Effects of the Economic Environment on Managers’ Decision-Making Activity

Plan

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Globalisation, which Johnson and Turner (2010) define as “the growing interconnected of countries world-wide through the increasing volume and variety of cross-border transactions” (p. 21), has arguably created the most dynamic and diverse environment in which a business can operate. Held, McGrew, Goldblatt and Perraton (1999) argue that the concept of globalisation has given rise to three main viewpoints: hyper globalist perspective, sceptical perspective and the transformationalist perspective. Firstly, the hyper globalist view argues that globalisation is a recent phenomenon and that the nature of a global market dissolves sovereignty and the authority of nation-states. Secondly, the sceptical approach points out that globalisation first started in the 19th century, and promotes regionalisation, whereby only developed countries benefit from this phenomenon. Finally, transformationalists believe that there is no single cause for globalisation and that its outcome cannot be determined.

The effects of globalisation can be applicable to individuals, firms, governments, and the environment. These effects range from

So, why do companies want to operate in this global environment? Czinkota (2011) suggests that there are four main drivers of globalisation: cost, market, environment and competition drivers. Cost drivers can include the need for business to maximise their investments and to achieve economies of scale, in order to reduce costs. Market drivers consist of the need for a business to expand and increase market share, to move on from saturated domestic markets towards the prosperous foreign markets. Environmental drivers encompasse government intervention, politics and technology. Finally, competitive drivers include the need to be better than other firms in an industry, the need to expand and increase market share, and produce cheaper products more efficiently.

Before globalisation, the majority of firms focused solely on either local or national environments, consisting of local buyers and suppliers, domestic government and laws, and an almost homogenous customer base in comparison to today’s environment. Whereas, in the current international business climate an organisation must consider factors like different economies, global supply chains, varying cultures, beliefs and values, international law, and corporate social responsibility.

Consequently, globalisation has given managers a greater responsibility of analysing and reacting upon the international environment. Sloman and Jones (2011) define globalisation as “the process whereby the economies of the world become increasingly integrated” (p. 13). According to this definition, it is important for managers to understand global and local economies that impact their decision-making activity. By using tools like PESTLE, managers have the ability to analyse different elements of the environment. PESTLE comprises factors in the political, economic, social, technological, legal and environmental climates. For the purpose of this assignment, the focus will primarily be on the economic environment and its effects on managers’ decision-making.

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