Concept Notes 2: The Firm and its Environment

INTRODUCTION

The components of an organization’s culture are as complex as the different aspects

of an individual’s personality. Today’s managers must understand how the forces of
an organization’s internal and external environment influence, and sometimes
constrain, its productivity. Managers must realize that organizational culture and
organizational environment have important implications for the way an organization
is managed. As we study and immerse ourselves in “Organization and Management”
in the process, it is necessary to identify various forces/elements of the firm’s
environment using the PEST and SWOT analyses.

OBJECTIVES
at the end of this module, you should be able to:
• Identify various forces/elements of the firm’s environment.
• Summarize these forces using the PEST and SWOT analyses.
• Describe the local and international business environment of a firm.
• Explain the role of business in relation to the economics.
• Discuss the different phases of economic development.

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 PRE-TEST
Instructions: Choose the appropriate WORD in the box and write the CORRECT
answer in the space provided before the number.

__________________ 1. refers to the factors/elements outside the organization which

may affect, either positively or negatively, the performance of the organization.

__________________ 2. refers to the factors/elements within the organization which may

affect, either positively or negatively, the performance of the organization.

__________________ 3. a technique used to determine and define your STRENGTHS,

WEAKNESSES, OPPORTUNITIES and THREATS.

__________________ 4. a framework that helps analyzing the level of competition within

a certain industry.

__________________ 5. a framework or tool used to analyze and monitor the macro

environmental factors that may have a profound impact on an organization’s
performance.

External Business SWOT

Porter’s Five Forces Internal Business
Organizer Chart PESTEL

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 INFORMATION

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

https://www.toppr.com/guides/commercial-knowledge/business-environment/environmental-scanning/
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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.

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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.

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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.

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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 decisionmaking. 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.

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 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.

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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.

Source: https://www.business-to-you.com/porters-five-forces/

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.

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 Source: https://www.business-to-you.com/scanning-the-environment-pestel-analysis/

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 worsecase

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.

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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).

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.

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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.

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.

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

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Comparative Analysis

Economic development generally refers to the sustained, concerted actions of

policymakers and communities that promote the standard of living and economic health of
a specific area. Economic development can also be referred to as the quantitative and
qualitative changes in the economy (www.abbreviations.com).

Walt 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. One of his most prominent ideas was the five stages of
economic development. In this model, he suggests that societies go through five stages of
economic development as they develop and grow.

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