Applied Economics: Business Environment

• Applied Economics involves studying the principles, tools, and techniques used in creating a business.

Business Environment

• Includes all internal and external factors affecting a company's performance, functions, including employees, customers and management.

Environmental Scanning

• Used by organistions to monitor the external and internal environments, to identify opportunities and threats to the company.
• It involves the organisation collecting data regarding its environment and analyses the impacts of changes in the market.

Environmental Analysis

• A strategic tool for assessing threats and opportunities, that helps management make better decisions.

Business Environment: Internal vs External

• Internal environment includes factors controllable by management, such as the value system, mission, structure, culture, quality of employees, labour unions and technological capabilities.
• With the external environment, there is a micro and macro view.
• External environment factors cannot be directly controlled, the business must still minimize impact using strategic planning.

Micro Environment Factors

• Suppliers include parties that can control the success of a business when they hold power as the only or largest vendor in the market.
• Resellers are market intermediaries that contribute to delivering products to consumers, they can leverage their reputation to market products.
• Customers are businesses or individuals that purchase goods or services & drive revenue.
• Competition occurs where other organizations sell similar products or services, which may reduce prices as companies seek to gain more market share.

Macro Environment Factors

• Political factors are how and to what degree government intervenes in the economy (government policy, political stability, foreign trade, tax, labour and trade restrictions)
• Economic factors significantly impact on how an organisation does business + profitability (economic growth, interest/exchange rates, inflation and incomes)
• Social factors include population belief, attitudes, population growth, age, health consciousness, career prospects.
• Technological factors affect management and marketing via production, the distribution of goods, and communication with target markets.
• Environmental factors relate to raw material scarcity, pollution targets, and ethical/sustainable business practices.
• Legal factors include health and safety, opportunities in the market, advertising standards, consumer rights, product labeling and product safety.

SWOT Analysis

• SWOT(Strengths, Weaknesses, Opportunities, and Threats) is a framework used to strategically plan and evaluate a company's competitive position
• SWOT analysis assesses internal and external factors, as well as current and future potential.
• It facilitates a fact-based look at the strengths and weaknesses of a business/organization.
• It's a technique for assessing performance, competition, risk and potential of a business.

SWOT: Internal Factors (S and W)

• Financial resources are the money and source of investment.
• Physical resources are the location, machinery and equipment.
• Human resources refer to employees.
• Access to trademarks, patents, copyrights and natural resources.
• Employee, sales, and marketing programs/capabilities.

SWOT: Strengths and Weakenesses

• Strengths are the things an organization excels at, that separates it from the competition, like a strong brand, a loyal customer base and unique technology.
• Weaknesses are the elements that stop an organization from performing at its optimum level.
• The weaknesses can be internal eg. lack of raw materials, poor location, and lack of a budget for product promotion.

SWOT: External Factors (O and T)

• Economic trends, such as the stock market and economic performance.
• Market trends, like technology, products, and lifestyle of society.
• National and local laws and regulations.
• Relationship with suppliers.
• Competitive threats.

SWOT: Opportunities and Threats

• Opportunities are favourable external factors giving a competitive advantage.
• Involve larger markets, the companies expansions, new customer trends.
• Threats refer to factors with the potential to harm an organization, e.g. government policy change, consumer tastes, recession and inflation.

Porter's Five Forces Analysis

• Originally deveoped by Michael E. Porter from Harvard Business School
• It's a framework or guide that helps assess/evaluate the competitive strength of a business or organisation, and potential entrance into different markets.
• It identifies five forces which determine the competitiveness and attractiveness of a market, seeking to locate the power in a business situation.
• Industry structure is the driver of competition and profitability (not the products or services themselves)

Porter's Five Forces

• Competitive Rivalry
• Bargaining Power of Suppliers
• Bargaining Power of Buyers
• Threat of New Entrants
• Threat of Substitute Products or Services

Porter's Five Forces: Competitive Rivalry

• Examines competition intensity, based on the count and capabilities of competitors in that marketplace.
• Rivalry is high when consumers easily switch to a competitor.

Porter´s Five Forces: Bargaining Power of Suppliers

• How much power a business' suppliers have
• How much control it has in prices, which reduces profitability.
• Power is determined by the number of suppliers available to a business, the fewer, the more power.

Porter’s Five Forces: Bargaining Power of Buyers

• Looks at the power of the consumer, to affect prices and quality.
• Power for the consumer is high with few of them and lots of sellers, and easy for them to switch sellers.
• Power for the consumer is low when they purchase small amounts and alternatives are hard to come by.

Porter's Five Forces: Threat of New Entrants

• Examines how easy or difficult it is for competition to join industry.
• The easier the entry, the high the risk of market share being depleted.
• Barriers to entry can be costs advantages, input, scale and established brands.

Porter's Five Forces: Threat of Substitute Products or Services

• Studies how easy it is for consumers to switch from a business’ product or service to that of a competitor.
• Competitor considerations are costs, quality, and profits(which may lower costs even more).