Chapter 2- Business and Its Environment
What is Business?
Business is largely responsible for bringing into
the market a wide array of products which were
not made available in the past. It is defined as
all profit-seeking activities and enterprises that
provide goods and services necessary to an
economic system.
Profits refer to the rewards for businesspersons
who take the risks involved in producing and
marketing goods and services.
Kinds of Business
Commerce- engaged in buying and selling of
goods and services. It includes trading,
merchandizing, and marketing.
Examples: Sari-sari stores, dry good stores,
supermarkets, importers.
Industry-which are mainly engaged in
production. Goods produced, which are
intended for ultimate consumption are called
consumer goods, while goods intended for use
of business and industry are called producer’s
goods.
Classifications of Industry Business:
a. Genetic Industries- involved in agriculture,
forestry, and fish culture.
b. Extractive Industries- involved in the
extraction of goods form natural resources,
which include mining, lumbering, hunting, and
fishing.
c. Manufacturing Industries- convert raw
materials into finished products. Examples are
firms engaged in the manufacture of drugs,
plastic, food, liquor, footwear, motorcar
d. Construction Industries- engaged in building
infrastructures like airports, seaports, dams,
and highways and dwelling units.
Services- which sells service to the buyer.
Service firms may be classified as:
a. Recreation- movie houses, television and
radio stations, theaters for drama and stage
presentations, resorts, and the like;
b. Personal- restaurant, barber shops,
transportation, hotels, tailoring shops, slimming
salons, and the like; and
c. Finance- banks, insurance companies,
investment house, financing institutions, credit
unions, savings and loans associations, and the
like.
Objectives of Business
A business firm is established primarily for
profit. There are other reasons, however, why
anyone would want to start a business.
Professional managers maintain that a business
firm should achieve the following multiple
objectives:
1. Creation and distribution of a product or
service;
2. Satisfaction of personal objectives like
profits for owners, salaries and other
compensation for executives, wages and
other compensation for employees, psychic
income for all, including pride in work,
security, recognition, and acceptance;
3. Protection and enhancement of the human
and physical resources of society; and
4. Economy and effectiveness of operation.
The Environment of Business Firms
Organizations will succeed or fail depending on
the environment that confronts them. The
manager of a particular business organization is
not entirely helpless. He can do something
about the environment, or make some
adjustments in the organization.
The environmental factors that affect the
activities of the organization may be internal or
external.
The External Environment - this consists of
elements outside an organization that are
relevant to business operations. These elements
play important roles in business operations
because these are sources of the inputs
required by business firms for conversion into
outputs which, in turn, are required by the
external environment.
Types of Elements in the External Environment
Direct Action Element- these directly influence
the organization.
These includes the consumers, competitors,
labor unions, suppliers, financial institutions,
and government agencies. They often referred
to as stakeholders of the organization.
Indirect Action Element- these do not affect the
organization directly. Instead, they affect the
climate in which the operations of the
organization take place.
These are the technological, economic, socio-
cultural, political-legal and international
variables.
The Direct-Action Components of the External
Environment
1. Customers
2. Suppliers
3. Labor Supply
4. Competitors
5. Financial Institutions
6. Government Agencies
1. Customers- the manager must continuously
strive to keep old customers and attract new
ones. It is not easy to deal with many customers
because they are different in many ways.
2. Suppliers- Suppliers are providers of raw
materials, services, energy, equipment, and
labor into usable products or services. As such,
business firms must maintain good relationship
with suppliers if they want on-time deliveries of
inputs.
3. Labor Supply The services of managers and
employees are indispensable requirement of
business operations. These services are in a way
procured through recruitment and hiring the
human resource specialists of business firms.
4. Competitors. In determining the appropriate
marketing strategy, the manager of a business
firm will have to consider not only the target
customers, but also the competitors.
Competitors may either be direct or indirect.
The intensity of competition will differ from one
situation to another. As such, the marketing
strategy of any business firm will depend on any
of the following situations:
a) Monopoly- where there is only a single
producer or seller;
b) Oligopoly- when there are only a few
producers or sellers of similar products; and
c) Pure Competition- when there are many
producers or sellers of similar products.
5. Financial Institutions. Business firms are
concerned with maintaining or expanding their
operations. In either case, the company will
need funds. The expansion option could be
opening a new brand, adding a new product to
its line, or purchasing a lot or new equipment.
Any of these moves will require financing
through borrowing money on short or long-
term basis.
Government Agencies. In many ways, business
organizations are affected by change in
government policies. From the enactment of
laws to the granting of business permits, the
viability of business firms could be enhanced or
limited by actions of government agencies.
The Indirect Action Elements of the External
Environment
1. Technological Variables
2. Economic Variables
3. Socio-Cultural Variables
4. Political-Legal Variables
5. International Variables
1. Technological Variables. Technology has
become widely recognized as an important
ingredient in the success of business firms and
manager who does not consider the
technological variable in his strategy faces the
risk of losing out to competitors.
2. Economic Variables. The economy is a very
important element in business pursuits. Even if
the company has the edge in technology and
financial capability over its competitors, it may
not be so successful if the economy does not
allow it.
3. Socio-Cultural Variables. Business
organizations can only flourish if they consider
society’s customs and values in the planning
and implementation of their activities.
4. Political-Legal Variables. These consists of
laws and regulations promulgated and
implemented at the local, national, and
international levels.
5. International Variables. This element
includes changes occurring in various parts of
the world, which may affect business
organizations in various ways and degrees.
Types of Business Environment
The environment of business may be classified
as either static or dynamic.
1. Static. Few forces in the environment are
changing to affect business. Among the notable
features of static environments are no new
competitors, no new technological
breakthrough by current competitors, and little
activity by public pressure groups to influence
the organization.
2. Dynamic. When significant number of
environmental forces that affect business are
changing. Among the features of a dynamic
environment are rapidly changing government
regulations affecting business, new
competitors, difficulties in acquiring raw
materials.
Designs of Business Organizations
Mechanistic Design- An organization with a
mechanistic design is deemed appropriate for a
task that is routine and unchanging.
This design is characterized by a vertical
structure that typically operates with:
a) More centralized authority;
b) Many rules and procedures;
c) A precise division of labor;
d) Narrow spans of control; and
e) Formal means of coordination.
Organic Design. An organization with an organic
design is appropriate for a task that is non-
routine and changing.
a) It is characterized by the following:
b) Decentralized authority;
c) Fewer rules and procedures; c. Less
precise division of labor;
d) Wider spans of control; and
e) More personal means of coordination.
Survival Strategies in Uncertain Environments
1. Application of Coping Strategies. Coping
strategies refer to the transformation of a part
or all of the organization to make its activities
more compatible with existing environmental
conditions
2. Adaptation of Environmental Control
Measures. Environmental control refers to
management actions to identify and influence
 environmental factors to obtain more positive This can be achieved by using any of the
effects on organizational activities. following methods.

Coping Strategies a) Mergers

b) Joint Ventures
Buffering. This refers to setting up buffers for
c) Interlocking Directorates
both input and output sides of organizational
d) Executive Recruitment
activities in order to absorb and cope with
e) Institutional Advertising
environmental uncertainty.
f) Resource Flows
Smoothing. Irregular demand is always a
2. Manipulating the Environment. Organization
problem for many business firms. Refers to
may attempt to manipulate the environment by
efforts involved in reducing changes in the
using any or all of the following: a. Changing
environment.
Elements b. Lobbying c. Forming Trade
Forecasting. This refers to making predictions, Associations
projections, or estimates of future events or
conditions in the environment in which the
organization operates.

Rationing. This happens when the

organization ignores some operations and
emphasizes others in order to preserve the
most critical functions of the technical core.

Boundary Spanning. This is to process of

creating jobs or roles in which individual
employees are required to have strong
communication links within their department,
with people in other units, and often with the
external community.

Structural Complexity. This is when the

business adapts to the environment by setting
up departments or subsystems that will
respond to specific groupings of
environmental factors.

Executive Succession. One way of adapting to

uncertainty in the environment is the
adoption of an effective executive succession.

Environmental Controlling

1. Creating Favorable Linkages. The objective of

crating favorable linkages is to reduce
environmental uncertainty.