themselves i.e. free market as such? Is there such a thing/society as FREE market? Is there a potential conflict between business creating profit and the welfare of society? Discuss the relevance for government intervention and provide few examples of strict business regulation.

Lecture 2: Economic environment of business 1. What is economic environment of business and why is it important? List few principal economic factors which affect business performance! Economic Environment are the economic factors that have effects on the working of the business. It includes system, policies and nature of an economy, trade cycles, economic resources, level of income, distribution of income and wealth. It is very dynamic and complex in nature and does not remain the same. 2. Principally, the economic environment of business is composed of…….? Are these features of economic environment completely independent or are they interrelated and how? Economic environment consists of external factors in a business' market and the broader economy that can influence a business. Principally, EE is composed of: economic system, economic policy, economic conditions, and other specific economic factors. Importantly, these features of EE are interdependent and interrelated. They determine the character and the nature of economic environment of business. 3. What do we mean by economic system? Which questions are of a priori relevance in determining the character of economic system? Economic systems represent a way how society decides to use and distribute its resources within the economy. There are three principal questions of relevance here: 1. Who determines the prices and the quantities produced in this system (i.e. government authorities vs. free markets)? 2. Who controls resource allocation and the distribution of resources in this system (i.e. Government authorities vs. Businesses, or both)? 3. Who can own property in this system (i.e. anyone or gov’t solely)?

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4. What is the principal difference between the capitalist and socialist/communist economic systems? Capitalism promotes free market and rights for private ownership, while socialism/communism promotes government intervention in almost every aspect of the society (including the economic system) and prohibition of private ownership. 5. Is the distinction and the categorization of economic systems into capitalist vs. mixed market economy really useful? Why (not)? It is useful because of the simplicity (categorization based on major characteristics of certain economic system). However, it’s quite hard nowadays to clearly distinct and precisely define which economic system is in question, but it’s better to at least have a rough picture of an economic system than to have none. 6. What do we mean by economic conditions and what determines a country’s state of the economic conditions for instance? Economic conditions - state of the economy in a country or region. Economic conditions change over time in line with the economic and business cycle, as an economy goes through expansion and contraction. 7. What do we mean by economic policy? Economic policy generally refers to the actions that governments take in the economic field, with an attempt to promote well being of the society. Economic policy alter economic system and conditions, determine and influence economic factors (e.g. interest rate, taxes) and attempt to create an environment conducive to growth and development. 8. Over which factors business organization may potentially have greater influence: over microeconomic factors or over macroeconomic factors? Business organization can eventually have greater influence over microeconomic factors, since these factors aren’t very broad in comparison to macroeconomic factors that are global happenings which can’t be really controlled. 9. How can microeconomic factors affect business? You could refer to few examples to explain the mechanism of influence! Microeconomic factors are company-specific trends. These are the factors in business that keep it afloat. Revenue, earnings and margin are the key micro factors at the company. The size of workforce, the production volume of your products and your advertising campaigns are all micro factors as well. In short, micro factors are parts of the business that can be fine-tuned and changed by the management. 10. What are the key targets of macroeconomic policy and how these are related to business performance? Specifically, explain what is macroeconomic stability and why is it important? Why is economic growth important for business? The more stable environment is, risk is lower and it’s easier to predict certain events which can affect decisions or business strategy. Macroeconomic stability describes a national economy that has minimized vulnerability to external shocks, which in turn increases its prospects for sustained longterm growth. Macroeconomic stability directly affects the BE, and because of the fact that BE affects businesses; the importance of macroeconomic stability is self-explanatory. Growth is the main

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condition for the improvements of living standards of the population, which should be the greater goal for all businesses. 11. List what policies are there to achieve the macroeconomic policy targets? 1. Fiscal Policy – decisions and policy options related to taxation and public expenditures. 2. Monetary Policy - decisions and policy options related to the rate of interest and the supply of money to the economy. 3. Exchange Rate Policy – decision on exchange rate regime 4. Competition and Industrial Policy – decisions and policy options that attempt to ensure fair market competition; policies to promote growth of selective industrial sectors. 5. Conflict and disarray of government policies – trade policy, distributional policies –income distribution, disposable income 12. Discuss how tax policy is related to business performance? You should refer to few examples! Tax policy as a fiscal instrument can affect business performance in two ways: 1. Increase in taxes leads to increase in prices, which leads to lower consumption and ultimately lower profits for the company (i.e. product’s price increase as the result of higher taxation) 2. Decrease in taxes leads to decrease in prices, which leads to increase in consumption and ultimately higher profits for the company (i.e. product’s price decrease as a result of higher taxation)

13. Discuss how trade policy is related to business performance? You should refer to few examples! Trade policy could affect positively, and as well negatively on business performance. For example, firm could gain from ive trade policy when the government provides indirect (low interest loans, tax breaks) or direct (cash grants, zero interest loans) subsidies. Firm can be more competitive by providing lower priced products (because of the subsidies) on domestic market, but on international market as well. However, trade policy could also affect negatively on the firm. For example, if aforementioned subsidized firm A has became competitive in a foreign country B comparing to its firms. Government of the foreign country B decided that the A’s advantage is unfair, and ultimately decided to impose a countervailing tariff in order to neutralize effect of the subsidy. This resulted in a loss of initial profit for the firm A. 14. Explain what effect will, for instance, lowering of interest rate have on the economy and on your business? Lower interest rate will have positive effect on the economy, but also on the business. If the interest rate decreases, money supply will go up, which will increase the investment, aggregate demand and at the end, GDP. From the firm’s view, increase in investment is always handy, since firm will have more money at its disposal. 15. Discuss, how increase in the inflation rate may affect your business? If the level of inflation rises because of Government policies this would make it easier for the company to raise its prices but the costs will also increase. If wages don't rise at the same rate of inflation, people actually lose money - this affect the demand pattern. When inflation rises, the value of the local currency decreases which reduces import and increases export.

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16. What is meant by competition policy and what is the role and purpose of competition policy? Competition policy is used to ensure that there are no monopoly providers who tend to maximize profits by charging prices that are higher than a competitive market price. It's also used to ensure that the competitive forces operate to optimize the allocation of resources, responsiveness to the choice of the consumer and that the full social costs of productions and distribution are reflected in the price charged to consumers (e.g. environmental tax) .

17. Has economic recession had an impact on strategic planning of firms in the UK? According to the study discussed what is considered the main barrier to future growth and development of business in the UK? Many of the companies have had to make major organizational changes to deal with the impact of recession and have had to make changes to their existing business strategies. They recognized that in the ‘good times’ prior to recession there was some degree of loss of focus on certain aspects of management and financial management. However, actions have been made in order to fix those problems. The main factor inhibiting future growth and development of companies is felt to be the lack of demand for product. During recession, some companies have lost clients, others have kept clients but have had reduced volume of orders while others have suffered both. The uncertainty about what precise policies on public spending will be adopted just adds to this uncertainty.

Questions reflecting critical reasoning  

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Explain how macroeconomic policies affect business performance, while referring to the targets of macroeconomic policy and underlying the mechanism of influence (i.e. the relevance of supply-demand and business cycle)! What is best environment which will cause business to operate efficiently? For instance, is it the environment created under the command-economic system with dominant communist/socialist ideology or en environment featured by free-market ideology? You may critically examine this question by briefly explaining the free market logic or simply referring to how profit motive and competition mechanism lead to economic efficiency. Discuss the free-market rationale while referring to the efficiency of price mechanism reflected in allocative efficiency, productive efficiency, distributive efficiency (preferably you may consult Lecture 3_Recommened reading 1 pp.35-41)

Lecture 3: Economic environment of business – part 2 1. What is the concept of Business enabling environment (BEE)? What are the key components/features of BEE which are of interest to wider int’l community? BEE is a mechanism through which greater development outcomes can be achieved. BEE requires the creation of: strong incentives for domestic and foreign private investment; the fostering of international economic linkages; access to new assets and markets; and the need for competition to spur innovation and raise productivity.

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2. Why the concept of BEE is important: consider for instance how investment climate affects business performance? The investment climate shapes the costs and risks of doing business, as well as barriers to competition, all of which strongly influence the role of the private sector in social and economic development. If BEE is strong and effective, investment climate will be more positive, which will ultimately bring more investments into the firms. 3. According to the OECD Development Assistance Committee, effective BEE requires the creation of? BEE requires the creation of: strong incentives for domestic and foreign private investment; the fostering of international economic linkages; access to new assets and markets; and the need for competition to spur innovation and raise productivity. 4. What are the main challenges concerning BEE (concept and framework of analysis) faced by the developing countries as reflected in growing empirical research? Main issues that developing countries are challenged by poor public governance, weak infrastructure, and policy and legal frameworks that are inconsistent, unstable, and unpredictable. 5. Donors implement a range of activities and programmes at both central and country levels aimed at promoting a more conducive enabling environment for both domestic and foreign investment, highlighting the policies, regulatory frameworks and institutions that businesses need to grow. List and explain those strictly related to economic policy! Those are: 1. Identify and remove barriers to foreign and domestic investment, especially promote effective FDI-related policies and institutions, 2. Identify the barriers related to the taxation policy (indirect taxes, direct taxes e.g. labour taxation), assess the impact of country credit ratings and taxation regimes on private investment 3. Policy, legal and institutional framework improvements of financial systems development can widen and deepen access to financial markets generally.

6. What are the main reasons for constrained access to financial markets in emerging market economies or developing economies in more general context? In this context, what is meant by poor supply side capacity and high cost of capital in particular? Main reasons for constrained access to financial market in emerging economies: 1. Underdeveloped financial markets and instruments. 2. Poor supply side capacity – inefficient enterprises, lack of FM knowledge and capacity, structure of private sector with dominant SME. 3. Cost of capital is too high, mostly has to do with low levels of domestic capital accumulation and savings.

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7. Briefly explain the concept and principal research findings of the Ayyagari et al. (2006) study titled How Important Are Financing Constraints? The role of finance in the business environment The study uses firm level survey data to present evidence on the importance of different features of the business environment. They find that only obstacles related to finance, crime and political instability directly affect the growth rate of firms, with obstacles to financing exhibiting greatest adverse impact on firms’ growth performance. Examining the Financing obstacle in more detail, they find that although firms perceive many specific financing obstacles, such as lack of access to long-term capital and collateral requirements, only the cost of borrowing (i.e. interest rates) directly affects firm growth. Questions reflecting critical reasoning  

What are the most common policy solutions to foster financial market development in developing countries? As to your understanding, what is the economic rationale behind privatization of banking sector i.e. sales of state assets to foreign banks/investment funds? Even in industrialized countries, characterized by the developed financial markets there are pervasive market failures related to financing (e.g. innovation). Explain and critically explore the presence of market failures related to financing technological and innovative efforts/activities by business enterprises.

Lecture 4: Political and legal environment of business 1. What is meant by political system and what are the distinctive political systems that co-exist? A political system is a set of formal institutions that constitute a government. It includes legislative bodies, political parties, lobbying groups, and trade unions. Political system provides protection from external threats, establishes stability based on laws and govern the allocation of resources. There are 3 distinctive political systems nowadays which co-exist: totalitarianism, socialism, democracy. 2. What is meant by legal system, and what are the distinct legal systems that exist? Legal system is a system used for interpreting and enforcing laws. There are 3 distinctive legal systems nowadays which co-exist: civil law, common law and religious law. 3. What is country risk? What are the dimensions of country risk? Is it possible to measure country risk? Country risk is the exposure to potential loss or adverse effects on company operations and profitability caused by developments in a country’s political and/or legal environments. It’s possible to measure the country’s risk by analyzing political stability, legal environment, economic indicators and tax policy. 4. What are the types of country risk produced by political systems: explain and refer to example where appropriate! Political systems greatly affect the country’s risk in of political stability. Political instability with volatile tendencies isn’t a really good deal for investing, i.e. Middle Eastern war torn countries like Pakistan, Afghanistan, and Iraq.

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5. What are the types of country risk produced by legal systems: explain and refer to example where appropriate! Legal systems also affects the country’s risk, but in a bit less severe manner where it often obstructs the business (Coca-Cola recycling issue in ) and sometimes it forces the firm to quit (Google and China’s censorship). Questions reflecting critical reasoning  

Discuss the relationship between political and economic system? What are the key characteristics of legal environment of business in BiH? You could refer to this question by drawing on few examples!

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