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MGMT 371 Chapter 2 Book and Lecture Notes

by: Savannah Baron

MGMT 371 Chapter 2 Book and Lecture Notes MGMT 371 001

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These notes outline chapter 2 as explained by the book and in lecture
Principles of Management
Dr. Danielle Ammeter
Class Notes
Management, Intro to Management, management principles
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This 15 page Class Notes was uploaded by Savannah Baron on Saturday February 13, 2016. The Class Notes belongs to MGMT 371 001 at University of Mississippi taught by Dr. Danielle Ammeter in Winter 2016. Since its upload, it has received 22 views. For similar materials see Principles of Management in Business, management at University of Mississippi.


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Date Created: 02/13/16
Chapter 2—Book Notes I. Intro  Businesses are part of a constantly evolving ecosystem, they do not operate in isolation  Successful business leaders not only respond to changes in the global business environment but also try to influence it o i.e., lobbying, identifying niches in the market, etc. o This is taking a proactive stance to manage their environment and adapt strategies accordingly  1990’s, economy surged with Internet-related commerce o eBay, Amazon, Google…successful companies o Many start-ups lacked a sound business foundation, built themselves on overzealous expectations, and failed  2001, economy was just beginning to deal with technology meltdown when terrorists attacked  More recently, homeownership has risen, fueling a host of other businesses o i.e., automobiles, home improvement, appliances, landscaping o By 2007, many homeowners couldn’t afford payments on mortgages and large financial companies had imploded o Other vulnerable companies also collapsed  The constant changing nature of global business represents both challenges and opportunities for managers o Ex) GE has adapted, switching the focus of the company from manufacturing to services o Today’s managers have to deal with not only employees, customers, and suppliers, but also public advocacy groups, community interest forums, and media representatives  To achieve consistently strong performance, managers need tools to evaluate and navigate the business environment of the firm o Internal company processes and capabilities o External forces like gov’t regulations or consumer sentiment  Increasing globalization of markets has also created a new challenge o Companies can no longer be competitive by exclusively selling in their domestic markets o Opportunities are immense in emerging economies like China and India (China’s middle class population is almost equivalent to the total population of the US) o Entering foreign markets also means competing with foreign firms within each industry o Coca-Cola = good example of a brand with a successful global presence II. Globalization  Globalization: the integration and interdependence of economic, technological, sociocultural, and political systems across diverse geographic regions  Earliest ideas of globalization can be traced back to the Roman Empire  Dutch East India Company of the Netherlands is considered the first multinational company, & first company to issue stock to shareholders o Concept was to reduce competition, achieve economies of scale, and increase trade among regions in the world  International trade accelerated as European imperial powers traded with their colonies, but broke down during and after WWI o War caused countries to look inward and focus more on self-reliance  Following WWII, leading economists preached globalization leading to multitude of international trade agreements A. Global Trade Agreements  Agreement of GATT based on 3 main principles: o Most favored nation status; a tariff rate granted to one member would be extended to all members o National treatment; foreign firms would be subject to the same rules and regulations as a country’s domestic firms o Consensus; trade disputes would be settled by unanimous agreement of all parties to the dispute  Uruguay Round o Cut tariffs and created agreements in areas as varied as services, capital, intellectual property, textiles, ad agriculture o Created WTO, successor to GATT, created to supervise and liberalize international trade B. World Trade and Free-Trade Associations  After stumbling in 2008, global trade rebounded by 2010 but pace of growth was not consistent across the globe o Emerging/developing economies increased GDP at more than double the rate (%) of developed economies  World Trade is supported through a series of free trade agreements negotiated between various countries and overseen by the WTO  Europe = highest concentration of trade (65% of exports went to EU member countries), Africa = lowest (12% of exports stayed within Africa o Africa’s main export market was the EU  Largest Trade Associations (by size) 1. European Union o Created to reduce trade barriers in coal and steel trading ring, eventually developed into its current form o Created a single market by a system of laws that apply in all member states, guaranteeing the freedom of movement of people, goods, services, and capital o Introduced the Euro as common currency in 1999 replacing numerous national currencies and unified a common marketplace to compete on par with the United States 2. NAFTA o US, Canada, and Mexico eliminated tariffs among the countries o Today forms the largest trading bloc in the world in terms of GDP o US and Mexico have strengthened their ties economically and politically through this agreement and many industries have benefitted as well 3. ASEAN o Association of South East Asian Nations (Indonesia, Malaysia, Philippines, Singapore, and Thailand o 3 primary goals: accelerating economic growth, promoting social and cultural development, and ensuring peace and stability o Most diverse population of all major trade association in terms of developed/developing economies o Trade within the region is far lower than in the EU and NAFTA o Strong foundation for future expansion and economic growth; trade has more than tripled with China since 1990’s 4. MERCOSUR o Argentina, Brazil, Paraguay, Uruguay, and Venezuela o Created to promote economic growth and integration through the reduction of tariffs and the free flow of goods within the region o Seeks to create an economic juggernaut in South America  While many critics decry some by-products of trade agreements, overall economic effect has been mostly positive  Chiquita has seen some of the serious effects of trade restrictions on firm viability when restrictive tariffs essentially shut the company off from its most important end markets  Supporters of globalization and free trade claim that reducing trade barriers increases economic prosperity for all  Comparative Advantage: theory that proclaims countries should specialize in producing goods for which they have the lowest opportunity cost of production o As a country continues to specialize, it generally becomes a more efficient producer o All countries involved in trade benefit from access to cheaper products  Overall, free trade can lead to lower prices, more employment, higher output, and a higher standard of living for those in developing countries III. External Environment  To be consistently successful, managers must understand all aspects of the business environment in which their firms operate  External Environment: represents all of the external forces that affect the firm’s business o General Environment = primary external forces that affect a firm, some stronger than others (i.e., political/legal forces in US healthcare) o Task Environment = includes entities that directly affect a firm on a continuous basis and include competitors, suppliers, and customers (i.e., Apple puts pressure on competing firms when releasing the iPad) A. General Environment  Form the basis of the strategic context in which all businesses in a particular industry compete  First step- identify the external dimensions that are pertinent to the firm and to develop strategies to help deal with them 1. Technological Dimension  Technological Dimension: refers to the processes, technologies, or systems that a firm can use to produce outputs  Often includes technology behind a firm’s manufacturing line or hardware/software used to run distribution system  Successful companies are able to capitalize on new innovations o Ex) Napster was only successful in the short- term by sparking the initial revolution of digital music, but didn’t recognize the importance of key stakeholders (gov’t regulators, recording artists, etc.). The company’s failure paved the way for Apple to satisfy all constituents in the music business 2. Economic Dimension  Often includes GDP, inflation, unemployment, consumer sentiment, and interest rates of all the countries where it sells its products or services  Understanding economic dimension is particularly important for managers looking to conduct business abroad  To gain knowledge, a manager should seek to understand economic components like structure, resource position, currency, and labor issues in the countries where it is doing business  Developed countries (Canada, Australia, Japan, Germany) are marked by high levels of free market principles, similar to US o Stable economic conditions  In less-developed countries, inflation and interest rates can fluctuate wildly because of fragility and infancy of economies  Manager must also consider resource position of global regions, because most markets don’t look like the US in terms of resource development and availability o Most developing countries don’t have reliable highway systems/infrastructure  Manager needs to investigate currency issues o Less developed countries have local currencies that can swing dramatically on a daily basis and change a consumer’s buying power o Firm can lose money if it doesn’t make adjustments in its prices to account for disparity  Manager must consider the labor situation in a global market o Markets differ widely in terms of the skill and education of the labor force o In general, it’s expensive for a firm to relocate an employee from domestic operations to a global site  Homebuilding industry is particularly prone to economic shifts, and often serves as a bellwether of the viability of the economic landscape 3. Political and Legal Dimension  Political Dimension: refers to the political events and activities in a market that affect a firm  Unrest and violence in many countries can have a direct or indirect impact on a firm in a global market o Can directly impact a firm when it leads to destruction of property o Can indirectly impact by destroying consumer confidence in a country o Firms must also be aware of the potential for asset expropriation in certain global markets  Legal Dimension: regulations and laws that a firm encounters in its markets o Can dictate the way a firm must process its products or market to consumers 4. Sociocultural Dimension  Refers to demographic characteristics as well as to the values and customs of a society  More prominent demographic forces that can impact a firm are the aging and changing racial composition of a population o Managers must consider this in how they run their business and hire employees  US’s Baby Boomer generation is getting older (in Japan and Germany as well) while India and Nigeria have a much younger population  Large companies with aging populations will have to replace a sizeable portion of upper management with younger employees o To do so, firms will likely need to look outside the company to fill key positions….large firms previously hired and promoted from within the organization  Since the older population has a greater disposable income and more leisure time, they are an attractive target market for many industries o EX) baby boomers make up 40% of golfers making them the perfect demographic for the PGA to target o Also more beauty conscious, therefore more interested in plastic surgery  Companies also develop strategies for the population’s changing racial composition o Hispanic population is growing faster than an other group o Ex) Home Depot used Spanish names for paint colors because they believed Hispanics were more likely to purchase colors advertised in Spanish  Most global markets still differ widely on important cultural dimension st o 1 step for managers is to gain an understanding or feel for the new culture (differences in religious beliefs, race, social norms, and language) o Trade between countries that share a common language is estimated to be 3x greater than trade between countries that do not share a language  Social values pose a much greater challenge for a company wanting to expand globally  Social Values: deeply rooted system of principles that guise individuals in their lives and interactions o Social values can affect the way a firm’s local employees act and behave o Can also affect the preferences of customers for certain product attributes  5 Universal Social Dimensions can help a manager better explain the social values of a particular country B. Task Environment  A firm’s task environment includes entities that directly affect the firm in a more immediate way, including competitors, suppliers, and customers o There parties have the ability to exert a greater and more constant influence over the firm 1. Competitors  Competitor: any organization that creates goods or services targeted at a similar group of customers  Competitive landscape has vastly changed because of technology, the rapid pace of globalization, and the speed of innovation  Technological and global changes have fueled competition in industries such as electronics, automobiles, and computers  Chinese companies in particular are posing a large competition to US firms 2. Suppliers  Supplier: provides resources or services for a firm to help in its creation of products and services o Not economical for firms to produce everything in-house  Firms generally maintain several sources of supplies for specific components to reduce reliance on one company 3. Customers  Customers: the people or other organizations that buy the firm’s products and services  Customer represents the most important aspect of the firm’s environment to most managers  “The customer is king” “The customer is always right”  Many firms have different sets of customers (retail and commercial) o Both sets of customers are important, but the relationships and sales processes involved are vastly different IV. Internal Environment  Internal Environment: consists of several dimensions that affect the firm from within its boundaries including owners, board of directors, employees, and culture A. Owners  Owners: people or institutions that maintain legal control of the organization  Sole proprietorship makes up the majority of businesses in the US (75%+ of US firms employ less than 10 people)  Firms owned privately do not trade their securities over an exchange  Rather have a set amount of stock that represents the owners’ equity in the business  Companies that are publically owned/traded must comply with several federal and state policies including the reporting of their earnings on a regular basis B. Board of Directors  Board of Directors: group of individuals elected by the shareholders and charges with overseeing the general direction of the firm  Oversee managers to ensure that they serve the interests of a diverse group of shareholders  Some are made up mostly of company executives, while others have substantial representation from nonexecutives  Because of some corporate scandals, many firms have moved to make their boards more independent with less representation from their executive ranks  Sarbanes-Oxley Act: passed in 2002, states that board members had to prepare financial statements and ensure sound reporting o Also created new responsibilities for corporate executives, corporate directors, lawyers, and accountants o Increased costs of audit fees, legal fees, board compensation, and insurance premiums  If fraud is found to be occurring today, directors can be held accountable by shareholders C. Employees  Employees: people who make the products and provide the services that allow the firm to exist  Extremely important component of a firm’s internal environment  Most firms have a mix of permanent and temporary employees  Firm’s internal environment has increased in complexity because of a new mix of employees D. Culture  Culture embodies who and what an organization is or represents  Observable characteristics can include physical space, how people dress, the hours/patterns of work schedules, or the overall behavior of its members  At its core, culture is a pattern of basic assumptions about how an organization should work and the manner in which individuals in an organization should interact with each other o Taught both implicitly and explicitly about what is accepted behavior  Culture develops over long periods of time, but is often the by-product of the founder’s personality  Firm’s culture is important for attracting, developing, and retaining a competent workforce and for creating a competitive advantage in the marketplace V. Chapter Review A. Summary  Globalization has resulted from an overall reduction in trade barriers and tariffs around the world o Effects have been mostly positive; better access to employment, commercial, and product opportunities around the world o Globalization has made life more challenging for managers, since they have to know how the global business environment affects their firms and industries  With lower trade barriers, firms can expect to see more competition in the marketplace o Trade agreements and organizations have changed the way managers think about competition  External environment includes 2 primary components: general and task environments o General environment represents primary external forces that impact a firm including technology, economic conditions, political and legal structures, and sociocultural factors o Task environment consists of the dimensions that have the most immediate impact on a firm including its competitors, suppliers, and customers  Managers must also pay close attention to their internal task environment, which consists of several dimensions that affect the way a firm operates, including owners, board of directors, employees, and organizational culture B. Key Terms  Board of directors  Comparative advantage  Competitor  Customers  Economic dimension  Employees  External environment  General environment  Globalization  Internal environment  Legal dimension  Owners  Political dimension  Social values  Sociocultural dimension  Supplier  Task environment  Technological dimension Chapter 2—Book Notes I. Reduction in Oil Prices  One thing (price of oil) can affect so many different things  China…buys less oil  Shale oil in US  Saudi Arabia continues  Iran—nuclear deal  Great for Eurozone  Bad for oil exporters o Iraq needs to fund war, infrastructure issues, etc. o Venezuela inflation; use money from oil proceeds to fund social programs o Russia & Nigeria; damage to overall economy  State economies o When price of oil goes down, negative effects for oil exporting states (i.e., Louisiana)  Automobile industry o People buy cars (bigger cars) when oil prices are lower o Bad emissions, ozone, regulations on MPG  Agriculture o Tractors, pick up trucks  Airline costs o Fuel costs for airlines eventually go down  Consumer spending o People are willing to spend more on other things since they don’t have to spend as much on fuel  The environment II. Managing in Difficult Times  Business Leaders o Respond to changes in the global business environment and try to change it o Lobby to influence government’s role in business o Identify growing market niches or target consumer segments and invest in research and development o Are proactive in adapting their strategies to an ever- changing global marketplace o Work with a broader array of stakeholders including public advocacy groups, community forums, and the media III. Globalization (outer circle of firm’s environment)  Integration and interdependence of economic, technological, socio-cultural, and political systems across diverse geographic regions  Advocated by leading economists and politicians post WWII  Movement led to the creation of several international trade agreements  US’s largest trading partner = Canada  Know ASEAN, EU, MERCOSUR, NAFTA o What might a Japanese company (Toyota) do to take advantage of NAFTA?  Open a plant in one of the NAFTA countries  World Population o 7.4 billion people in the world  Biggest countries: China (1.4 bil), India (1.2 bil), US (300 mil) o What does this mean? Opportunities? Threats?  Laws are different, overcrowding, different regulations  Threats of Globalization o Distribution systems o Income streams—lack of stability  Movement/stability of economy o Pollution  Causing health issues o Governments  Meddling  Failing to provide basic services o Laws—pirating (squeeze profit margins)  Intellectual property is not as protected in other countries  Opportunities of Globalization o Huge potential market o Growing economies o Brainpower for cheap o Optimism o Polycentric innovation (R&D around the world) o Come up with smart ways of designing products/services and organizing processes to reach the billions of consumers just entering the global market  Comparative Advantage o Countries should specialize in producing goods for which they have the lowest opportunity cost of production  Specialization in a particular product, helps become an efficient producer o Free trade leads to a more efficient allocation of resources  Results in all countries that are involved in trade benefiting from access to cheaper goods IV. The External Business Environment 1. General Environment a. Socio-cultural Demographics  Increasing age in many developed countries o Opportunities? (Employees, customers, values)  This older group of people is a target demographic in itself; golf industry, assisted living facilities, etc. o Threats?  Older execs will retire and take contextual knowledge with them  Less experienced, younger people will have to fill roles  Racial Composition o White people will make up <50% of racial composition soon o Must know how to market to these different demographic groups  Religious Beliefs  Social norms/values o Disney in France  Serving alcohol, preferred physical appearance (facial hair, etc.)  Languages  Sexual Orientation b. Social Values  The deeply rooted system of principles that guide individuals in their everyday choices and interactions o Affects employee behavior and customer preferences  Social Dimensions o Small v. Large Power Distance o Individualism v. Collectivism o Masculinity v. Femininity o Uncertainty Avoidance o Long v. Short-Term Orientation 2. Task Environment  Competitor: any organization that creates goods or services target at a similar group of customers  Supplier: a company that provides resources or services for a firm to help in its creation of products and services  Customers: People or other organizations that buy a firm’s products or services 3. Internal Environment  A group of parties or factors that directly impact a firm, including owners, board of directors, employees, and culture


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