SH1710

The Firm and Its Environment

I. Environmental Forces and Scanning

Environmental Forces

Systematic monitoring of the major external forces influencing organizations is necessary to

improve the management of companies. Failure to consider a company’s general and specific
business environments may affect the strategies that management will make and use.

The general business environment includes the economic, socio-cultural, politico-legal,

demographic, technological, and world and ecological situations. All these must be
considered as manager’s plan, organize, staff, lead, and control their respective organizations.

Inflation, rates of interest, changing options in stock markets, and people’s spending habits
are some examples of factors/elements of economic situations. Economic situations may
affect management practices in organizations. For example, companies may postpone
expansion plans if bank loan interest rates are too high.

Sociocultural situations include the customers’ changing values and preferences; customs
could also affect management practices in companies. For example, Filipino customers are
now conscious about the importance of avoiding fatty foods, so many food companies now
make sure that the products they offer are cholesterol-free or are low in cholesterol. In doing
so, they avoid losing their customers.

Politicolegal situations refer to national or local laws, international laws, and rules and
regulations that influence organizational management. For example, labor laws related to
preventing employers from firing their employees without due process require the former to
allow the latter to exercise their right to present their position during disciplinary action
before their employment can be terminated.

Demographic situations such as gender, age, education level, income, the number of family
members, geographic origin, etc. may also influence some managerial decisions in
organizations. For example, decisions regarding the hiring of human resources may be
affected by an organization’s management policy that shows prejudice to the hiring of
married females who are in the child-bearing age. This may be because they would like to
minimize payment of maternity leave benefits.

The technological situations of companies involve the use of varied types of electronic
gadgets and advanced technology such as computers, robotics, microprocessors, and others
that have revolutionized business management; e-commerce, teleconferencing, and
sophisticated information systems have rapidly changed the ways that business is conducted
in the 21st century.

World and ecological situations are related to the increasing number of global competitors
and markets, as well as the nature and conditions of the changing natural environment.

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Products produced by companies, of course, must cater to the changing needs of people in
the global community, while, at the same time, considering their impact on the natural
environment. For example, car manufacturing managers must give the go signal for the
development of vehicles that are environment-friendly instead of only being focused on the
product’s speed, fuel economy, and design.

Meanwhile, the specific business environment focuses on stakeholders, customers, pressure

groups, and investors or owners and their employees.

Stakeholders are parties likely to be affected by the activities of the organization, while
customers are those who patronize the organization’s products and services. Increasing
customer sophistication makes it necessary for managers of organizations to make crucial
decisions regarding the development of products with higher value and the improvement of
their services to meet their patrons’ increasing demands. Also, this has prompted companies
to solicit feedback from their customers to avoid dissatisfaction that may lead to patronizing
another company offering similar products and services instead.

Suppliers are those who ensure the organization’s continuous flow of needed and reasonably
priced inputs or materials required for producing their goods and rendering their services.
Inputs mentioned also include financial and labor supply. Managers decide what, where, and
when to buy their supplies and which supplier to favor with their organization’s supply
orders.

Pressure groups are special-interest groups that try to influence the organization’s decisions
or actions. For instance, pressure from the Food and Drug Administration (FDA) on some
department and drug stores led them to stop selling beauty products containing lead and to
stop ordering or importing such products from their suppliers.

The organization’s investors or owners provide the company with the financial support it
needs. The company, of course, cannot exist without them; thus, they greatly influence
organizational management. Top-level, middle-level, and lower-level managerial decisions
are all influenced, in one way or another, by the investors or owners of organizations.
Branching out, offering new products and services, and applying for needed loans are all
affected by the investors’ or owners’ way of thinking.

Employees pertains to those who work for an employer in exchange for salaries/wages or
non-monetary benefits. Employees execute the company’s strategies and are important for
the maintenance of the company’s stability. For example, managerial decisions are
influenced by the company’s knowledge workers.

An organization’s internal environment must also be subjected to internal analyses. Internal

strengths and weaknesses, opportunities, and threats with regard to its resources such as
financial, physical, mechanical, technological, and human resources, researches and
development endeavors, production of goods, procurement of supplies like materials , inputs,
and finance, and products and services must all be considered prior to organizational
planning.

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Environmental Scanning

Adapting to environmental uncertainties must start with developing a competitive mindset.

Ignorance of present-day realities may cause individuals or organizations to do certain things
that they may regret in the future; hence, environmental scanning is necessary. By seeking
for and sorting through data about the environment, you may be able to understand and
predict the various changes, opportunities, and threats that may affect organizations in the
future. Knowing the present-day competitors, the possible number of barriers to entering
your chosen business industry, the existence or nonexistence of substitutes to your planned
product or service, and possible dependence on powerful suppliers and customers will be
helpful in developing a competitive mindset.

In preparation for future conditions that may influence your planned business endeavor, you
must also consider future business scenarios. By conditions and best-case scenarios or
favorable future conditions, as well as middle-ground possible conditions, you will have an
idea of what to do in the future.

Meanwhile, business predictions, also known as business forecasting, is a method of

predicting how variable 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.

Another component of environmental scanning involves gauging the performance of the

organization in relation to those of others; this is called benchmarking.

Benchmarking is defined as 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. Best practices of said industry leaders are observed so that understanding
their competitive advantage would be easier. This is followed by gathering information about
the company’s own operations and those of the other company in order to identify gaps; this,
in turn, could be used to find out the underlying reasons for the performance differences.
From these reasons, a set of best practices in one’s own company will be listed down, and
that, ultimately, leads to the company’s improved performance.

II. Phases of Economic Development

Walt Whitman Rostow took a historical approach in suggesting that developed countries
have tended to pass through five (5) stages to reach their current degree of economic
development. These are the following:

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.

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

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income (GDP). Some external funding is required - for example in the form of overseas aid
or perhaps remittance incomes from migrant workers living overseas.

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.

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.

Age of mass consumption. Output levels grow, enabling increased consumer expenditure.
There is a shift towards tertiary sector activity and the growth is sustained by the expansion
of a middle class of consumers.

III. Forms of Business Organizations

The form of a business organization may depend on the purpose, nature of operations, and
resources of the company. However, a business organization’s form, change along with the
changing times and demands they present.

Change is constant and organizations continue to undergo various changes in form to ensure
effectiveness, efficiency, and relevance in the world of business.

Business organizations may be traditional or open/flexible in form.

Traditional form of business organizations include the following:

Simple business organizations have few departments, centralized authority with a wide span
of control, and with few formal rules and regulations.

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

Divisional business organizations are made up of separate business units that are semi-
autonomous or semi-independent, with a division head responsible for his/her unit’s
performance. In other words, each division has its own functional organization and its own
general manager. However, the central headquarters management maintains responsibility for
the delineation of organizational goals of the individual divisions.

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Profit business organization is designed for the purpose of achieving their organization’s
mission, vision, goals, and objectives and maintaining their organizational stability through
income generation and profit-making activities.

Immediate revenues or cost factors account for their success or failure.

Non-profit organization is 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 their endeavors. Their success or failure may be measured by the
high or low evaluation scores they obtain.

On the other hand, open/flexible business organization is formed to meet today’s changing
work environment.

These forms affect and are affected by the environment and change, therefore, becomes
inevitable; other forms that emerged under this form are:

Team structures where the organization as a whole is made up of small teams that work
together to achieve the organization’s purpose; popular in collective culture.

Matrix business organizations are those which assign experts or specialists belonging to
different functional departments to work together on one (1) or more projects; exhibit dual
reporting relationships in which managers’ report to two (2) superiors – the functional
manager and the divisional manager.

Project business structure is a business organizational form with a flexible design, where the
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 organization is a business organization whose design eliminates

vertical, horizontal, or external boundaries, and is described to be flexible and unstructured;
there are non-barriers to information flow and therefore, completion of work is fast.

Virtual business organization is made up of a small group of full-time workers and outside
experts who are hired on a temporary basis to work on assigned projects; members are
physically dispersed and usually communicated electronically.

Different organizations have different preferences as to the business form that is appropriate
for their need/s and the purpose of their existence. Manager, therefore, must be creative in
finding ways to structure or design and organizer work in their respective firms.

References:
Cabrera, H., Altarejos, A. & Riaz, B. (2016). Organization and Management. Quezon City, Philippines: VIBAL
Group, Inc.
Frias, S. & Orjalo, V. (2016). Organization and management: Concepts, caselets, and exercises. Quezon City,
Philippines: PHOENIX Publishing House, Inc.
Rostow-Five Stages of Economic Growth Model. (2015). In Tutor 2u Retrieved from
http://www.tutor2u.net/economics/reference/rostow-five-stages-of-economic-growth-model

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