Environmental Forces and Environmental Scanning

The environment in which a business operates is a major consideration in determining an

organization’s design structure. Considerations such as uncertainty, procurement, and competition are
linked with the external environment. A company’s strategy and approach to operations must also be
aligned with the limitations of its external environment.
Definition of Terms
1. Environmental scanning means seeking for and sorting through data about the environment

2. External business environment refers to the factors/elements outside the organization which may
affect, either positively or negatively, the performance of the organization.

3. Internal business environment refers to the factors/elements within the organization which may affect,
either positively or negatively, the performance of the organization.

The various components of business environment are External environment consists of those
factors that affect a business enterprise from outside. External environment includes shareholders,
competitors, customers, society, government laws and regulations, policies and technology.
4. Micro-environment includes those players whose decisions and actions have a direct impact on the
company. Production and selling of commodities are the two important aspects of modern business.
Accordingly, the micro-environment of business can be divided.

5. Macro-environment is the condition that exist in the economy as a whole, rather than in a particular
sector or region. In general, the macro environment includes trends in the gross domestic product (GDP,
inflation, employment, spending, and monetary and fiscal policy.

The various constituents of micro-environment are as under:

1. Suppliers of inputs: An important factor in the external micro-environment of a firm is the supplier of its
inputs such as raw materials and components. Normally, most firms do not depend on a single supplier of
inputs. To reduce risk and uncertainty business firms prefer to keep multiple suppliers of inputs.
2. Customers: The people who buy and use a firm’s product and services are an important part of external
micro-environment. Since sales of a product or service is critical for a firm's survival and growth, it is
necessary to keep the customers satisfied. A concern for customers’ satisfaction is essential for the success
of a business firms. Besides, a business firm has to compete with rival firms to attract customers and
thereby increase the demand and market for its product.

3. Marketing intermediaries: In the firm's external micro-environment, marketing intermediaries play an

essential role of selling and distributing its products to the
final customers. Marketing provides an important link between a business firm and its ultimate customers.
4. Competitors: Different firms in an industry compete for sale of their products. This competition may be
based on pricing of their products and non- price competition through competitive advertising such as
sponsoring some events to promote the sale of different varieties and models of their products. Because
of liberalization and globalization of the Indian economy since the adoption of economic reforms there has
been a significant increase in the competitive environment of business firms. Now, Indian firms must
compete not only with each other but also with foreign firms whose products can be imported. In America,
American firms faced a lot of competition from the Japanese firms producing electronic goods and
automobiles.

5. Publics: Finally, publics are an important force in external microenvironment. Environmentalists, media
groups, women’s associations, consumer protection groups, local groups, Citizens Association are some
important examples of publics which have an important bearing on the business decisions of the firm. The
existence of various types of publics influences the working of business firms and compels them to be
socially responsible.

External Macro Environment

Apart from micro-environment, business firms face large external environmental forces. An important fact
about external macro environmental forces is that they are uncontrollable by the management. Because of
the uncontrollable nature of macro forces a firm must adjust or adapt it to these external forces. These
factors are:
1. Economic Environment: Economic environment includes all those forces which have an economic
impact on business. Accordingly, total economic environment consists of agriculture, industrial production,
infrastructure, and planning, basic economic philosophy, stages of economic development, trade cycles,
national income, per capita income, savings, money supply, price level and population.

2. Political-legal Environment: Business firms are closely related to the government. The political- legal
environment includes the activities of three political institutions, namely, legislature, executive and
judiciary which usually play a useful role in shaping, directing, developing and controlling business
activities.

3. Technological Environment: Technological environment is exercising considerable influence on

business. Technology implies systematic application of scientific or other organized knowledge to practical
tasks or activities. Business makes it possible for technology to reach the people in proper format.

4. Global or International Environment: Global environment plays an important role in shaping business
activity. With the liberalization and globalization of the economy, business environment of an economy
has become totally different wherein it has to bear all shocks and benefits arising out of global
environment.
5. Socio-cultural Environment: Social and cultural environment also influences the business environment
indirectly. These include people’s attitude to work and wealth, ethical issues, role of family, marriage,
religion and education and also social responsiveness of business.

6. Demographic Environment: The demographic environment includes the size and growth of population,
life expectancy of the people, rural-urban distribution of population, the technological skills and
educational levels of labor force. All these demographic features have an important bearing on the
functioning of business firms.
7. Natural Environment: Natural environment influences business in diverse ways. Business in modern
times is dictated by nature. The natural environment is the ultimate source of many inputs such as raw
materials and energy, which firms use in their productive activity. The natural environment which includes
geographical and ecological factors such as minerals and oil reserves, water and forest resources, weather
and climatic conditions are all highly significant for various business activities.
8. Ecological Environment: Due to the efforts of environmentalists and international organizations such as
the World Bank the people have now become conscious of the adverse effects of depletion of exhaustible
natural resources and pollution of environment by business activity. Accordingly, laws have been passed
for conservation of natural resources and prevention of environment pollution. These laws have imposed
additional responsibilities and costs for business firms.

Internal Environment
The factors in internal environment of business are to a certain extent controllable because the firm can
change or modify these factors to improve its efficiency. However, the firm may not be able to change all
the factors. The various internal factors are:
1. Value system: The value system of an organization means the ethical beliefs that guide the organization
in achieving its mission and objectives. It is a widely acknowledged fact that the extent to which the value
system is shared by all in the organization is an important factor contributing to its success.

2. Mission and objectives: The business domain of the company, direction of development, business
philosophy, business policy etc. are guided by the mission and objectives of the company. The objective of
all firms is assumed to be maximization of profit. Mission is defined as the overall purpose or reason for its
existence which guides and influences its business decision and economic activities.

3. Organization structure: The organizational structure, the composition of the board of directors, the
professionalism of management etc. are important factors influencing business decisions. The nature of
the organizational structure has a significant influence over the decision-making process in an
organization. An efficient working of a business organization requires that the organization structure
should be conducive for quick decision-making.

4. Corporate culture: Corporate culture is an important factor for determining the internal environment of
any company. In a closed and threatening type of corporate culture the business decisions are taken by
top level managers while the middle level and lower level managers have no say in business decision-
making. This leads to lack of trust and confidence among subordinate officials of the company and secrecy
pervades throughout the organization.

5. Quality of human resources: Quality of employees that is of human resources of a firm is an important
factor of internal environment of a firm. The characteristics of the human resources like skill, quality,
capability, attitude and commitment of its employees etc. could contribute to the strength and
weaknesses of an organization.
6. Labor unions: Labor unions collectively bargains with the managers for better wages and better working
conditions of the different categories of workers. For the smooth working of a business firm good relations
between management and labor unions is required.

7. Physical resources and technological capabilities: Physical resources such as, plant and equipment and
technological capabilities of a firm determine its competitive strength which is an important factor for
determining its efficiency and unit cost of production. Research and development capabilities of a
company determine its ability to introduce innovations which enhances productivity of workers.

Specific Components of the External Business Environment

Stakeholders, Customers, Suppliers, Pressure groups, Organization’s investors or owners and Employees.
Component of the Internal Business Environment
1. Resources – financial, physical, mechanical, technological, and human resources must be subjected to
internal analysis (SWOT)
What Is a SWOT Analysis?
A SWOT analysis is a technique used to determine and define your Strengths, Weaknesses, Opportunities,
and Threats (SWOT). SWOT analyses can be applied to an entire company or organization, or individual
projects within a single department. Most commonly, SWOT analyses are used at the organizational level
to determine how closely a business is aligned with its growth trajectories and success benchmarks, but
they can also be used to ascertain how well a particular project – such as an online advertising campaign –
is performing according to initial projections.

Porter’s Five Forces

Porter’s Five Forces analysis is a framework that helps analysing the level of competition within a certain
industry. It is especially useful when starting a new business or when entering a new industry sector.
According to this framework, competitiveness does not only come from competitors. Rather, the state of
competition in an industry depends on five basic forces: threat of new entrants, bargaining power of
suppliers, bargaining power of buyers, threat of substitute products or services, and existing industry
rivalry.

PESTEL Analysis. A PESTEL analysis or PESTLE analysis (formerly known as PEST analysis) is a framework or
tool used to analyses and monitor the macro-environmental factors that may have a profound impact on
an organization’s performance. This tool is especially useful when starting a new business or entering a
foreign market. It is often used in collaboration with other analytical business tools such as the SWOT
analysis and Porter’s Five Forces to give a clear understanding of a situation and related internal and
external factors. PESTEL is an acronym that stands for Political, Economic, Social, Technological,
Environmental and Legal factors.

Components of Environmental Scanning

1. Developing a competitive mindset – by seeking and sorting through data about environment, you may
be able to understand and predict the various changes, opportunities and threats that may affect
organizations in the future.
2. Considering future business scenarios – by realistic consideration of both worse-case scenario or
unfavorable future conditions, as well as middle ground possible conditions, you will have an idea or what
to do in the future

3. Business prediction (also known as business forecasting) – is a method of predicting how variables in the
environment will alter the future of business. It could be used in making decisions regarding offshoring,
branching out locally, and expanding or downsizing the company. However, the accuracy of such business
predictions cannot always be assured.

Benchmarking – the process of measuring or comparing one’s own products, services, and practices with
those of the recognized industry leaders in order to identify areas for improvement.
After deciding to start a business (and the business to pursue), one of the important issues is the form of
business entity that will serve as the vehicle in pursuing the business. You may say that the next important
issue is the source of funding, which is correct, but that issue will be discussed later. Right now, let’s focus
on the forms of business.
The choice of the form of business or business organization depends on various factors. In certain
business, like banks, the law requires that the business entity must be a corporation. A small business, like
your friendly sari-sari store, is better off as a sole proprietorship, although it could also be converted to
another form of business if the circumstances require that shift.
A. Partnership

Partnership consists of two or more persons who bind themselves to contribute money or industry to a
common fund, with the intention of dividing the profits among themselves. The most common example of
partnerships are professional partnerships, like in the case of law firms and accounting firms. Just like a
corporation, it is registered with the Securities and Exchange Commission (SEC).

Advantages of a Partnership
 Partnerships are relatively easy to establish; however time should be invested in developing the
partnership agreement.


 With more than one owner, the ability to raise funds may be increased.

 The profits from the business flow directly through to the partners’ personal tax return.

 Prospective employees may be attracted to the business if given the incentive to become a partner.

 The business usually will benefit from partners who have complementary skills.

Disadvantages of a Partnership
 Partners are jointly and individually liable for the actions of the other partners.


 Profits must be shared with others.


 Since decisions are shared, disagreements can occur.


 Some employee benefits are not deductible from business income on tax returns.


 The partnership may have a limited life; it may end upon the withdrawal or death of a partner.

Types of Partnerships that should be considered:

1. General Partnership
Partners divide responsibility for management and liability, as well as the shares of profit or loss according
to their internal agreement. Equal shares are assumed unless there is a written agreement that states
differently.
2. Limited Partnership and Partnership with limited liability
“Limited” means that most of the partners have limited liability (to the extent of their investment) as well
as limited input regarding management decision, which generally encourages investors for short term
projects, or for investing in capital assets. This form of ownership is not often used for operating retail or
service businesses. Forming a limited partnership is more complex and formal than that of a general
partnership.
3. Joint Venture
Acts like a general partnership but is clearly for a limited period of time or a single project. If the partners
in a joint venture repeat the activity, they will be recognized as an ongoing partnership and will have to file
as such and distribute accumulated partnership assets upon dissolution of the entity.

B. Sole proprietorship
Also referred to as “single proprietorship,” a sole proprietorship is the simplest form of business and the
easiest to register, through the Bureau of Trade Regulation and Consumer Protection (BTRCP) of the
Department of Trade and Industry (DTI). It is owned by an individual who has full control/authority of its
own and owns all the assets, as well as personally answers all liabilities or losses. The fact that it is run by
the individual means that it is highly flexible and the owner retains absolute control over it.
Advantages of a Sole Proprietorship
a. Easiest and least expensive form of ownership to organize.

b. Sole proprietors are in complete control, and within the parameters of the law, may make decisions as
they see fit.

c. Profits from the business flow-through directly to the owner’s personal tax return.

Disadvantages of a Sole Proprietorship

a. Sole proprietors have unlimited liability and are legally responsible for all debts against the business.
Their business and personal assets are at risk.
b. May be at a disadvantage in raising funds and are often limited to using funds from personal savings or
consumer loans.

c. May have a hard time attracting high-calibre employees, or those that are motivated by the opportunity
to own a part of the business.

d. Some employee benefits such as medical insurance premiums are not directly deductible from business
income (only partially as an adjustment to income).

C. Sole Corporation
A mixture of the features of a sole proprietorship and a corporation is found in a new entity authorized
under the Revised Corporation Code — the One Person Corporation. An OPC is registered in the same
manner as other corporations with the SEC, except that it is composed of only one person, just like a sole
proprietorship. [See One Person Corporations under the Revised Corporation Code]

D. Corporation
A corporation is a juridical entity established under the Corporation Code and registered with the SEC. It
must be created by or composed of at least 5 natural persons up to a maximum of 15, technically called
“incorporators” (the 5-person minimum has been removed under the Revised Corporation Code). Juridical
persons, like other corporations or partnerships, cannot be incorporators, although they may subsequently
purchase shares and become corporate shareholders/stockholders. 

Advantages of a Corporation
a. Shareholders have limited liability for the corporation’s debts or judgments against the corporation.
b. Generally, shareholders can only be held accountable for their investment in stock of the company.
(Note however, that officers can be held personally liable for their actions, such as the failure to withhold
and pay employment taxes.

c. Corporations can raise additional funds through the sale of stock.

d. A Corporation may deduct the cost of benefits it provides to officers and employees.

e. Can elect S Corporation status if certain requirements are met. This election enables company to be
taxed similar to a partnership.

Disadvantages of a Corporation
a. The process of incorporation requires more time and money than other forms of organization.

b. Corporations are monitored by federal, state and some local agencies, and as a result may have more p
c. Paperwork to comply with regulations.

d. Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible from
business income; thus this income can be taxed twice.

E. Cooperative

A cooperative is an organization established for the purpose of purchasing and marketing the products of
its members, i.e., shareholders, and/or procuring supplies for resale to the members, whose profits are
distributed to the members (in the form of patronage dividends), not on the basis of the members' equity
According to REPUBLIC ACT 9520 also known as "Philippine Cooperative Code of 2008".
The primary objective of every cooperative is to help improve the quality of life of its members. Towards
this end, the cooperative shall aim to:
a. Provide goods and services to its members to enable them to attain increased income, savings,
investments, productivity, and purchasing power, and promote among themselves equitable distribution
of net surplus through maximum utilization of economies of scale, cost-sharing and risk-sharing;
b. Provide optimum social and economic benefits to its members;
c. Teach them efficient ways of doing things in a cooperative manner;
d. Propagate cooperative practices and new ideas in business and management;
e. Allow the lower income and less privileged groups to increase their ownership in the wealth of the
nation; and
f. Cooperate with the government, other cooperatives and people-oriented organizations to further the
attainment of any of the foregoing objectives.

 Walk Whitman Rostow, also known as W.W. Rostow was an economist in the Lyndon B. Johnson
administration from 1966-1969. He also published articles and developed models on economic
development.

 The Five Stages of Economic Development model is developed by Walt Withman Rostow. The five
stages are 1) Traditional Society, 2) Preconditions for Take-off, 3) Take-Off, 4) Drive to maturity, and 5) Age
of Mass Consumption.


 Partnership consist of two or more persons who bind themselves to contribute money or industry to a
common fund, with the intention of dividing the profits among themselves.


 Types of partnership are 1) General Partnership, 2) Limited Partnership and Partnership with limited
liability, and 3) Joint Venture.

 Sole proprietorship is the simplest form of business and the easiest to register, through the Bureau of
Trade Regulation and Consumer Protection (BTRCP) of the Department of Trade and Industry (DTI). It is
owned by an individual who has full control/authority of its own and owns all the assets, as well as
personally answers all liabilities or losses.

 Corporation is a juridical entity established under the Corporation Code and registered with the SEC.
 Cooperative is an organization established for the purpose of purchasing and marketing the products or
its members, i.e., shareholders, and/or procuring supplies for resale to the members, whose profits are
distributed to the members (in the form of patronage dividends), not on the basis of the members’ equity.