UPI Study › Courses › Business Essentials › Free lessons › Lesson 1.1 Free with a free account
Decoding Economic and Legal Forces Shaping Business Operations
Business Essentials · Chapter 1: The Business Environment and Ethical FoundationsSection 1.1 · lesson 1 of 10514 min · free with a free account
Free preview
Create a free account to keep watching
It takes a minute and costs nothing. Your free account unlocks all of Chapter 1 and 3 more lessons of Business Essentials.
Lesson complete
Earn the 3 college credits for Business Essentials
Enrolling adds a quiz after each lesson, the graded work and the official transcript. Recommended for credit by NCCRS.
Next lesson: Understanding Technological Shifts: Business Effects and Strategic Responses →Next lesson: Understanding Technological Shifts: Business Effects and Strategic Responses →
In this lesson
What surrounds a business, and how it reaches each decision.
- Define a business and its three organizational forms
- Separate the six external forces from the internal environment
- Trace one economic change to five business decisions
- Map the sources, levels and areas of business law
Free study notes
Get this lesson's notes by email
The key points and 4 practice questions with answers, in your inbox. One email, free.
One email. Unsubscribe in one click.
Transcript
Everything said in the video, section by section (1,958 words). Read along, or search it.
The Business Environment and Ethical Foundations
Decoding Economic and Legal Forces Shaping Business Operations
Every business, however small, lives inside forces it did not choose. This section is about those forces, and about the part a business does control. We do four things. First, we define what a business is, in a deliberately wide sense. Second, we name six external forces, and set them against the internal environment. Third, we follow one rise in ingredient prices through five separate decisions at a small bakery. And fourth, we map the law. Where rules come from, who makes them, and what they cover. One idea ties it all together. A force can only be handled in time if someone is actually watching for it.
What A Business Is
Creating Value for Others
Start with the definition, because it is wider than most people expect. A business is an organization that creates value by providing goods or services to others. People often use the word as if it meant only firms chasing profit. This definition deliberately does not. A for-profit organization is one whose owners expect to keep any surplus left after costs are paid. A non-profit must devote any surplus to its stated mission. It cannot hand that surplus to owners. A public organization is owned and operated by a government body, such as a city transit authority. The three differ in who receives the surplus, and in who answers for the organization's conduct. But they share something more basic. Each one takes in resources, and turns them into something other people value. And each depends on people and institutions outside itself to do it. That dependence is what this chapter studies.
Figure 1.1.1
Six Forces Around One Bakery
Those outside people and institutions make up the external environment. It is the set of forces beyond an organization's control, which still shape what it can do, what it must do, and what will succeed. Picture a bakery. It cannot set the price of wheat, or the terms of a city license. It cannot choose the tastes of the people walking past its window. It can only notice, interpret, and adjust. A great deal of good management is exactly that. Spotting a force early, while acting on it is still cheap. This chapter sorts the environment into six forces, placed around a fictional neighborhood bakery called Marlowe Bakehouse. The economic force is introduced here, and chapter two analyzes it in depth. Legal and regulatory forces fill the second half of this section. Technology follows in subchapter one point two, competition in one point three, and society in one point four. The global environment, which reaches even a purely domestic business, is the subject of one point five. The key point is that each force reaches a different decision first. The economy reaches pricing and hiring. Global forces reach the supply of flour and packaging. So a business that watches only the forces nearest its daily work will be surprised by the rest.
Internal Environment
What a Business Controls
Set against those outside forces is the internal environment, the resources and capabilities a business controls. Resources are the assets it owns or can draw on. Money, equipment, premises, and people. Capabilities are what it has learned to do well, by combining those resources. Fast order fulfillment is a capability. So is careful quality control. The distinction that matters here is control. A business can change its internal environment by decision. It can hire, train, buy equipment, or redesign a process. Its external environment, it can only respond to. It adapts to a force it cannot alter, or prepares in advance for one it can see coming. Confusing the two produces two characteristic errors. The first is blaming an outside force for a problem that was really internal. The second is waiting for an outside force to change, when the only thing that can change is the business.
Economic Environment
Five Conditions That Matter Most
Now take the first force, the economy. The conditions that matter most can be named without any economic theory at all. Demand is the willingness and ability of customers to buy, at a given price. It takes both. Employment conditions describe how easy or hard it is to find work. That cuts two ways. It shapes customers' incomes, and it shapes how hard it is to hire. Credit availability is how readily, and how cheaply, businesses and households can borrow. Input prices are what a business pays for its materials, energy, and services. Consumer confidence is how secure households feel about their finances. Secure enough to spend, rather than save. Public agencies measure these. The Bureau of Labor Statistics reports on employment and consumer prices. The Bureau of Economic Analysis covers national output and spending, and the Federal Reserve covers credit and interest rates. How those measures are built, and why economies expand and contract, waits for chapter two. For now, the economy is simply the force that reaches decisions most directly.
Worked Example
When Flour and Butter Cost More
To see how directly, go back to Marlowe Bakehouse. It is a fictional bakery with six employees. It sells bread and pastries to nearby households, and it supplies two local cafes. Suppose the prices of flour and butter rise. The figures here are illustrative, built for the exercise. Before the increase, ingredients cost sixty cents per loaf. Afterward, they cost sixty-nine cents. The loaf sells for four dollars, and all other costs come to two dollars and ninety cents. So the margin per loaf falls from fifty cents to forty-one cents. The first decision this reaches is pricing, the choice of what to charge. Raising the price by ten cents would restore most of the margin. But only if customers keep buying at the higher price. And that depends on demand, and on what competitors charge. So price is not really a single decision. It is a judgment about how the other forces will respond.
Longer Routes
One Change, Five Decisions
The same price rise reaches other decisions too, by longer routes. Hiring is one. A bakery earning less per loaf may delay adding a weekend baker. Inventory is the stock of goods and materials held for future use. A bakery expecting further increases may buy flour in larger quantities now. That ties up cash, and it risks spoilage. Investment means spending on assets expected to produce returns over several years. A new oven is easier to justify when customers are confident, and harder when they are cutting back. Credit terms are the conditions on which a business buys from suppliers, or lends to customers. A supplier that is itself short of cash may demand payment sooner. Meanwhile, a cafe customer may ask for more time. Count them up. One economic change has reached five separate decisions. Each has its own delay, and its own trade-off. An economic change rarely arrives as just one problem.
Sources Of Law
Where a Rule Comes From
Now to the second half of the section, the legal and regulatory environment. Business law comes from several sources. Knowing the source of a rule tells a business who can change it, and where to look. Constitutional law is the body of principles in the federal and state constitutions. Those principles limit what governments may do, and divide authority among them. Statutory law is made of statutes, the laws that legislatures enact. Regulatory law is the detailed rules issued by government agencies, under authority a statute has delegated to them. Common law is made by courts, through decided cases. It remains central in areas such as negligence, and the interpretation of agreements. Contract law governs the enforceable promises that parties make to one another. It is unusual, because the parties themselves write much of the rule.
Levels Of Government
Which Law Applies?
Authority is also divided by level of government. Federal authority covers matters given to the national government, such as regulating commerce among the states. State authority covers much else. In some areas, it is the primary authority. Forming corporations and limited liability companies is largely a state matter. So is regulating insurance. That means the rule in one state cannot be assumed to be the rule in another. Local authority belongs to cities and counties. It covers zoning, business licenses, and signage. Now the idea to hold onto. Federal law frequently sets a floor. A floor is a minimum standard. States may add further requirements above it. So a business operating in several states faces several sets of rules on the same subject. The practical question is never only what the law says. It is which law applies.
Table 1.1.1
Seven Areas of Regulation
Regulation reaches a business through seven principal areas. Formation and licensing covers the legal creation of a business, and its permits to operate. It is mainly state and local. Employment rules cover wages and hours, under the federal Fair Labor Standards Act. They cover workplace safety, through the Occupational Safety and Health Administration. And they cover discrimination, under Title Seven of the Civil Rights Act of nineteen sixty-four. State law often adds more. Consumer protection governs truthful advertising, product safety, and lending disclosures, under the Federal Trade Commission Act and others. Competition rules ban conduct that suppresses rivalry. The Sherman Act and the Clayton Act are central here. Environmental rules cover emissions, waste, and land use, under laws such as the Clean Air and Clean Water Acts. Tax rules set what a business owes each level of government, and when it must report. Industry-specific rules add more, such as food safety for a bakery, or licensing for a financial institution. Two patterns stand out. Most areas involve several levels of government, and compliance is owned by several functions. So hiring a first employee can trigger formation, employment, tax, and industry rules at once. No single department sees them all.
Compliance
Constraint and Opportunity
Meeting those rules is called compliance. It means finding out which rules apply, and changing practice to meet them. It also means keeping records that show the rules were met, and correcting failures. Compliance is a business function, and it has real costs. Staff time, fees to advisers, record-keeping systems, and the opportunity cost of slower decisions. Those costs do not fall equally. A fixed reporting obligation weighs more on a six-person bakery, than on a firm with its own compliance department. That is one reason regulation is so often argued about in terms of its burden on small firms. Whether a particular rule is worth its cost is contested. Reasonable people disagree, and it is not settled here. But regulation is more than a constraint. A food safety standard stops a business from cutting corners. That protects careful firms from a less careful rival. A licensing requirement can keep some competitors out. A new environmental rule can create demand for firms that already meet it. So the same rule can be a cost for one firm, and an opening for its neighbor.
Scanning
How a Signal Reaches a Decision
None of this helps a business that is not watching. Scanning is the systematic watching of the environment for changes that matter. It fails when nobody is responsible for it. In a small business, that is the usual condition. Larger organizations divide the job. Finance watches credit and the wider economy. Human resources watches employment rules and the labor market. Marketing watches customers and competitors. Operations watches suppliers and safety rules, and legal staff watch regulation. In a small business, one person, usually the owner, does all of it in the margins of the day. Here is a composite case. Dana owns Alder Signworks, a fictional three-person shop that makes storefront signs. A customer mentions that her sign permit was returned. The city had revised its rules on illuminated signs. Dana had heard nothing. Two of her current jobs involve illuminated signs, and one is already built. She gets the revised rule, confirms what it requires, and tells both customers the same day. The change had traveled through a public channel. But nobody was assigned to watch it, so it arrived by accident. Afterward, she sets a monthly check of the city's rule changes, and asks her permit contact to email her directly.
About Business Essentials at UPI Study
Business Essentials (Business 100) is a self-paced online course of 105 video lessons in 24 chapters, from the business environment, economics and global markets to ownership, management, leadership, operations, people, marketing, accounting, finance and banking. It carries a NCCRS credit recommendation for 3 semester credits.
Every lesson transcript is free on pages like this one, and the videos are free with a free UPI Study account. Enrolling adds a practice quiz after each lesson, the graded work and final exam that earn the credit, lifetime access, and an official transcript on completion. UPI Study has helped over 130,000 students with college credits. ACE and NCCRS have over 2,100 cooperating colleges that will consider accepting credits; the final decision is with the universities.
Enroll now → Course details Download the syllabus All Business courses Every course with PRO →
Why take it here
Why students take Business Essentials with UPI Study
Where the credit goes
Universities that work with NCCRS
Business Essentials carries a NCCRS credit recommendation. These universities work with NCCRS; some are UPI Study's signed partners. ACE and NCCRS have over 2,100 cooperating colleges that will consider accepting credits; the final decision is with the universities.
Thomas Edison State UniversitySigned partner
University of the PeopleSigned partner
Charter Oak State CollegeSigned partner
Strayer UniversitySigned partner
Columbia Southern UniversitySigned partner
Indiana TechSigned partner
Penn StateWorks with NCCRS
Southern New Hampshire UniversityWorks with NCCRS
SUNYWorks with NCCRS
+many more cooperating universitiesFind my college →Find my college → Not listed? Ask Athena in the corner of this page, or book a 15-minute call.
FAQ
Questions students ask us
About Decoding Economic and Legal Forces Shaping Business Operations
What is the difference between a business's external and internal environment?
What are the main sources of business law in the United States?
How does a rise in ingredient prices affect a small business's profit margin?
Why is regulatory compliance harder for small businesses?
About the Business Essentials course
How many college credits is Business Essentials?
How much does Business Essentials cost and what is included?
Which universities accept UPI Study credits?
How long does Business Essentials take?
How are the exams done?
How do my credits reach my college?
Ready for the full course? Earn 3 credits in Business Essentials.
105 video lessons, a quiz after each one, and the graded work that earns the credit. Recommended for credit by NCCRS.
3 credits · NCCRSEnroll →