THE FIRM AND ITS ENVIRONMENT

What I need to know?

In this module, you will discover that all managers, without exception, must
consider their organizations external and internal environments before planning
anything. Responding to the various forces/elements of the firm internal and external
business environments is a must because failure to do so may bring about negative
effects. However, managers must make sure that they respond based on the proper
identification and evaluation of these forces/elements in their surrounding
environments.

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.

Environmental scanning means seeking for and sorting through data about
the environment
External business environment refers to the factors/elements outside the
organization which may affect, either positively or negatively, the performance of the
organization.

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

Source:https://www.managementstudyhq.com/functions-of-management.html

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EXTERNAL BUSINESS ENVIRONMENT

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.

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.

Micro-environment

1. Suppliers of inputs
2. Customers
3. Marketing intermediaries: They play an essential role of selling and
distributing its products to the final customers.
4. Competitors
5. Publics. The existence of various types of publics influences the
working of business firms and compels them to be socially responsible.

Macro-Environment

1. Economic Environment; 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: It 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: Technology implies systematic

application of scientific or other organized knowledge to practical
tasks or activities.

4. Global or International Environment: 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: 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.
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 7. Natural Environment: 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: 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.

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. An efficient working of a business organization requires
that the organization structure should be conducive for quick
decision-making.

4. Corporate culture: 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: 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
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 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.

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 Model

Porter’s Five Forces analysis is a framework that helps analyzing 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

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 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.

Source: https://www.wordstream.com/blog/ws/2017/12/20/pestel-analysis

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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Phases of Economic Development

Economic Development

- is a total process which includes not only economic growth or the increase
in the given amount of goods and services produced by the country’s
economy, but also considers the social, political, cultural, and spiritual
aspects of the country’s growth.

Economic Development Phases

- are distinct stages involved in the total process of economic development

in a particular country. These include economic growth, improvement of
the Human Development Index (HDI), availability of benefits provided by
science ant=d technology, and the societal improvement of the
opportunities and general welfare of its members.

Economic Growth
- increase in the given amount of goods and services produced by the
country’s earning.

Phases of Economic Development

1. Traditional Society

This is an agricultural economy of mainly subsistence farming, little of which is

traded. The size of the capital stock is limited and of low quality resulting in very low
labor productivity and little surplus output left to sell in domestic and overseas markets.

2. Pre-conditions for take-off

Agriculture becomes more mechanized and more output is traded. Savings and
investment grow although they are still a small percentage of national income (GDP).
Some external funding is required - for example in the form of overseas aid or perhaps
remittance incomes from migrant workers living overseas

3. Take-off

Manufacturing industry assumes greater importance, although the number of

industries remains small. Political and social institutions start to develop - external
finance may still be required. Savings and investment grow, perhaps to 15% of GDP.
Agriculture assumes lesser importance in relative terms although the majority of
people may remain employed in the farming sector. There is often a dual economy
apparent with rising productivity and wealth in manufacturing and other industries
contrasted with stubbornly low productivity and real incomes in rural agriculture.

4. Drive to maturity

Industry becomes more diverse. Growth should spread to different parts of the
country as the state of technology improves - the economy moves from being
dependent on factor inputs for growth towards making better use of innovation to bring
about increases in real per capita incomes

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5. Age of mass consumption

Output levels grow, enabling increased consumer expenditure. There

is a shifttowards tertiary sector activity and the growth is sustained by the
expansion of a middle class of consumers.

Changing Forms of Business Organizations

Simple Business Organizations - these refer to business

organizations withfew departments, centralized authority with a wide span of
control, and with few formalrules and regulations.

Functional Business Organization – these pertain to business

organizations that group together those with similar or related specialized
duties that introduced the concept of delegation of authority to functional
managers like the personal manager, sales manager, or financial manager but
allow CEOs to retain authority for strategic decisions.

Divisional Business Organizations - these are made up of separate

business units that are semi-autonomous or semi-independent, with a division
head responsible for his or her units performance.

Profit Business Organizations – these are designed for the purpose

of achieving their organizations mission, vision, goals, and objectives and
maintaining their organizational stability through income generation and profit-
making activities.

Non-Profit Business Organizations - these are designed for the

purpose of achieving their organizations mission, vision, goals, and objectives
providing service to clients without expecting monetary gains or financial
benefits for endeavors.

Open/Flexible Business organizations – these are formed to meet

today’s changing work environment.

Team Structures – where the organization as a whole is made up of

work teams that work together to achieve organizations purpose, popular
collectivist culture.

Matrix Business Organizations – those which assign experts or

specialists belonging to different functional departments to work together on
one or more projects;exhibits dual reporting relationships in which manager
report to two superiors – the functional manager and the divisional manager.

Project Business Structure – a form with flexible design, where

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employees continuously work on projects assigned to them; projects may be
short-term or long- term and members disband when the project is completed.

Boundaryless Business organizations – whose design eliminates

vertical, horizontal, or external boundaries, and is described to be flexible and
unstructured; there are no barriers to information flow and therefore,
completion work is fast

Virtual Business Organization – made up of small group of full-time

workersand outside experts who are hired on a temporary basis to work in
assigned projects:members usually communicate online.

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