Unit 2: The Firm and Its Environment

Lesson 2.1

Environmental Scanning

Contents

Introduction 1

Learning Objectives 2

Let’s Connect 3

Discover 4
Firm, Industry, and Business 4
Environmental Scanning 5
External Environment 5
Macro Environment 6
Political Factors 6
Economic Factors 7
Social Factors 8
Technological Factors 9
Internal Environment 12
Capabilities 13
Resources 13

Wrap-Up 15

Try This! 15

Challenge Yourself 16

Photo Credits 18

Bibliography 18
Unit 2: The Firm and Its Environment

Lesson 2.1

Environmental Scanning

Introduction
Being the “first” in the industry is admirable, but maintaining to stay on top means a firm
must be open to changes that may happen in the future and honest and objective with its
capabilities and lack thereof to respond to these changes.

Environmental scanning is a way for a firm to foresee its “surroundings” and capabilities
clearly. A firm’s “surroundings” are external factors or influences that are uncontrollable
and outside the firm. These external factors are the bases to determine the potential
changes in an industry. The internal factors of the firm are controllable and consist of

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Unit 2: The Firm and Its Environment

activities and capabilities that have value. These internal and external factors are the bases
for the SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis. Furthermore,
environmental scanning is not really far from caring for your personal well-being or
development. This will help you to have an open mind, decide objectively, and think clearly.
For instance, you may have friends in your “surroundings” who are bad influences. The bad
influences in your life are external and not within your control. However, you can
“internally” control how you react and let go of the bad influences in your life.

Learning Objectives DepEd Learning Competency

At the end of this lesson, you should be able to
In this lesson, you should be able to do the identify various forces/elements of the firm’s
following: environment (ABM_AOM11-Ic-d-4).

● Define the terms firm, business,

and industry.
● Define environmental scanning.

● Identify the external factors

affecting the industry and internal
factors influencing the firm.
● Explain the importance and impact
of environmental scanning in an
industry.

Let’s Connect

Internal vs. External 10 minutes

Internal vs. External is a group activity where each group will determine whether the listed
factors are either internal or external. The class will form four groups, and each group will
be assigned a list of factors. The list will be classified as either internal or external.

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Unit 2: The Firm and Its Environment

Instructions:
1. Form a total of four groups. Adjust the number of members accordingly depending
on the class size, and duplicate the lists below.
2. Below are the lists assigned to each group:
a. Group 1 List – an increase in the peso-dollar exchange rates, a decrease in
lending rates, an increase in the total population, and an increase in mobile
data usage
b. Group 2 List – strong brand name, lack of information systems, and effective
collection system
c. Group 3 List – Filipinos are becoming more health conscious, an increase in
artificial intelligence (AI) technologies, and employment rates
d. Group 4 list – strong financial position, advanced machines, and strong
customer service
3. As a group, determine whether these are internal or external factors.
4. Explain why the list assigned is uncontrollable or controllable.
5. Share your answers with the class, and discuss your answers using the Guide
Questions 1 and 2.

Guide Questions
1. Based on your list, why are these considered as internal or external factors?
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________

2. What are the characteristics of these factors that make them controllable or
uncontrollable?
__________________________________________________________________________________________
__________________________________________________________________________________________
____________________________________________________________________________________
________________________________________________________________________________________

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Unit 2: The Firm and Its Environment

3. Discuss the results of the class sharing for numbers 1 and 2 with your groupmates,
and share why you think we need to determine the controllable or uncontrollable
factors?
__________________________________________________________________________________________
__________________________________________________________________________________________
____________________________________________________________________________________
________________________________________________________________________________________

Discover
During the strategic (long-term) planning of a firm, environmental scanning is conducted
to identify the influential external factors of the industry and internal factors of a firm. In
practice, external factors are identified prior to the internal factors. This way, the firm can be
more objective with its capabilities that are critical to its success. Before the identification of
the external factors, the terms that are used for the succeeding sections are defined.

How can environmental scanning identify the limits of

what a firm can achieve?

Firm, Industry, and Business

Below are the key terms used in this lesson for better understanding:
● A firm refers to an organization with an intention to make a profit from an exchange
of goods and/or services.
● An industry refers to a group of firms that satisfies similar needs and wants. This is
classified by division based on the Philippine Standard Industrial Classification (PSIC).
● A business refers to an organization that can be either for profit or non-profit. This
includes the exchange of goods and/or services and/or philanthropic activities or
social causes (e.g. United Nations Children's Fund (UNICEF), World Wide Fund (WWF)).

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Unit 2: The Firm and Its Environment

Environmental Scanning
Environmental scanning is the process of evaluating the macro environment and task
environment to identify the potential changes that may pose as a threat or opportunity to
the industry. For the macro environment, the PEST (Political, Economic, Social and
Technological) framework is applied.The task environment, on the other hand, is
composed of Michael E. Porter’s five competitive forces. Both the macro and task
environments are external to the firm. After the identification of the external factors, the
internal factors are objectively evaluated based on the capabilities and resources of the
firm to determine its strengths and weaknesses. Hence, the threats and opportunities of the
industry and the strengths and weaknesses are the bases of strategies.

Ignoring the external and internal factors or the absence of environmental scanning in a
firm’s planning stage can pose a danger to its success. When the key stakeholder with a
decision stick says, “We have been doing this for the longest time. There is no need to
change the way we have been doing things or the products we are offering,” be more
cautious.

External Environment

Fig. 1. External Analysis Process

Figure 1: External Analysis Process shows the steps in conducting the external analysis. The
scope of this lesson is from Step 1 (Determine external factors.) to Step 2 (Identify the
potential changes of each factor in the industry.) only.

For the macro environment, the PEST (Political, Economic, Social and Technological)
framework is used. The macro environmental factors are based on forecasts and trends
because the decisions that are made by the key stakeholders of the firm are decisions for
the future. These forecasts and trends can be found in legitimate sources as needed by the
company.

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Unit 2: The Firm and Its Environment

Macro Environment
Political Factors
Political factors are strong influences based on the ideologies of the government system in
a country. These ideologies dictate the policies on trade, employment, wage levels, ease of
doing business, prices of basic commodities, allocation of investment funds, and regulating
authorities for specific industries. For instance, the regulating authority of the financial
services industry in the Philippines is the Central Bank or Bangko Sentral ng Pilipinas (BSP).

The Philippines has a democratic political system where the economic system is a
free-market, thus making it easier for industries to do business. China, on the other hand,
has been a socialist country since 1949; the majority of the heavy industries are owned and
produced by the government. Some industries are privately owned, but the major ones are
still predominantly owned by the government (Silbergeld, Chen & et. al, 2020).

The consumer electronics industry develops goods such as mobile phones, computers, and
televisions. Since the wage levels and the manufacturing cost policies are lower in China as
compared to the U.S., the majority of the firms in the industry manufacture their products in
China.

The potential changes based on the political factors can greatly affect how the industry will
do business in a specific country.

Economic Factors
Economic factors are the statistical measures of a country’s capital cost and availability and
consumer demand. These factors include the following: Gross Domestic Product (GDP),
imports and exports of goods and services, foreign direct investments and reserves,
interest rates, inflation rates, consumer price index, unemployment levels, and exchange
rates (Jeffs, 2012).

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Fig. 2. Exchange rates and federal reserves of a country

According to the Philippine News Agency (2020), the inflation rate is projected to change
from 2.6% to 3.1% from 2020 to 2022. Hence, the potential change is that there will be an
increase in inflation rate for goods and services, and this can greatly affect industries such
as food and beverage manufacturing and other basic commodities.

Social Factors
Social factors are the statistical socio-cultural elements of a country. These elements
include the following: demographics (population size, age groups, social economic classes,
ethnic mix, disposable income by age group), consumer lifestyles, number of households,
employment population, unemployment population, consumption expenditure by category,
leisure, tourism, and social values. When social factors are being considered for study, they
should apply to a specific country or region (only when applicable). For example, in the
Philippines, the residents of the Visayas Region may have different social economic classes,
behaviors, and lifestyles from the residents of Metro Manila.

Another cultural trait is that Filipinos are very emotional (Ropero, 2019). This trait greatly
contributes to the advertising and market research industry for promotional executions and
creative insights.

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Unit 2: The Firm and Its Environment

Technological Factors
Technological factors are advancements in skills, knowledge, methods, and other forms of
machines. As compared to the other macro environmental factors, these factors are the
fastest to change in terms of development. For example, Artificial Intelligence (AI) is one of
the fastest-growing technologies in any industry, whether in consumer electronics,
education, or manufacturing.

Fig. 3. Technological shift of the imaging industry from film (left) to digital (right)

The imaging industry used to produce films to take pictures. After the use of these films,
these were taken to commercial printing establishments to produce the pictures. The most
pivotal technological change in this industry is the shift from film to digital imaging. (Figure
3). Film Studios Inc. used to be the leading manufacturer of films and cameras. When it
shifted from film to digital imaging in the 90s, Film Studios Inc. was able to develop digital
cameras and photos that were stored digitally in a compact disc (CD). In 2005, Film Studios
Inc. began to struggle with the advanced technologies when the mobile phone industry
came with a camera feature in the market. Consumers demanded fewer digital cameras and
bought mobile phones instead. Therefore, it is important to detect the critical changes
especially in industries that are technology-driven such as mobile phones, computer chips,
games, and the like.

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Check Your Progress

Why is the external environment uncontrollable?
________________________________________________________________________
________________________________________________________________________
__________________________________________________________________

Internal Environment

Fig. 4. Internal Analysis Process

Figure 4: Internal Analysis Process shows the steps in conducting the internal analysis. The
scope of this lesson is from Step 1 (Identify the capabilities of core competencies from the
value chain and/or resources.) to Step 3 (Interpret the comparison of performance
capabilities and resources.).

After assessing the external environment, an internal analysis is conducted by the firm. The
internal environment is based on the firm’s current capabilities that is sourced from its
value chain (an interrelated set of activities of transforming the inputs to outputs, where
each activity has value and cost implications) and its resources. The firm needs to analyze
its current and future core competencies.

Capabilities
Capabilities refer to a firm’s skills and knowledge of transforming resources to outputs.
These capabilities are based on standard policies and procedures set by the management.
Ideally, these standards are based on “best practices” or industry standards. The
implementation of these policies and procedures is highly dependent on the firm’s
organizational structure, processes, and control systems. Because of organizational
structure, a firm can have different levels of decision-making, suitable rewards systems, and
norms and values that shape behavior.

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Unit 2: The Firm and Its Environment

Resources
Resources refer to physical, financial, human capital, technological, and organizational
factors that produce goods and services that have value to the customer. There are two
types of resources, namely tangible and intangible. Tangible resources are physical, such as
land, cash or cash equivalents, plant and equipment, and inventory. Intangible resources
are non-physical entities that have value (usually with monetary value) such as brand
names, reputation, and the intellectual properties (e.g. patents, copyrights, and
trademarks).

To determine the bases of the firm’s strengths and weaknesses, the capabilities and
resources of the firm are compared with the industry standard. Financial ratios and value
chain analysis are frameworks that can be used for comparison and analysis. A strength is a
capability that is above or within industry standards while weakness is the lack or absence
of a vital core competency; the exercise of this competency may also be below industry
standards.

Animation Studios Inc. is an entertainment firm widely known for cartoon characters. The
core value of Animation Studios Inc. is “to make people smile.” This explains their strategies
such as animated films, theme parks, and other licensed merchandise.

The core competency of developing animated films require the following skills: storytelling,
character development, audio recording, illustration, and musical scoring, among others.
From 1923 to 1994, when animated films were developed, professional artists used pen and
paper to draw and illustrate animations. In 1995, Animation Studios Inc. and 3D Trust
Studios developed computerized 3D animation for films. Hence, the core competency of
Animation Studios Inc. used to be the development of animated films until they were
incapable of meeting the industry standards such as computerized digital animation,
character development, and storytelling.

In 2005, the gross profit ,argin of Animation Studios Inc. was 27.9%, which is lower than the
industry standard of 34.2% (ReadyRatios, n.d.).

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Unit 2: The Firm and Its Environment

Check Your Progress

Why is it important to know a firm’s source of capabilities and
resources?
________________________________________________________________________
________________________________________________________________________
__________________________________________________________________

In Philippine Context
The Philippines is one of the most dynamic countries to conduct environmental scanning
because every region or province may have different external factors. One of the factors in
the macro environment that is critical to the Philippines is the ecological factor due to
natural calamities. These calamities affect business operations and agriculture. Moreover,
internal analysis of firms should be conducted regularly to cope with the changes in the
macro and task environments.

Wrap-Up
_____________________________________________________________________________________________
● Environmental scanning includes the evaluation of the external and internal
factors. External factors are considered prior to internal factors.
● The macro environment is composed of political, economic, social, and
technological factors, where the potential changes of these factors are identified.
● The potential changes in the macro environment greatly affect the task
environment or the immediate environment of an industry, which may pose a
threat or an opportunity.
● The internal factors are identified based on the capabilities and resources of the
firm. The performance of capabilities and resources of a firm is compared to
industry standards or best practices, which are the bases to determine the
strengths and weaknesses of a firm.
_____________________________________________________________________________________________

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Try This!
A. True or False. Write true if the statement is correct. Otherwise, write false.

_______________ 1. Environmental scanning only considers the uncontrollable

factors.

_______________ 2. Economic factors include GDP, interest rate, and Peso-Dollar

exchange rates.

_______________ 3. Trademarks are considered tangible resources.

_______________ 4. Consumer lifestyles are considered as a factor only when it is

relevant to the industry.

_______________ 5. A core competency of the firm can change over time.

_______________ 6. Environmental scanning is a process that is conducted on a

weekly basis.

_______________ 7. An organizational structure is an external factor.

_______________ 8. When conducting environmental scanning, historical data

must be used.

_______________ 9. Changes in consumer lifestyles is a demographic factor.

_______________ 10. Financial resources are not important to the firm’s success.

B. Identification. Identify the term or phrase being described in each item.

________________ 1. This refers to physical, financial, human capital, technological,

and organizational factors that produce goods and services
that have value to the customer.

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Unit 2: The Firm and Its Environment

________________ 2. It is the immediate external environment of an organization

________________ 3. This refers to physical resources.

________________ 4. These factors are measures of a country’s performance in

terms of production, consumption, and trade of goods and
services.

________________ 5. These factors include advancements in skills, knowledge,

methods, and other forms of machines.

Challenge Yourself
Short-Response Essay. Answer each question within two to three sentences, and write your
answer on the space provided. The rubric found at the end of the section will be used to
grade your answers.

1. Let us suppose that the lending rate changed from 3% to 1% in 2020. How is this a
relevant factor to the financial and banking services industry?
__________________________________________________________________________________________
__________________________________________________________________________________________
____________________________________________________________________________________

2. How and why is a core value important to a firm?

__________________________________________________________________________________________
__________________________________________________________________________________________
____________________________________________________________________________________

3. Why is environmental scanning important to a firm’s success?

__________________________________________________________________________________________
__________________________________________________________________________________________
____________________________________________________________________________________

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Unit 2: The Firm and Its Environment

Suggested Rubric for Grading

The rubric below is a suggested one. Your teacher may modify the rubrics based on your
needs. Consult your teacher for the final rubric.

Performance Levels

1 2 3 Suggested
Criteria Score
Beginning Proficient Advanced Weight
Proficiency Proficiency

Content Less than half of the More than half of All of the answers
answers are logical the answers are are logical and ×3
and plausible. logical and plausible. plausible.

Clarity Less than half of the More than half of All of the answers
answers are the answers are are explained ×2
explained clearly. explained clearly. clearly.

Language Less than half of the More than half of All answers are
answers are the answers are grammatically
grammatically correct grammatically correct correct and free ×1
and free from spelling and free from spelling from spelling errors.
errors. errors.

Total Possible Score 18

Photo Credits
Coins, Banknotes, Money by Stevepb is licensed under CC0 1.0 via Pixabay

Person holding camera film by Luriko Yamaguchi is licensed under under CC0 1.0 via Pexels

Digital Camera by Pixel2013 is licensed under under CC0 1.0 via Pixabay

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Bibliography
Business World. “Top Fast-Food Chains.” BusinessWorld. BusinessWorld, January 17, 2019.
https://www.bworldonline.com/top-fast-food-chains/.

Cruz, Edgar O. https://business.inquirer.net/. Philippine Daily Inquirer, February 16, 2014.

https://business.inquirer.net/164130/multiplying-buns-and-patties.

Hill, Charles WL, and Gareth R Jones. Essentials of Strategic Management. 3rd ed. Mason,
Ohio: Cengage Learning, 2012.

Hongyu, Bianji. “China Remains World’s Largest Producer, Consumer, Exporter of Consumer
Electronics.” China remains world’s largest producer, consumer, exporter of
consumer electronics | http://en.people.cn/, April 9, 2019.
http://en.people.cn/n3/2019/0409/c90000-9564908.html#:~:text=China%20also%20r
emains%20the%20world's,of%20these%20devices%20in%202018.&text=Statistics%2
0indicate%20that%20China%20produced,200%20million%20televisions%20last%20y
ear.

Huffman, Brian J. Rep. Why Environmental Scanning Works Except When You Need It.
Cambridge, Massachusetts: Harvard Business Publishing, 2004.

Jeffs, Chris. Strategic Management. Thousand Oaks, California: SAGE Publications Ltd, 2012.

Porter, Michael E. Competitive Strategy: Techniques for Analyzing Industries and Competitors.
New York, New York: Free Press, 1998.

Readyratios. “Motion Pictures: Average Industry Financial Ratios for U.S. Listed Companies.”
Motion Pictures: industry financial ratios benchmarking. Accessed November 18,
2020. https://www.readyratios.com/sec/industry/78/.

Ropero, Gillan. PH among most emotional countries: study. ABS-CBN News, April 25, 2019.
https://news.abs-cbn.com/news/04/25/19/ph-among-most-emotional-countries-stud
y.

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Silbergeld, Jerome, and Cheng-Siang Chen. “China.” Encyclopædia Britannica. Encyclopædia

Britannica, inc., November 10, 2020. https://www.britannica.com/place/China.

“The World Factbook: Philippines.” Central Intelligence Agency. Central Intelligence Agency.
Accessed November 17, 2020.
https://www.cia.gov/library/publications/resources/the-world-factbook/geos/print_rp.
html.

Thompson, Arthur A, Alonzo J Strickland, and John Thompson. Strategic Management:

Concepts and Cases. 13th ed. New York, New York: McGraw-Hill Companies, 2003.

Villanueva, Joann. “Fitch Solution Cuts 2020 PH Inflation Forecast.” Fitch Solution cuts 2020
PH inflation forecast | Philippine News Agency. Philippine News Agency, October 5,
2020. https://www.pna.gov.ph/articles/1117508.

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