The Business Environment

and Business Economics

The Business Environment

• What is business economics?– decision making in business• external influences on the firm

– the business environment

• internal decisions of the firm

• the external effects of business decision making

• What do business economists do?– description

– analysis

– recommendations

The Business Environment

• Political / legal factors

• Economic factors– the microeconomic environment

– the macroeconomic environment

• Social / cultural factors

• Technological factors

• PEST analysis– relationship between the four sets of factors

– importance of the economic factors

The Structure of Industry

• Importance of industrial structure to the performance of firms

• Classifying production– primary production

– secondary production

– tertiary production

• Shares in GDP and employment of the three sectors– trends over time

– current position

Output of industrial sectors(as % of GDP)

1974

54.9%

2.8%

42.3%

Secondary

Primary

Tertiary

Output of industrial sectors(as % of GDP)

1974

54.9%

2.8%

42.3%

70.9%

5.8%

23.3%

2002

Secondary Secondary

Primary Primary

Tertiary Tertiary

1974

54.7%

3.4%

41.9%

Secondary

Primary

Tertiary

Employment by industrial sector(% of total employees)

1974

54.7%

3.4%

41.9%

79.8%

1.8%

18.4%

2002

Secondary Secondary

Primary Primary

Tertiary Tertiary

Employment by industrial sector(% of total employees)

The Structure of Industry

• Classifying firms into industries– nature of an industry

– industrial sectors

– why classify firms into industrial sectors?• helps in analysing trends

• identifying specific needs

• helps to understand relationships between firms

• Standard industrial classification– nature of the system of classification

– sections, subsections• divisions, groups and classes

Standard industrial classification: 1992

The Structure of Industry

• Changes in the structure of UK economy

– expanding and contracting sections

• by output

• by employment

80

90

100

110

120

130

140

150

160

170

180

190

200

210

220

230

240

1980 1985 1990 1995 2000

GDP by industry (1980 = 100)G

DP

by

indu

stry

(19

80 =

100

)

C

A/B

80

90

100

110

120

130

140

150

160

170

180

190

200

210

220

230

240

1980 1985 1990 1995 2000

GD

P b

y in

dust

ry (

1980

= 1

00)

C

A/BD

GDP by industry (1980 = 100)

80

90

100

110

120

130

140

150

160

170

180

190

200

210

220

230

240

1980 1985 1990 1995 2000

GD

P b

y in

dust

ry (

1980

= 1

00)

E

C

A/BD

GDP by industry (1980 = 100)

80

90

100

110

120

130

140

150

160

170

180

190

200

210

220

230

240

1980 1985 1990 1995 2000

GD

P b

y in

dust

ry (

1980

= 1

00)

EF

C

A/BD

GDP by industry (1980 = 100)

80

90

100

110

120

130

140

150

160

170

180

190

200

210

220

230

240

1980 1985 1990 1995 2000

GD

P b

y in

dust

ry (

1980

= 1

00)

I

G/H

EJ-Q

F

C

A/BD

GDP by industry (1980 = 100)

20

30

40

50

60

70

80

90

100

110

120

130

140

150

1980 1985 1990 1995 2000

Employment by industry (1980 = 100)E

mp

loym

ent

by

indu

stry

(19

80 =

100

)

C

A/B

20

30

40

50

60

70

80

90

100

110

120

130

140

150

1980 1985 1990 1995 2000

Employment by industry (1980 = 100)E

mp

loym

ent

by

indu

stry

(19

80 =

100

)

C

A/B

D

20

30

40

50

60

70

80

90

100

110

120

130

140

150

1980 1985 1990 1995 2000

Employment by industry (1980 = 100)E

mp

loym

ent

by

indu

stry

(19

80 =

100

)

E

C

A/B

D

20

30

40

50

60

70

80

90

100

110

120

130

140

150

1980 1985 1990 1995 2000

Employment by industry (1980 = 100)E

mp

loym

ent

by

indu

stry

(19

80 =

100

)

E

F

C

A/B

D

20

30

40

50

60

70

80

90

100

110

120

130

140

150

1980 1985 1990 1995 2000

Employment by industry (1980 = 100)E

mp

loym

ent

by

indu

stry

(19

80 =

100

)

I

G/H

E

J-Q

F

C

A/B

D

The Structure of Industry

• Changes in the structure of UK economy

– expanding and contracting sections

• by output

• by employment

• Analysing industrial structure

The Structure of Industry

• Changes in the structure of UK economy

– expanding and contracting sections

• by output

• by employment

• Analysing industrial structure

– changes in industrial concentration

The Structure of Industry

• Changes in the structure of UK economy

– expanding and contracting sections

• by output

• by employment

• Analysing industrial structure

– changes in industrial concentration

– the distribution of SMEs in the economy

Number of businesses, employment and turnover by industrial sector (2001)

• Structure → conduct → performance

– relationship between business structure and business conduct (behaviour)

• competitive markets and competitive behaviour

• limited competition and collusion

– relationship between business conduct and business performance

• different indicators for measuring performance

• profitability, market share, growth, etc.

The Determinants of Business Performance

The Determinants of Business Performance

• Internal aims and organisation– profit maximisation as the prime goal

– other goals

– distinction between owners and managers

– importance of managers’ own objectives

– “satisficing”

The Determinants of Business Performance

• Other factors affecting performance– internal structure

– information

– competence of management

– quality of the workforce

– systems• information systems

• motivation

• technical systems

• distribution systems

• financial systems