MPANDE, D

BUSINESS ENVIRONMENT
CHAPTER TWO
UNIT 2
THE INTERNAL BUSINESS ENVIRONMENT
2.1. Types Of Organization

There are several types of organizations, for example; sole proprietorship, partnerships,
corporations, Limited Liability Companies and cooperatives. The form of ownership, income
tax structure and the owner's legal liability basically determines the type of an organization.

At this point, let us define each one of the types of organizations.

2.1.1. Sole proprietorship

Starting with the first one, sole proprietorship organization is defined as a business owned by a
single individual and this of course is the most basic and easiest type of organization to set up.
In this type, the owner has unlimited liability and creditors can collect any of his personal
assets when a default in payment arises.

2.1.2. Partnership

In the case of partnership, the business is owned by two people who have agreed to jointly put
resources into a specified investment. The number may not always be restricted to two, it can
also be any number above that.

2.1.3. Corporation

A corporation on the other hand is a business with a distinct legal personality from its owners
and in this system, the share holders as they are commonly known are the owners of the
corporation even though they have limited involvement in the daily running of the company.

Unlike sole proprietorship and partnership, in a corporation, owners enjoy limited liability.

2.1.4. Cooperative

A cooperative is an organization that is owned by a group of people for the sole purpose of
mutual benefit.

2.1.5. Limited liability

Lastly, a limited liability company can be loosely thought of as a hybrid of corporations and
partnerships.
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2.2. Capabilities and Competences

For any organization, competencies refers to when the resources or capabilities of an

organization meet a certain criteria. An organization that wants to compete in any market and
maintain a huge advantage over its competitors should ensure that its capabilities are adequate
and meet the criteria which is valuable, expensive to imitate, non-substantial and rare. The core
competences of organization are categorized as follows:

A. Organic competences

A business enterprise can be said to be an organic entity whose development is analogous to

biological growth. The same way a human being eats, grows and increase its production, so
does a business entity grows and through investment ultimately produces more. Again in the
same manner that a human being goes through childhood, adulthood and maturity, a business
equally goes through the same stages. During infancy, the core objectives of a business is
survival and later on the objective becomes growth and establishment of a prestigious position
in the business world. In this way, we can thus classify organic competency as follows;

i. Survival objective

With regards to the objective of survival, we can also include the maintenance of a firm's
competitive position in the market and earning profits that are adequate to protect it from
extinction when economic and political odds are against it.

ii. Growth objective

The growth objective can be pursued in many other ways and growth can also be measured in
terms of size of the business and ability to capture a large share of the market or obtaining
increased earnings on the total investment.

iii. Prestige maintenance objective

The objective of maintaining prestige is a very important factor in any business because the
presentation of a good image in business attracts customers and also allows for borrowing of
funds for the business.

B. Economic competence

Economic competency refers to the core objectives of business firms during the early times and
these include;
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1. Profit

2. Creation of customers: The sole purpose of business is customer creation

because it is the customer that determines what a business

3. Innovation for better stability and income: In line of this, management

must be looking out for novel designs and adopt new techniques so as to
grow the firm strongly and rise above competitors, otherwise the firm will be
put out of business.

C. Social competence

Social competence is difficult to define in the clear sense because the needs of society are always
changing. Since every institution is society's tool, institutions are therefore assets through
which society performs constructive functions for the benefit of the society. A business' social
responsibility changes depending on the economic level of development for that particular
country or community and also the people's requirements. Whether in underdeveloped or
developed countries, social competence is stated in the following ways:

i. Supply of quality goods

ii. Providing employment

iii. Avoidance of anti- social practices: Anti-social practices are a great

constraint to the success of a business enterprise and avoiding such should
make up one of the primary objectives of a business firm. A business must
avoid profiteering, black-marketing and other undesirable activities. Of
course, society recognizes and understands that the business needs to make
profits, however, there is no justification that society will accept for
exploiting the consumer through creation of artificial scarcities.

D. Human competence

Human competence implies that the businesses should have a responsibility of looking after
those that make it succeed. For example, the employees of the business must be seen and
considered as human beings and not just mere tools for business and desirable approaches such
as a parental approach must be used. This competence consists of the following :

i. Fair deal: If you are the overall leader of a business firm and you give fair wages
and provide better environmental conditions to your employees and everyone
around you, your business will easily fulfill its objective of fair deal to employees
and the business will thrive.
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ii. Participation

iii. Job satisfaction

2.3. Internal environmental factors

As opposed to the external business environmental factors, factors in the internal business
environment to a certain extent are controllable because the firm has the power to change and
modify these factors and by doing so improve its efficiency. You should note at this point that
the firm is unable to modify or change all the factors. These factors are as follows:

2.3.1. Value system

The value system refers to the aspects of ethics and morals within the organization that help it
to achieve its mission and objectives. It is a well known fact that how well the value system is
shared among all in the organization greatly affects the success of the firm.

2.3.2. Mission and objectives

Objectives and mission of any business guides the business domain, direction of development,
business philosophy and policy of a company. We can split these two for easier understanding.
The objective of the business firm is to maximize profits. The mission on the other hand defines
the overall reason for the existence of the firm and guides and influences the business decision
and economic activities of the firm.

2.3.3. Organization structure

The nature of the organizational structure has a significant influence over the decision making
process in an organization. An efficient business organization contains a structure that is
suitable for fast decision making.

2.3.4. Corporate culture

Corporate culture determines the company's internal environment. In closed corporate

cultures, business decisions are made by managers while lower level managers have no
participation decision making. This kind of system is common in African and Asian firms and
leads to a lack of trust and confidence among subordinate officials and of course secrecy
pervades throughout the organization. Also a sense of alienation especially among the lower
level managers and workers of the company is commonly felt. In an open and participating
culture, business decisions are made by the lower level managers and top management has a
high degree of confidence in the subordinates. This type of culture doesn't allow participation of
workers in managerial tasks. Development of a work culture that includes and supports
employees is important for maintaining a business with a health internal environment.
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2.3.5. Quality of human resources

The quality of employees of a firm is an important factor of internal environment of a firm.

Human resource such as commitment, skill and quality of its employees could contribute to the
strength of an organization. Some organizations struggle to restructure or modernize due to
the resistance by its employees. Due to the importance of human resources for the success of
the company, there are now special courses for managers so as to be able to select and manage
efficiently the human resources of a company.

2.3.6. Labor unions

Labor unions bargain for better wages with the managers for different categories of workers.
For the continuous running of business, strong relations between management and labor
unions is important.

2.3.7. Physical resources and technological capabilities

Physical resources i.e. plant, equipment as well as technology in a business determines its
strength of competitions which is important for determining its efficiency and unit cost of
production. Research and development of companies indicate the company's ability to introduce
innovations which enhances productivity of workers. It is, however, important to note that the
rapid technological growth and the growth of information technology in recent years have
increased the relative importance of intellectual capital and human skills compared to the
physical resources of a company.