THE GLOBAL BUSINESS

ENVIRONMENT
CHAPTER 1
 TOPICS COVERED

➢ Nature of business - goals and functions

➢ External environments of business

➢ Economic systems - factors of production

➢ Demand and supply affect

➢ Elements of private enterprise

➢ Degrees of competition

➢Economic Indicators
WHAT DO YOU KNOW
ABOUT BUSINESS?
 THE CONCEPT OF BUSINESS AND PROFIT

Business is an organization that provides

goods or services to earn profits.

Business is an entity that engages in

commercial, industrial or professional
activities that produce and/or sell goods
or services for profit.
THE CONCEPT OF BUSINESS AND PROFIT

Profit is the difference

between a business’s
revenues and its expenses.

Profit is the amount of

money gained after selling
goods and services minus
the expenses.

Profit = Revenue - Expense

 CONSUMER CHOICE AND DEMAND

• Consumers have freedom of choice.

• Businesses must take into account what
consumers want or need.
 BENEFITS OF BUSINESS
• Businesses produce most of the goods and services we consume.
• They employ most working people.
• They create most of the innovations.
• They provide opportunities for new businesses as suppliers.
• They contribute to a better quality of life and standard of living for the
society.
• They increase income of owners and stockholders.
• Business taxes support government at all levels.
• Many businesses support charity and provide community leadership
 THE EXTERNAL ENVIRONMENT OF BUSINESS

External Environment consists of everything outside

an organization’s boundaries that might affect it. It plays a
major role in determining the success or failure of any
organization.

Internal Environment – corporate culture, day-to-day decisions,

policies, employees, etc.
DIMENSIONS OF THE EXTERNAL ENVIRONMENT
Discuss the dimensions of External Environment for
Panda Stores.
❑Domestic
❑Socio-Cultural
❑Technological
❑Political
❑Economic
❑Global
• Panda Retail Company is a Saudi Arabian grocery retailing company. Panda is one
of The Savola Group’s subsidiaries.
• United Panda Co. was founded in Riyadh in 1981 with a capital of SR 207.50
million
• As of June 2016, the company operated 65 HyperPanda stores and 156 Panda
Chain outlets across Saudi Arabia.
 DIMENSIONS OF THE EXTERNAL ENVIRONMENT

1. Domestic Business Environment. The domestic business environment refers to the

environment in which a firm conducts its operations and derives its revenues.
(customers, suppliers, competitors)

2. Global Business Environment. The global business environment refers to the

international forces that affect a business; various factors affect the global environment
at both the general and immediate levels. (international suppliers, cultures, currencies)

3. Technological Environment. The technological environment generally includes all the

ways by which firms create value for their constituents; technology includes human
knowledge, work methods, physical equipment, electronics and telecommunications,
and various processing systems. (mobile apps for online shopping)
 DIMENSIONS OF THE EXTERNAL ENVIRONMENT

4. Political-Legal Environment. The political-legal environment reflects the relationship

between business and government, usually in the form of government regulation of
business. (employment laws, tax policies, safety and health standards)

5. Sociocultural Environment. The sociocultural environment includes the customs,

mores, values, and demographic characteristics of the society in which an organization
functions. (acceptable to society or not, recycling)

6. Economic Environment. The economic environment refers to relevant conditions

that exist in the economic system in which a company operates.
(economic system, spending power of consumer, inflation, unemployment)
WHAT IS AN ECONOMIC SYSTEM?
 ECONOMIC SYSTEM

Economic system
• a nation’s system for allocating its
resources among its citizens, both
individuals, and organizations
 FACTORS OF PRODUCTION

Factors of production
• the resources that a country’s businesses use to produce
goods and services
FIVE FACTORS OF PRODUCTION
Example: FoPs and External Environment of Business

A Coffee Shop
 Factors of Production (FoP) in Coffee Shops
Labor Capital Physical Information Entrepreneurs
Resources Resources

baristas, store shop, business

money, owner or
managers, machines, plan, market
investments manager
coffee beans. forecasts
tasters/buyers
 What are the factors of production used to
produce coffee?

1. Labor – The baristas and other employees who are needed to make and serve
coffee.
2. Capital – The investment needed to buy land and set up a coffee shop.
3. Entrepreneurs – The owner or manager of the coffee shop who will take the
risks, create and operate the business.
4. Physical Resources – The equipment and machines needed to make coffee -
coffee beans and other products - tables and chairs - interior decoration.
5. Information Resources – business plan, market forecasts, specialized
knowledge, economic data
 How does the External Environment
influence the business of coffee shops?
 How does the External Environment
influence the business of coffee shops?
1. Domestic Business Environment. logistics, customer base,
competition
2. Global Business Environment. Trade agreements, wars.
3. Technological Environment. Technology and manufacturing
maturity, emerging technology, data transfer.
4. Political-Legal Environment. Government licensing, taxes,
import taxes (Tariffs).
5. Sociocultural Environment. Social demographics, Coffee habits,
values, religion, trends.
6. Economic Environment. Economic Stability, Inflation, purchasing
power.
InClass Assignment – FoP & ExtEnv

• Download the assignment from elearning/Moodle page.

• Complete the two tables.
• Submit on the same Moodle link.
 WHAT IS AN ECONOMIC SYSTEM?

An economic system is a nation’s system for allocating its resources

among its citizens, both individuals, and organizations.

North Korea, China U.S & Japan

 ECONOMIC SYSTEMS
The major differentiator among economic systems is whether the
government or individuals decide:
➢ How to allocate limited resources—the factors of production—to
individuals and organizations to best satisfy unlimited societal
needs
➢ What goods and services to produce and in what quantities
➢ How and by whom these goods and services are produced
➢ How to distribute goods and services to consumers

https://courses.lumenlearning.com/suny-osintrobus/chapter/how-business-and-economics-work/
 ECONOMIC SYSTEMS

• Businesses and other organizations operate according to

the economic systems of their home countries.
• Today the world’s major economic systems fall into two broad
categories: free market, or capitalism; and planned economies,
which include communism and socialism.
• However, in reality many countries use a mixed market system
that incorporates elements from more than one economic system.
 TYPES OF ECONOMIC SYSTEMS

1. Planned Economy (Communism)

• An economy that relies on a centralized government to control all
or most factors of production and to make all or most production
and allocation decisions.

2. Free Market economy (Capitalism)

• An economy where the ownership of both the factors of
production and the actual businesses is private. It creates an
environment in which producers and consumers are free to sell
and buy what they choose.
 TYPES OF ECONOMIC SYSTEMS

3. Mixed market economy (Socialism)

• features characteristics of both planned and market
economies

Privatization
The process of converting government enterprises into
privately owned companies
Saudi Entrepreneurial
Business Success Stories

• https://www.monshaat.gov.sa/en/success-stories/all
 GROUP WORK
Write at least 3 goods or services for each of the
following businesses:

1. Telecommunications Company (STC, Mobily)

2. Microsoft
3. Logistics Company
 Global Market Economy

• Demand and Supply

• Private Enterprise
• Degrees of Competition
 DEMAND AND SUPPLY IN A MARKET ECONOMY
In a market economy, individual producers and consumers control production
and allocation by creating combinations of supply and demand.

Demand Supply
• The willingness and ability of • The willingness and ability
buyers to purchase a product of producers to offer a
(a good or a service)
good or service for sale
 DEMAND AND SUPPLY

Price increases

produce more
purchase less

The Law of Demand The Law of Supply

Buyer Producers will
Buyers will purchase Demand
(demand) more of a PRODUCT offer (supply)
Producer
product as its price Supply more of a product
drops and less of a for sale as its price
product as its price purchase more produce less rises and less of a
increases. product as its
price drops.
Price drops
 DEMAND AND SUPPLY IN A MARKET ECONOMY
The point at which the
Market Price demand curve intersects
OR with the supply curve is
called the market price or
the equilibrium price.

A Demand Curve is a graph showing how many units of a

product will be demanded (bought) at different prices.

A Supply Curve is a graph showing how many units of a

product will be supplied (offered for sale) at different prices.
Airlines Tickets or Hotel Prices

• During Holiday season

• During off season
 SHORTAGE AND SURPLUS

• Shortage – when quantity demanded exceeds quantity supplied.

• Surplus – when quantity supplied exceeds quantity demanded
 PRIVATE ENTERPRISE SYSTEM (CAPITALISM)

• Private enterprise system – individuals can pursue their own interests

with minimal government restriction. It requires the presence of 4
elements:
1. Private property rights – ownership
2. Freedom of choice – buyers and sellers are free to choose products
and work or hire where/who they want.
3. Profits – motivates individuals to take risks
4. Competition – motivates businesses to operate efficiently.
 COMPETITION IN A MARKET ECONOMY

Competition
• occurs when two or more businesses vie for the same
resources or customers.

• forces all businesses to make products better or cheaper.

• motivates individuals to operate a business efficiently.

 DEGREES OF COMPETITION

Perfect Competition - Many small firms exist in an industry;

no single firm is powerful enough to influence price.
For perfect competition to exist, two conditions must prevail:
• all firms in an industry must be small, and
• the number of firms in the industry must be large
Example: Grocery stores, salt production, local farmers

Monopolistic Competition - Market or industry

characterized by numerous buyers and relatively numerous
sellers trying to differentiate their products from those of
competitors by differentiation strategies such as: branding,
design, advertising
Examples: Clothing stores, Coffee shops. Office supply
stores
 DEGREES OF COMPETITION

Oligopoly
• Market or industry characterized by few large sellers
with the power to influence the prices of their
products
Examples: Steel Industry, Airline Industry

Monopoly
• Market or industry in which there is only one producer
that can therefore set the prices of its products
Examples: Public Utility (Electricity & Water)
DEGREES OF COMPETITION
 DEGREES OF COMPETITION

❖Dominos Pizza Monopolistic Competition

❖A local fruits store Perfect Competition

❖Toyota Monopolistic Competition

❖STC Oligopoly

❖Saudi Electric Company Monopoly

DEGREES OF COMPETITION
 MEASURING THE HEALTH OF THE
ECONOMY

Economic indicators provide information about how an

economy is performing.
 ECONOMIC INDICATORS

Economic indicators
• Statistics that show whether an economic system is
strengthening, weakening, or remaining stable. They
help assess the performance of an economy.
ECONOMIC GROWTH, AGGREGATE OUTPUT, GDP
AND STANDARD OF LIVING

Aggregate output
• The total quantity of goods and services produced
by an economic system during a given period
• Primary measure of growth in the business cycle

Gross domestic product (GDP)

• The total value of all goods and services produced
within a given period by a national economy through
domestic factors of production
• Measure of aggregate output
 ECONOMIC GROWTH, AGGREGATE OUTPUT AND
STANDARD OF LIVING

Standard of living
• The total quantity and quality
of goods and services that
people can purchase with the
currency used in their
economic system.
• Higher GDP and higher
Productivity means higher SoL
 PURCHASING POWER PARITY

Price of a Big Mac in U.S. Currency in Jan 2020

The principle that exchange
rates are set so that the prices of
similar products in different
countries are about the same.

Purchasing power parity gives us

a much better idea of what
people can actually buy with the
financial resources allocated to
them by their respective
economic systems.
 PRODUCTIVITY
Productivity
• It is a measure of economic growth that compares how much a
system produces with the resources needed to produce it.

The amount of output produced compared with the amount of

resources used to produce that output:

1 U.S. worker + 1 U.S. dollar + 8 hours = 10 soccer balls

2 German workers + 1.37euros (1.5 dollars) + 8 hours = 10 soccer balls

 ECONOMIC STABILITY

Stability
• Condition in which the amount of money available in an
economic system and the quantity of goods and services
produced in it are growing at about the same rate.

Economic Stability is threatened by :

• Inflation
• Unemployment
 ECONOMIC STABILITY

Inflation
• Inflation occurs when widespread price increases plague
an economic system; the amount of money in the
economic system exceeds the amount of actual output.
• Inflation is measured by measuring price increases using
consumer price index (CPI).

The consumer price index (CPI)

measures inflation by determining the
change in prices of a hypothetical basket
of goods bought by a typical household.
 ECONOMIC STABILITY

Unemployment
• Unemployment is the level of joblessness among people
actively seeking work in an economic system.
 ECONOMIC INDICATORS
Economic indicators are key stats about the economy that can help you
better understand where the economy is headed.
1. GDP – It is one of the first indicators used to gauge the health of an
economy. It represents economic production and growth, or the size of
the economy.
2. Productivity - It is a measure of economic growth that compares how
much a system produces with the resources needed to produce it
3. Unemployment Rate – It measures how many people are unemployed
and actively looking for work.
4. CPI – It measures changes in prices of goods and services.
Other Indicators - The Stock Market, Interest Rates, Currency Strength,
Income and wages, and Inflation.
 Pair Work

Go to the below link:

1. Population of Saudi Arabia

2. GDP per capita
3. Unemployment Rate
4. Inflation
5. Exchange Rate

Link:

https://www.focus-economics.com/countries/saudi-arabia
END OF CHAPTER