Chapter 2 Notes: Environment of Business — Global Environment and Managing in a Global Environment

Key ideas and study orientation

  • This chapter helps you understand how global events affect businesses (like a company making clothes, a charity, or even the government), owners, managers, and customers.

  • Imagine a "bubble" around a company – that's its organizational boundary. Everything outside that bubble but still affecting it is the external environment. This environment isn't just about weather; it includes how the economy is doing, new technologies, laws, culture, and global events.

  • We'll link these ideas to tools you know (like SWOT analysis) and how a country's economy grows, deals with rising prices (inflation), unemployment, and government debt.

  • You'll learn how governments can influence the economy (through fiscal policy, like taxes and spending) and how central banks (like the Bank of Canada) manage monetary policy (like interest rates) to steer the economy.

Major concepts and definitions

  • Organizational boundaries vs. external environment

    • Organizational boundary: This is the invisible (or sometimes physical) line that separates a company from the rest of the world. Think of a pizza shop: its boundary is the shop itself, but also its website and delivery service. With remote work, these boundaries are becoming less clear.

    • External environment: Everything outside the pizza shop that can affect it. This includes:

    • Economic environment: How healthy the economy is. If people lose jobs, they might buy less pizza.

    • Technological environment: New ovens, online ordering apps, or delivery drones can change how the pizza shop operates.

    • Political/legal environment: New health regulations for restaurants or taxes on dough imports.

    • Socioeconomic/Sociocultural environment: If people start preferring healthy salads over pizza, or if the local population grows, that affects the shop.

  • Business cycle concepts

    • Economies don't just grow steadily; they have ups and downs, like waves in the ocean: expansion (economy grows) → peak (highest point) → contraction (economy slows down, maybe a recession) → trough (lowest point).

    • Recession: A significant decline in economic activity. Think of it as a bad cold for the economy.

    • Depression: A very severe and long-lasting recession, like a serious illness.

    • Soft landing: When central banks try to slow down an overheating economy gently without causing a recession.

  • Macro indicators and measures

    • GDP (Gross Domestic Product): The total value of all goods and services produced inside a country's borders in a specific time. Example: All the cars made, food produced, and services like haircuts provided within Canada.

    • GNP (Gross National Product): The total value of goods and services produced by a nation's residents and companies, no matter where they are in the world. Example: If a Canadian company makes cars in Mexico, that still counts towards Canada's GNP.

    • GNI (Gross National Income): Similar to GNP, often used to measure income per household.

    • GDP per capita: This is the GDP divided by the population. It's like asking: If we shared all the stuff made equally, how much would each person get? \text{GDP per capita} = \frac{\text{GDP}}{\text{Population}}

    • Real vs nominal growth: Nominal growth is growth measured at current prices (the raw numbers). Real growth takes out the effect of rising prices (inflation), showing the actual increase in goods and services. If your salary goes up by 5% (nominal), but prices also went up by 3%, your real pay rise is only 2%. g{\text{real}} \approx g{\text{nominal}} - \text{inflation (rate)}

    • Purchasing Power Parity (PPP): This helps compare how much you can buy with your money in different countries. It adjusts exchange rates so that a similar item (like a Big Mac) costs roughly the same everywhere. This gives a better idea of living standards.

  • Prices, inflation, and consumer measures

    • CPI (Consumer Price Index): A tool to measure inflation (the general rise in prices). It tracks the cost of a "basket of goods" (a standard list of items like groceries, gas, rent for a typical household). If your weekly grocery bill for the exact same items goes up, the CPI reflects that.

    • Inflation: A general increase in prices across the economy. Your dollar buys less than it used to. Example: A loaf of bread that cost 2 today costs 2.20 next year.

    • Deflation: A general decrease in prices. Your dollar buys more. Example: That loaf of bread costs 1.80 next year.

  • Balance, debt, and governance finance

    • Balance of trade: This is the difference between what a country exports (sells to other countries) and what it imports (buys from other countries). \text{BOT} = \text{Exports} - \text{Imports}

    • If Exports > Imports, it's a trade surplus (selling more than buying).

    • If Imports > Exports, it's a trade deficit (buying more than selling).

    • National debt: The total amount of money a government owes to its lenders (people, other countries, companies). Example: The Canadian government borrows money by issuing bonds, which adds to the national debt.

    • Fiscal policy: How the government uses its spending and taxes to influence the economy. Example: The government might cut taxes to encourage people to spend more, or spend more money on building roads to create jobs.

    • Monetary policy: How the central bank (like the Bank of Canada) manages the money supply and interest rates. Example: If inflation is too high, the central bank might raise interest rates to make borrowing more expensive, which slows down spending.

  • Unemployment and productivity

    • Unemployment rate: The percentage of people who are actively looking for a job but cannot find one.

    • Types of unemployment:

    • Frictional: When someone is temporarily between jobs. Example: A student just graduated and is looking for their first job.

    • Seasonal: Jobs that exist only for certain seasons. Example: A ski instructor in summer.

    • Cyclical: Linked to economic downturns (recessions). Example: Factory workers laid off because people are buying fewer cars during a recession.

    • Structural: A mismatch between the skills workers have and the skills jobs require. Example: A coal miner whose mine closed needs retraining for a job in renewable energy.

    • Productivity: How much output (goods/services) is produced per unit of input (like labor or capital). If a baker can make more loaves of bread in the same amount of time using a new machine, their productivity has increased.

The economic environment in depth

  • Goals and indicators

    • Governments and central banks aim for a healthy economy: high growth, low unemployment, and low inflation. However, it's often a balancing act between these goals.

  • Government policy tools

    • Fiscal policy: Government chooses to either increase spending (e.g., funding new infrastructure projects) or decrease taxes (e.g., giving tax breaks to businesses), or both, to stimulate the economy.

    • Monetary policy: The central bank adjusts a key interest rate (often called the policy rate or prime rate). If the central bank raises this rate, banks charge more for loans (mortgages, car loans), making people less likely to borrow and spend, which can cool down inflation. If they lower rates, borrowing becomes cheaper, encouraging spending and investment.

Global markets and globalization

  • Global institutions and frameworks

    • WTO (World Trade Organization): Acts like a referee for international trade, setting rules to reduce trade barriers and resolving disputes between countries. It evolved from something called GATT.

    • Free trade agreements and blocs: Groups of countries that agree to reduce or eliminate tariffs and other trade barriers among themselves to encourage more trade. Examples: NAFTA (now USMCA between US, Mexico, Canada) or the European Union (EU).

  • Market characteristics and barriers

    • Countries sometimes put up "walls" to protect their own industries:

    • Quotas: A limit on the quantity of specific goods that can be imported. Example: Only 10,000 foreign cars can be imported this year.

    • Tariffs: A tax placed on imported goods. Example: A 10% tax on imported shoes makes them more expensive for consumers.

    • Subsidies: Government payments to domestic producers to help them compete. Example: Giving money to local farmers so their produce is cheaper than imports.

    • Embargoes: A complete ban on trade with a specific country or for specific goods. Example: A ban on importing oil from a certain country.

  • Classical trade theories and national advantage

    • Absolute advantage (Adam Smith): A country should produce goods it can make more efficiently than any other country and trade for others. Example: If Canada can grow wheat better than any other country, it should focus on wheat.

    • Comparative advantage (Ricardo): A country should specialize in producing goods where it has a relative efficiency advantage, even if another country is better at everything. Example: A lawyer is great at law and also good at typing. Their assistant is only okay at typing. The lawyer has an absolute advantage at both, but a comparative advantage in law. It's better for the lawyer to focus on law and hire the assistant to do the typing.

    • National competitive advantage (Porter’s Diamond): Explains why some nations are dominant in certain industries by looking at four factors:

    • Factor conditions: Resources like skilled labor, infrastructure.

    • Demand conditions: Sophisticated local buyers who push companies to innovate.

    • Related and supporting industries: Nearby strong suppliers or related businesses.

    • Firm strategy, structure, and rivalry: How companies compete and are organized in that country.

  • International market entry modes and structures

    • How companies enter foreign markets:

    • Exporting/Importing: Simply selling goods to or buying goods from other countries. Low risk.

    • Licensing and franchising: Allowing a foreign company to use your brand, product recipe, or business model in exchange for fees. Example: A McDonald's franchise in Japan operates using the McDonald's brand and system.

    • Foreign Direct Investment (FDI): Investing directly in facilities in another country.

      • Greenfield investment: Building a brand-new factory or operation from scratch. High risk, high control.

      • Brownfield investment: Buying an existing company or facility. Faster but might inherit existing issues.

The organizational and strategic toolkit for global environments

  • Porter’s framework and industry competition (Five Forces Model): This model helps analyze competition in an industry:

    • Rivalry among existing competitors: How many competing companies there are and how intense their competition is.

    • Threat of new entrants: How easy it is for new companies to start up and join the competition.

    • Bargaining power of buyers: How much power customers have to drive prices down.

    • Bargaining power of suppliers: How much power suppliers have to raise prices.

    • Threat of substitutes: How many other products or services can do the same job for customers. Example: For a soft drink company, water or juice are substitutes.

    • If these forces are strong, competition is tough, and companies have less power to set prices.

  • The emerging challenges and opportunities

    • Outsourcing: Hiring another company (often overseas) to perform tasks that your company used to do internally. Example: A Canadian tech company might outsource its customer support to a call center in India to save costs.

Quick reference: key equations and definitions (LaTeX)

  • GDP per capita
    \text{GDP per capita} = \frac{\text{GDP}}{\text{Population}}

  • Real vs nominal growth (conceptual relation)
    g{\text{real}} \approx g{\text{nominal}} - \text{inflation rate}

  • Consumer Price Index (CPI)
    \text{CPI} = \frac{\text{Cost of basket in year t}}{\text{Cost of basket in base year}} \times 100

  • Balance of trade
    \text{BOT} = \text{Exports} - \text{Imports}

  • GDP vs GNP (conceptual)
    \text{GDP} = \text{Domestic production value}
    \text{GNP} = \text{GDP} + \text{Net factor income from abroad}

  • Unemployment rate (definition)
    U = \frac{\text{Number of unemployed}}{\text{Labor force}} \times 100\%

  • Purchasing Power Parity (PPP) (conceptual)
    \text{PPP exchange rate} \Leftrightarrow \frac{P{\text{domestic}}}{P{\text{foreign}}}

  • Exchange-rate dynamics (conceptual)
    \text{Exchange rate impact: if domestic currency depreciates} \rightarrow \text{exports rise, imports fall} $$