BUSINESS ENVIRONMENT

1. Present a clear distinction between the general and industry environment.

 The general environment represents those elements in the broader society that
can influence all (or most) industries and the firms that compete in those
industries; it represents elements or segments that firms cannot directly control.
The general environment is composed of the following segments: demographic,
economic, political/legal, sociocultural, technological, and global segments.
 The industry environment is the constellation of factors that directly influences a
firm and its competitive actions and responses. Firms are influenced by these
factors and should attempt to establish a position in the industry that enables the
firm to favorably influence the factors or to successfully defend against the
factors’ influence. These factors are: threat of new entrants, bargaining power of
suppliers, bargaining power of buyers, threat from substitute products, and
intensity of rivalry among competitors.
2. Discuss the characteristic of industry environment namely:
New Entrant - In Porters five forces, threat of new entrants refers to the threat new
competitors pose to existing competitors in an industry. A profitable industry will attract
more competitors looking to achieve profits. If it is easy for these new entrants to enter
the market – if entry barriers are low – this poses a threat to the firms already
competing in that market. More competition – or increased production capacity without
concurrent increase in consumer demand – means less profit to go around. According
to Porter’s 5 forces, threat of new entrants is one of the forces that shape the
competitive structure of an industry. Porters threat of new entrants definition
revolutionized the way people look at competition in an industry.
The threat of new entrants porter created affects the competitive environment for the
existing competitors and influences the ability of existing firms to achieve profitability. A
high threat of entry means new competitors are likely to be attracted to the profits of
the industry and can enter the industry with ease. New competitors entering the
marketplace can threaten or decrease the market share and profitability of existing
competitors and may result in changes to existing product quality or price levels. An
example of the threat of new entrants porter devised exists in the graphic design
industry: there are very low barriers to entry.
A high threat of new entrance can make an industry more competitive and decrease
profit potential for existing competitors. On the other hand, a low threat of entry makes
an industry less competitive and increases profit potential for the existing firms. New
entrants are deterred by barriers to entry.
Substitute – Porter’s Five Forces model refers to “substitute products” as those
products that are available in other industries that meet an identical or similar need for
the end user. As more substitutes become available and affordable, the demand
becomes more elastic since customers have more alternatives. Substitute products may
limit the ability of firms within an industry to raise prices and improve margins.

For example, the price of aluminum cans is constrained by the price of glass bottles,
steel cans, and plastic containers. These containers are substitutes, yet they are not
rivals in the same industries. A substitute product to the services offered by a local
accountancy firm is accounting software such as Sage Line 50 or tax-based software –
two very different industries that offer some of the same consumer benefits.
The treat of substitutes often impacts price-based competition. There are other
concerns in assessing the threat of substitutes relating to technology. New technologies
contribute to competition though substitute products and services. Think of the impact
wireless technologies have had on traditional telephone service. Except in remote areas
it is unlikely that cable TV could compete with free broadcast TV from an antenna
without the greater diversity of entertainment that it affords the customer.
Again, a segment is unattractive when there are actual or potential substitutes for a
product.
Competitor – Competition within an industry is grounded in its underlying economic
structure. It goes beyond the behavior of current competitors.
The state of competition in an industry depends upon five basic competitive forces. The
collective strength of these forces determines profit potential in the industry. Profit
potential is measured in terms of long-term return on invested capital. Different
industries have different profit potential—just as the collective strength of the five
forces differs between industries.
Industry analysis enables a company to develop a competitive strategy that best
defends against the competitive forces or influences them in its favour. The key to
developing a competitive strategy is to understand the sources of the competitive
forces. By developing an understanding of these competitive forces, the company can:
Highlight the company’s critical strengths and weaknesses (SWOT analysis)
Animate its position in the industry
Clarify areas where strategic changes will result in the greatest payoffs
Emphasize areas where industry trends indicate the greatest significance as either
opportunities or threats
The five competitive forces reveal that competition extends beyond current competitors.
Customers, suppliers, substitutes and potential entrants—collectively referred to as an
extended rivalry—are competitors to companies within an industry.
The five competitive forces jointly determine the strength of industry competition and
profitability. The strongest force (or forces) rules and should be the focal point of any
industry analysis and resulting competitive strategy.
Short-term factors that affect competition and profitability should be distinguished from
the competitive forces that form the underlying structure of an industry. Although these
short-term factors may have some tactical significance, analysis should focus on the
industry’s underlying characteristics.
3. Discuss the importance of environmental scanning to a management
practitioner.
The need and importance of environmental scanning are as follows:
Environmental analysis will help the firm to understand what is happening both inside
and outside the organization and to increase the probability that the organizational
strategies developed will appropriately reflect the organizational environment.
Environmental scanning is necessary because there are rapid changes taking place in
the environment that has a great impact on the working of the business firm. Analysis
of business environment helps to identify strength weakness, opportunities and threats.
SWOT analysis is necessary for the survival and growth of every business enterprise.
The following is the need and importance of environmental scanning:
1. Identification of strength:
Strength of the business firm means capacity of the firm to gain advantage over its
competitors. Analysis of internal business environment helps to identify strength of the
firm. After identifying the strength, the firm must try to consolidate or maximize its
strength by further improvement in its existing plans, policies and resources.
2. Identification of weakness:
Weakness of the firm means limitations of the firm. Monitoring internal environment
helps to identify not only the strength but also the weakness of the firm. A firm may be
strong in certain areas but may be weak in some other areas. For further growth and
expansion, the weakness should be identified so as to correct them as soon as possible.
3. Identification of opportunities:
Environmental analyses helps to identify the opportunities in the market. The firm
should make every possible effort to grab the opportunities as and when they come.
4. Identification of threat:
Business is subject to threat from competitors and various factors. Environmental
analyses help them to identify threat from the external environment. Early identification
of threat is always beneficial as it helps to diffuse off some threat.
5. Optimum use of resources:
Proper environmental assessment helps to make optimum utilization of scare human,
natural and capital resources. Systematic analyses of business environment helps the
firm to reduce wastage and make optimum use of available resources, without
understanding the internal and external environment resources cannot be used in an
effective manner.
6. Survival and growth:
Systematic analyses of business environment help the firm to maximize their strength,
minimize the weakness, grab the opportunities and diffuse threats. This enables the
firm to survive and grow in the competitive business world.
7. To plan long-term business strategy:
A business organization has short term and long-term objectives. Proper analyses of
environmental factors help the business firm to frame plans and policies that could help
in easy accomplishment of those organizational objectives. Without undertaking
environmental scanning, the firm cannot develop a strategy for business success.
8. Environmental scanning aids decision-making:
Decision-making is a process of selecting the best alternative from among various
available alternatives. An environmental analysis is an extremely important tool in
understanding and decision making in all situation of the business. Success of the firm
depends upon the precise decision making ability. Study of environmental analyses
enables the firm to select the best option for the success and growth of the firm.

4. Enumerate and explain the advantages and disadvantages of different

legal form of business enterprise in the Philippines.
It is important to understand the different types of business organizations types such as
a sole proprietorship, partnership, and corporation. A business’s organizational structure
influences issues, legal issues, financial concerns, and personal concerns.
A Sole Proprietorship is a business with one owner who operates the business on his
or her own or employ employees. It is the simplest and the most numerous form of
business organization in the United States, however it is dangerous as the sole
proprietor has total and unlimited liability. Self-contractor is one example of a sole
proprietorship.
Advantages of a sole proprietorship
 Simplest and least expensive form of business to establish and to dissolve.
 The owner is making all the decisions and controlling the whole operations.
 All profit flows directly to the owner.
 It is subject to fewer regulations.
 It has tax advantage: any income is declared as the owner’s personal income tax
return, therefore there are no corporate income taxes.

Disadvantages of a sole proprietorship

 The owner is responsible for all the obligations of the business.
 It is difficult to raise capital: it can only use the owner’s personal saving and
consumer loans.

A Partnership is a business with two or more individuals owns and manages the
business. Partners share the unlimited liabilities of the business and operate the
business together. There are three classification of partnerships: general partnership
(partner divide responsibility, liability and profit or loss according to their agreement),
limited partnership (in additional at least one general partner, there are one or more
limited partner who have limited liability to the extent of their investment), and limited
liability partnership (all of the partners have limited liability of the business debts; it has
no general partners).
Advantages of a partnership
 It is relatively easy to form but considerable amount of time should be invested
in developing the partnership agreement.
 It is easier to raise capital compared to a sole proprietorship as there are more
than one investor.
 Any income is declared as the partners’ personal income tax returns, therefore
there are no corporate income taxes.
 Employees may be motivated and attracted to the business by the inventive to
become a partner
Disadvantages of a partnership
 Partners are jointly responsible for all the obligations of the business.
  Partners must make decision together therefore disputes or conflicts may occur.
It may eventually lead to dissolving the partnership.
A corporation is a limited liability entity doing business owned by multiple
shareholders and is overseen by a board of directors elected by the shareholders. It is
distinct from its owners and can borrow money, enter into contracts, pay taxes and be
sued. The shareholders gain from the profit through dividend or appreciation of the
stocks but are not responsible for the company’s debts.
Advantages of a corporation
 It can raise additional funds through the sale of stock.
 Shareholders can easily transfer the ownership by selling their stock.
 Individual owner’ liability is limited to the value of stock they are holding in the
corporation.
Disadvantages of a corporation
 It is restricted by more regulations, more closely monitored by governmental
agencies and are more costly to incorporate than other forms of the
organizations.
 Profit of the business is taxed by the corporate tax rate. Dividends paid to
shareholders are not deductible from corporate income, so this part of income is
taxed twice as the shareholders must declare dividends as their personal income
and pay personal income taxes too.

5. Explain the fundamental economic problem of scarcity and choice.

Human beings have unlimited wants. That is to say that there is never such a time that
a human being is satisfied and not in need of anything. On the other hand, resources
available in nature, which should be used to meet those human wants, are limited. The
available resources can never be enough to satisfy all human needs. This phenomenon,
where there are unlimited human wants which are to be met by very limited resources,
is essentially what economists call scarcity. Scarcity is referred to as the fundamental
economic problem, and all economic activities revolve around trying to solve this
problem. In view of scarcity, a good which is usable but in abundant supply may not
qualify to be called an economic good. Air and water, for example, are just ‘goods’ in
the sense that they are readily available and cannot be deemed to be scarce. Economic
goods are presumed to be scarce in supply, that is to say, they cannot at one time
meet the demand of humans. The concept of scarcity is so vital in modern economics
that it informs a later-day definition of economics, which states that economics is the
study of human actions and behavior as a relationship between ends and scarce means
which have alternative uses.
Along with scarcity comes another equally important concept in economics: Choice.
Choice comes about as a result of scarcity, and in a way, choice is informed by these
circumstances. Here is how it comes about: Since human wants are unlimited and
resources limited, it emerges that one cannot be able to practically meet all their wants
at any one time. Because of this, it becomes inevitable for someone to choose between
the many unlimited wants which one to satisfy at any given moment. This, in
economics, is not just a conscious decision; it is an inevitable action that one has to
take. Whether or not you consciously decide to skip something, you should realize that
somehow you can only do one thing at a time. This is very important.
Since you make a choice of doing something, or fulfilling a certain want, it turns out
that at any one time, there is a certain want that you have to ignore, or forego, in order
to fulfill another want. When you wake up to go to work or school in the morning, for
example, you probably would have loved to sleep just a little more, but then you have
to wake to wake up and leave for work because you must earn a living. In this scenario,
it can be rightly assumed that you have foregone sleep in order to go to work.
A famous phrase people use nowadays is ‘there is no such a thing as free lunch’, and
that is perhaps the best way of saying it. Even if someone is offering to buy you lunch,
you have to sacrifice time which you would have spent doing something else. Due to
scarcity of resources, one therefore has to make a choice of which want to satisfy. By
making a choice, it is inevitable that one will have to forego another one. This option
that has been foregone is usually called an opportunity cost.