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)
Primary 2.8% Secondary

42.3% 54.9%

Tertiary

1974

Output of industrial sectors

(as % of GDP)
Primary 2.8% Secondary Primary 5.8% Secondary 23.3% 42.3% 54.9% 70.9%

Tertiary

Tertiary

1974

2002

Employment by industrial sector

(% of total employees)
Primary 3.4% Secondary

41.9% 54.7%

Tertiary

1974

Employment by industrial sector

(% of total employees)
Primary 3.4% Secondary Primary

1.8%

Secondary

18.4%
41.9% 54.7% 79.8%

Tertiary

Tertiary

1974

2002

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

Section
A Agriculture, hunting and forestry B Fishing C Mining and quarrying
CA Mining and quarrying of energy producing materials CB Mining and quarrying except energy producing materials DA DB DC DD DE Manufacture of food products, beverages and tobacco Manufacture of textiles and textile products Manufacture of leather and leather products Manufacture of w ood and w ood products Manufacture of pulp, paper and paper products; publishing and printing DF Manufacture of coke, refined petroleum products and nuclear fuel DG Manufacture of chemicals, chemical products and man-made fibres DH Manufacture of rubber and plastic products DI Manufacture of other non-metallic mineral products DJ Manufacture of basic metals and fabricated metal products DK Manufacture of machinery and equipment (other) DL Manufacture of electrical and optical equipment DM Manufacture of transport equipment DN Manufacturing not elsew here classified

Subsection

D Manufacturing

E Electricity, gas and w ater supply F Construction G Wholesale and retail trade, repair of motor vehicles and personal and household goods H Hotels and restaurants I J L Transport, storage and communication Financial intermediation Public administration and defence; compulsory social security

K Real estate, renting and business activities

M Education N Health and social w ork O Other community, social and personal service activities P Private households w ith employed persons Q Extra-territorial organisations and bodies

The Structure of Industry

Changes in the structure of UK economy
expanding and contracting sections
by output by employment

GDP by industry (1980 = 100)

240 230 220

GDP by industry (1980 = 100)

210 200 190 180 170 160 150 140 130 120 110 100 90 80 1980 1985 1990 1995 2000

C
A/B

GDP by industry (1980 = 100)

240 230 220

GDP by industry (1980 = 100)

210 200 190 180 170 160 150 140 130 120 110 100 90 80 1980 1985 1990 1995 2000

C D A/B

GDP by industry (1980 = 100)

240 230 220

GDP by industry (1980 = 100)

210 200 190 180 170 160 150 140 130 120 110 100 90 80 1980 1985 1990 1995 2000

C D A/B

GDP by industry (1980 = 100)

240 230 220

GDP by industry (1980 = 100)

210 200 190 180 170 160 150 140 130 120 110 100 90 80 1980 1985 1990 1995 2000

E
F

C D A/B

GDP by industry (1980 = 100)

240 230 220

GDP by industry (1980 = 100)

210 200 190 180 170 160 150 140 130 120 110 100 90 80 1980 1985 1990 1995 2000

G/H J-Q E F

C D A/B

Employment by industry (1980 = 100)

Employment by industry (1980 = 100)
150 140 130 120 110 100 90 80 70 60 50 40 30 20 1980 1985 1990 1995 2000

A/B

Employment by industry (1980 = 100)

Employment by industry (1980 = 100)
150 140 130 120 110 100 90 80 70 60 50 40 30 20 1980 1985 1990 1995 2000

A/B D

Employment by industry (1980 = 100)

Employment by industry (1980 = 100)
150 140 130 120 110 100 90 80 70 60 50 40 30 20 1980 1985 1990 1995 2000

A/B D E C

Employment by industry (1980 = 100)

Employment by industry (1980 = 100)
150 140 130 120 110 100 90 80 70 60 50 40 30 20 1980 1985 1990 1995 2000

F A/B D E C

Employment by industry (1980 = 100)

Employment by industry (1980 = 100)
150 140 130 120 110 100 90 80 70 60 50 40 30 20 1980 1985 1990 1995 2000

J-Q

G/H

I F A/B D E C

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)

Sector All Size of enterprise SMEs Large firms SMEs Large firms SMEs Large firms SMEs Large firms SMEs Large firms SMEs Large firms SMEs Large firms SMEs Large firms SMEs Large firms SMEs Large firms SMEs Large firms SMEs Large firms SMEs Large firms Number of enterprises (and % of sector) 3 739 565 (99.8) 6 775 (0.2) 181 115 25 5 705 95 290 425 2 325 691 595 205 540 655 1 000 123 220 205 235 110 455 63 650 350 866 470 1 015 117 355 75 232 470 565 391 695 260 (99.9) (0.1) (98.4) (1.6) (99.2) (0.8) (99.9) (0.1) (99.8) (0.2) (99.8) (0.2) (99.8) (0.2) (99.5) (0.5) (99.9) (0.1) (99.9) (0.1) (99.8) (0.2) (99.9) (0.1) Employment (% of sector) 55.4 44.6 97.5 2.5 14.6 85.4 50.8 49.2 84.5 15.5 50.1 49.9 53.8 46.2 39.1 60.9 21.4 78.6 70.2 29.8 84.4 15.6 42.0 58.0 73.1 26.9 Turnover (% of sector) 51.4 48.6 97.5 2.5 19.8 80.2 36.4 63.6 74.7 25.3 52.8 47.2 58.5 41.5 38.1 61.9 n/a n/a 71.9 28.1 86.0 14.0 36.8 63.2 63.5 36.5

A, B C, E D F G H I J K M N O

The Determinants of Business Performance

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

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