Chapter 2 Understanding the environments of business

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Chapter 2 Understanding the environments of
business
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Todays Class

• Boundaries of the firm (internal v external)
• The economy
• terms background
• Global environment
• Business environment
• Porters 5-forces

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Boundaries of the firm

• For analysis want to consider
• internal factors
• external factors
• Complications
• controllability of internal factors
• influence on external factors
• internal v external

FIRM
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Boundaries of the firm

• Suppose you were going to start a new airline.
  Which of the following activities or assets do
  you think the airline would need? That is, which
  of the following need to be within the firm and
  which ones need not be?
• Assets
• Airplanes
• Brand name
• Head office
• Maintenance facilities
• Reservations system (hardware software)
• Activities
• Accounting
• Brand development
• Flights (pilots and flight attendants)
• HR management
• Logistics
• Marketing

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Boundaries of the firm

• We noted that a firm can influence the decisions
  of people outside the firm. How can a firm do
  that? Consider
• customers
• suppliers
• the government
• competitors.

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Boundaries of the firm

• Outsourcing examples

Why would a firm be willing to pay extra for a
temp?
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Economic Indicators Business cycle
TUESDAY, OCT 29, 1929
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Economic indicators Business cycle

• Dot-com bubble
• Recessions
• Cycles hard to predict
• Real estate bubble

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Economic Indicators GDP GNP

• GDP income earned IN country
• GNP income earned BY country
• difference income earned overseas
• Canadas GDP 1.371 trillion
• Would you guess that Canadas GNP is higher or
  lower than her GDP? Why?

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Economic indicators GDP GNP

• Guess the 7 countries with the largest GDPs
• United States
• Japan
• Germany
• China
• United Kingdom
• France
• Italy
• Canada

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Economic indicators - Inflation

• Stories from your grandparents?
• price increases
• recently moderate
• 70s and early 80s - high
• CPI
• What types of products have had large price
  increases in the last few years?
• What types of products have had price decreases?

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Economic indicators - Inflation

• Deflation rare
• High inflation BAD Why?
• Hyperinflation
• sometimes over 100 per year
• Zimbabwe now at 1,000 - chopping off last 3
  zeros
• Germany after WW I
• 3.25 million
• prices doubled every 2 days!

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Economic indicators GDP growth

• High GDP growth implies a booming economy
• e.g. China 9.9 in 2005
• Low GDP growth implies a stagnant economy
• e.g. Germany 0.9 in 2005
• Canadas GDP growth 2.9
• Real GDP growth

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Economic indicators GDP comparisons across
countries

• Complication different currencies
• Canadian dollar
• US dollar
• Mexican peso
• United Kingdom ___________
• Japan __________
• France _________
• Israel ________

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Economic indicators GDP comparisons across
countries

• The problem
• Canadas GDP C1.371 trillion
• Chinas GDP 18.2 trillion yuan
• Which economy is bigger?
• Solution convert to US
• Using the nominal exchange rate
• Canadas GDP US1,130 billion
• Chinas GDP US2,225 billion

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Economic indicators GDP comparisons across
countries

• GDP per capita
• Canada (nominal) US35,064
• China (nominal) US 1,703
• Using nominal rate exaggerates the difference
• GDP per capita using PPP
• Canada (PPP) US34,273
• China (PPP) US 7,204

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Economic indicators GDP comparisons across
countries

• Highest GDPs-per-capita (using PPP)
• Luxembourg 69,800
• Norway 42,364
• United States 41,399
• Ireland 40,610
• (Canada is 7th at 34,273)

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Economic indicators GDP comparisons across
countries

• Lowest GDPs per capita
• Malawi 596
• Tanzania 723

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Economic indicators Problems with GDP
measurements

• Criticisms of using GDP to measure economic
  well-being
• What problems can you think of? In what ways do
  GDP statistics not fairly measure economic
  well-being?

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Economic indicators Balance of trade

• Exports minus imports
• Examples of major Canadian exports
• Examples of major Canadian imports
• Implications of positive balance of trade
• Implications of negative balance of trade
• Long-term trade deficit is a problem

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Economic indicators National debt

• Most governments borrow
• Fiscal policy to offset business cycles
• John Maynard Keynes idea
• But
• governments keep borrowing
• What makes governments so short-sighted?

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Economic indicators National debt

• Prevailing view in 1970s and early 80s
• Governments dont go bankrupt
• 1982 Mexico defaulted
• Now clear that
• Governments can go bankrupt
• There are limits to how much debt a government
  can handle

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Economic indicators National debt

• Debt versus deficit
• Debt total amount owing
• Deficit how much debt increased during the year
• 10 years ago, Canada had deficits around 40
  billion
• Canada has now wiped out the deficit
• BUT Debt is still 500 billion
• thats 15,000 per person!

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Economic indicators Unemployment
of people actively looking for work
of people employed PLUS of people actively
looking for work
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Global environment

• International Business - covered later in course
• Events overseas affect us
• Example
• Katrina
• Demand in China
• OPEC

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Business environment Porters Five Forces Model
Bargaining Power of Suppliers
Industry Competitors
Potential Entrants
Potential Substitutes
Bargaining Power of Buyers
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Force 1 - Competition

• intensity and nature
• compete on price?
• Which of these industries do you think
  experiences the fiercest price competition, and
  why?
• Airlines
• Software operating systems
• Soft drinks

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Force 2 Threats of entry

• barriers to entry
• Which of the following industries do you think
  have high barriers to entry, and why?
• Airlines
• Computer manufacturing (final assembly)
• Soft drinks

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Force 3 Threats of substitution

• Upper limit on prices
• OR Threatens the whole industry

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Force 4 Buyer power

• How easily can the industrys customers force
  down the price?
• Supermarkets
• Which of the following industries customers have
  the most bargaining power?
• Car dealerships
• Pharmaceutical companies

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Force 5 Supplier power

• Same concept as buyer power

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