Chapter 7: The business environment
Summary

• This chapter introduced the concept of value, and its production and distribution. It considered organisations as value-creating systems that interact with a wider value network. They have the option to design their internal activity systems and their relationships and activities with the wider value network to optimise their performance. Information is important for the support of both internal activity and activity with external stakeholders,. The concepts considered in this chapter therefore provide a context for considering the place of ICT and information systems in organisations.
• The primary environment of any commercial organisation is the economy. Economies can be considered as systems for coordinating the production, distribution and consumption of value. Value traditionally comes in two forms, goods and services (that is, products produced or activities performed by organisations). Goods and services can be seen as the end-points of activity systems performed in business organisations.
• Goods and services can be categorised in a number of ways. Tangible goods and services have a physical form. Intangible goods and services have a non-physical form and are amenable to representation as information. The flow of both tangible and intangible goods and services has a corresponding flow of information or transactions. A transaction is a data structure that records a coherent unit of activity, typically an event in an activity system or between activity systems.
• Activity between economic agents is typically organised in one of three ways: hierarchies, markets or networks. Markets are systems of competition. They are media of exchange between buyers and sellers. Managerial hierarchies are systems of cooperation. Exchange within hierarchies is conducted on the basis of established trading arrangements. More recently, a third form of economic control has been proposed. Networks are intermediate forms of economic control in which both cooperation and competition are evident.
• According to Michael Porter, an economic environment is determined in terms of: the competitive structure of the industry, the relative power of buyers and sellers, the basis of competition, the state of regulation, the state of technological deployment and whether the industry is growing, shrinking or stable. An organisation takes up a position in an economic system that is defined by its activities and relationships with its competitors, suppliers, customers and regulators.
• Porter has also proposed a template for the activity systems of the typical business, known as the internal value chain and consisting of a defined set of primary and secondary activities. Two other chains of value are also seen as critical to the competitive environment: the supply chain and the customer chain. These three value chains overlap with another frequently ignored chain of value of increasing significance to organisations: the community chain, founded on social networks of individuals. Its value lies in its ability to generate social capital, one indicator of which is a high level of interpersonal trust, an essential prerequisite for many forms of business and commerce.
• The concepts of the internal value chain and the wider value network provide the business analyst with ways of considering potential changes to business systems. These involve not only competitive performance but improvements in managing networks of cooperative relationships with other organisations and the global network of potential customers. The effective management of information is critical to ways in which the organisation adapts itself continually to its environment.
• The next chapter uses the material in this one as a platform to consider the rise of eBusiness and eCommerce. These are defined in terms of the value chain and the value network, and we consider the place of technological innovation in this mix. The role of ICT in reducing transaction costs is one crucial aspect. This is considered in Chapter 9. The concept of the value network also recurs in considering business strategy in Chapter 10.