In a capitalistic system, such as that in the United States, businesses exist to earn profits for owners; within certain broad constraints, an owner is free to set up a new business, grow that business, sell it, or even shut it down. But consumers also have freedom of choice. In choosing how to pursue profits, businesses must take into account what consumers want or need. No matter how efficient a business is, it won’t survive if there is no demand for its goods or services. Neither a snowblower shop in Florida nor a beach umbrella store in Alaska is likely to do well.

If enterprising businesspeople can spot a promising opportunity and then develop a good plan for capitalizing on it, they can succeed. For example, when large businesses such as Circuit City, Linens-N-Things, and Blockbuster Video close their doors, other firms profit from these closings by handling the inventory liquidations of these failed companies. And as oil prices recently dropped, gasoline producers like Exxon Mobile and BP have seen their profits decline. But food distributors like Sysco and delivery services such as FedEx saw their expenses drop and hence their profits grow. In general, then, business opportunity involves goods or services that consumers need or want—especially if no one else is supplying them or if existing businesses are doing so inefficiently or incompletely.

So what are the benefits of businesses? Businesses produce most of the goods and services we consume, and they employ most working people. They create most innovations and provide a vast range of opportunities for new businesses, which serve as their suppliers. A healthy business climate also contributes to the quality of life and standard of living of people in a society. Business profits enhance the personal incomes of millions of owners and stockholders, and business taxes help to support governments at all levels. Many businesses support charities and provide community leadership. However, some businesses also harm the Earth’s environment, and their decision makers sometimes resort to unacceptable practices for their own personal benefit.

We now turn our attention to the environment in which businesses operate. Understanding the environment provides a foundation for our subsequent discussions dealing with economic forces that play a major role in the success and failure of businesses everywhere.

The domestic business environment refers to the environment in which a firm conducts its operations and derives its revenues. In general, businesses seek to be close to their customers, to establish strong relationships with their suppliers, and to distinguish themselves from their competitors. Take Urban Outfitters, for example. The firm initially located its stores near urban college campuses; it now locates stores in other, often more upscale, areas as well. The company also has a strong network of suppliers and is itself a wholesale supplier to other retailers through its Free People division. It has established a clear identity for itself within the domestic business environment that enables it to compete effectively with such competitors as American Eagle and J. Crew.

The global business environment refers to the international forces that affect a business. Factors affecting the global environment at a general level include international trade agreements, international economic conditions, political unrest, and so forth. For example, as political protests spread through much of the Middle East in 2014, oil prices began to surge and companies with operations in the region took emergency measures to protect their employees. But in 2015, a global oil surplus caused oil prices to plunge. At a more immediate level, any given business is likely to be affected by international market opportunities, suppliers, cultures, competitors, and currency values. For instance, Urban Outfitters currently has stores in the United States, Canada, Belgium, France, Denmark, Germany, Ireland, Scotland, Sweden, and several others and ships to customers in 133 countries. But as it has expanded into other parts of the world, it has to contend with different languages, more diverse cultures, different forms of technology, different currencies, and many other factors. Complicating things further, many of its suppliers are foreign companies.

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 that are used to perform business activities. For instance, Urban Outfitters relies on a sophisticated information system that tracks sales and inventory levels to be highly responsive to its customers. The firm also enjoys considerable success with its e-commerce websites. Urban Outfitters has developed a strong market presence in Japan, for example, even though it has no traditional brick-and-mortar retail outlets in that country.

The political-legal environment reflects the relationship between business and government, usually in the form of government regulation of business. This environment is important for several reasons. First, the legal system defines in part what an organization can and cannot do. For instance, Urban Outfitters is subject to a variety of political and legal forces, including product identification laws, employee hiring restrictions, and local zoning requirements. Likewise, various government agencies regulate important activities, such as advertising practices, safety and health considerations, and acceptable standards of business conduct. Pro- or anti-business sentiment in government and political stability are also important considerations, especially for international firms. For instance, shortly after President Barack Obama first took office, a number of new regulations were imposed on businesses. Among other things, he signed legislation that imposed new restrictions on lobbying and on political action committees (these regulations are discussed in Chapter 2). But, shortly after Donald Trump was elected president in 2016, he pledged to reduce what he called excessive government regulation.

The sociocultural environment includes the customs, mores, values, and demographic characteristics of the society in which an organization functions. Sociocultural processes also determine the goods and services, as well as the standards of business conduct, that a society is likely to value and accept. For example, a few years ago, Urban Outfitters introduced a Monopoly-like game called Ghettopoly. The company received a lot of unfavorable publicity about the game, based on critics’ charges that it made light of poverty and other social problems. In response, Urban Outfitters pulled it from shelves and discontinued its sale. But the firm continues to push the limits. For instance, in recent years, Urban Outfitters has been criticized for selling t-shirts with a pocket patch resembling the yellow stars Jews were forced to wear during the Nazi regime in Germany, for clothing items with a color option listed as Obama Black, and for a holiday catalog with numerous items containing words and images that some people saw as offensive.⁴

The economic environment refers to relevant conditions that exist in the economic system in which a company operates. For example, if an economy is doing well enough that most people have jobs and wages are high, a growing company may find it necessary to pay even higher wages and offer more benefits to attract workers from other companies. But if many people in an economy are looking for jobs, a firm may be able to pay less and offer fewer benefits. Like many retailers, Urban Outfitters experienced some financial pressures during the recent recession, but its revenues and profits stabilized again when the economy began to rebound. But, like many other brick-and-mortar retailers, Urban Outfitters is also facing intense competition from online retailers like Amazon and Alibaba and has recently closed several underperforming stores. The rest of this chapter is devoted to the economic environment; the other environments of business are covered throughout the rest of the book.