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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 account 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 cant be changed by a single company. Its
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?

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
account 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.
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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 passive 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 todays 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 passes.




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12. What do we mean by environmental influences on businesses - how business and the
environment interact?

Its 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 its 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.

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 account these things, tries to satisfy the demands
of the users 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. Its 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-to-
day 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. (Slino 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?

Its 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 its 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.

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 account these things, tries to satisfy the demands
of the users 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
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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 govt 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, its quite hard nowadays to clearly distinct and precisely define which economic
system is in question, but its 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 countrys 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 arent very broad in comparison to macroeconomic factors that are global happenings which
cant 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 its 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 long-
term 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. products 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. products 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 passive 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 As 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 firms 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
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 intl 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 countrys political and/or legal environments. Its possible to
measure the countrys 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 countrys risk in terms of political stability. Political instability with
volatile tendencies isnt 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 countrys risk, but in a bit less severe manner where it often obstructs
the business (Coca-Cola recycling issue in Germany) and sometimes it forces the firm to quit (Google
and Chinas 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!