Organization AND Management: Chapter 2: The Firm and Its Environment

ORGANIZATION
AND
MANAGEMENT
CHAPTER 2: THE FIRM

AND ITS
ENVIRONMENT
EXTERNAL ENVIRONMENT OF THE FIRM
Management should give emphasis to the organization‘s relationship with forces

and elements outside of its walls. These forces are also called key players, are essential to
the success of the organization through the interplay that happens between them and the
organization.
The process of identifying and analyzing various forces or elements interacting with
the organization is called environmental scanning. Through this, organizations are able to
determine the effect of these forces to the achievement of the goals of the organization.
Through this process, organization are able to describe how to respond to the various
issues and challenges brought around by these key players.
Reference: Ng, M.F. G. 2019. Organization and management. Anvil publishing Inc. 7th floor Quad Alpha Centrum, 125 Pioneer Street, Mandaluyong City, 1550 Philippines
THE EXTERNAL ENVIRONMENT OF THE FIRM IS COMPOSED OF TWO PARTS: THE GENERAL
ENVIRONMENT AND THE SPECIFIC ENVIRONMENT.
GENERAL ENVIRONMENT
General environment of the firm, sometimes also known as the macroenvironment, consists of the
most general elements that can potentially influence the strategic and long-term decisions of the firm. It is
made up of all the background conditions and forces outside of the firm. These forces are uncontrollable-
the firm does not any control over them – but the firm can think of various ways to respond and adapt to
the influences that these may bring to the organization.
The following are the elements that compose the general environment;
1. Legal-political conditions
2. Economic conditions
3. Technological conditions
4. Demographic conditions
5. Sociocultural conditions
6. Natural environment
THE EXTERNAL ENVIRONMENT OF THE FIRM IS COMPOSED OF TWO PARTS: THE GENERAL ENVIRONMENT
AND THE SPECIFIC ENVIRONMENT.
SPECIFIC ENVIRONMENT
The specific environment of the firm consists of all the actual organizations, groups, and
persons with whom the organization interacts and conducts business. It is also called the task
environment or competitive environment.
The specific environment is often described through the consideration of a firm’s stakeholders
which represent all the persons, groups, and institutions who are affected by the organization's
performance and who have a general interest in the affairs of the business. Important stakeholders of a
firm include it s customers, suppliers, competitors, government regulators, and investors or owners.
The elements of the specific environment include:

1. Competitors
2. New entrants
3. Substitute and complements
4. Suppliers
5. Customers
ENVIRONMENTAL SCANNING
For firms to operate effectively and achieve their organizational goals, they need to
study the environment and analyze how to respond to the forces and elements that they
interact with. This process called environmental scanning includes careful monitoring of an
organization's internal and external environment for detecting early signs of opportunities
and threats that may influence its current and future plans.
There are two ways on how to scan and analyze a firm’s environment. One is by
doing a PEST analysis and the other is by doing a SWOT analysis.
PEST ANALYSIS
It is an acronym for Political, Economic, Social and Technological analysis, it is a tool that
describes how macro-environmental factors influence the operations, decisions, and directions of firms,
businesses, or organizations. Aside from the four environmental factors, modern management
practitioners have added legal and environmental as part of the analytical tool, thereby giving it an
alternative name of PESTEL Analysis.
PEST Analysis is useful for four main reasons:

1. It helps spot business or personal opportunities, and gives advance warnings of significant
threats.
2. It reveals the direction of change within the business environment. This helps businesses
shape what they are doing so that they work with change rather than resist it.
3. It helps avoid starting projects that are likely to fail for reason beyond control.
4. It can help businesses break free from unconscious assumptions when they enter new
country, region, or market because it helps develop an objective view of this new environment.
SWOT ANALYSIS
It is short for strengths, weakness, opportunities, and threat analysis it involves specifying the
objectives of the firm and identifying the internal and external factors that are both favorable and
unfavorable to achieve the objectives. SWOT analysis is important because it can help influence the
planning aspect of firm.
A SWOT analysis begins with a systematic evaluation of a firm’s resources and capabilities,
which are its basic strengths, and weaknesses. Strength refer to characteristics of the business that give
it an advantage over others and enable it to do what it does exceptionally well over others. Weaknesses,
on the other hand, refer to characteristics that place the business at a disadvantages relative to others
and that hold the organization back from fully accomplishing objectives.
SWOT ANALYSIS
In addition to identifying strengths and weaknesses, an organization should also identify

external factors in its environments that could potentially provide opportunities or pose as threats to
the firm. Opportunities refer to elements that the firms could use to its advantage. Threats, in contrast,
refer to elements in the environment that could cause trouble or setbacks to the firm.
Strengths and weakness represent the internal factors of the SWOT analysis, whereas
opportunities and threats represents the external factors.
KEY ISSUES IN THE EXTERNAL ENVIRONMENT
In performing both environmental scanning and environment analysis, a firm will be able to
identify key issues within its external environment that it needs to address.
Some of these key issues within the local environment of the firm are as follows:
1. Competitive advantage
2. Environmental uncertainty
3. Customer and supplier relationship
4. Organizational effectiveness
COMPETITIVE ADVANTAGE
Competitive advantage refers to a core competency that clearly sets the organization apart from its
rivals or competitors and gives it a distinct advantage or edge over others in the industry. It is the totality of
all the strategies and factors that makes a firm perform well in the market or industry.
Competitive advantage may be achieved through different of ways, some of which are as follows:
1. Low-cost advantage: when firms have the ability to lower their costs of production, they will be able to
offer affordable and competitive prices that their competitors will have difficulty matching.
2. Quality advantage – creating products or offering services whose quality is demonstrably higher or better
than those offered by competitors.
3. Delivery advantage – outperforming competitors by delivering products and services to customers faster
and on time, while continuing to develop timely new products.
4. Flexibility and customization advantage – adjusting, tailoring, and customizing products and services to fit
customer needs in ways that are difficult for competitors to match.
ENVIRONMENTAL UNCERTAINTY
Environmental uncertainty means that there is a lack of complete information regarding what
exists and what developments may occur in the external environment. This means that managers do not
have enough information about the environment to be able to understand or predict the future. A firm
might experience this when, for example, it ventures into a new territory or decides to carry out a new
business that is different from the one it usually conducts. One way to mitigate the effects of
environmental scanning and environmental analysis. Furthermore, firms may conduct a feasibility study
of a particular business venture’s viability and potential for success.
CUSTOMER AND SUPPLIER RELATIONSHIPS
Customers and suppliers are both key stakeholders of a firm. Customers patronize the goods
and services offered by businesses, whereas suppliers provide the needed raw materials and processes
to enable firms to produce outputs and deliver results to its customers.
Customer service means giving customers what they want or need the way they want it. This
can be done through a variety of ways such as speed of filling and delivery of orders, willingness to meet
emergency needs, delivering merchandise in good condition, after-sales support, additional perks and
services, and the like.
On the other end, business improve its relationships with their suppliers through supply chain
management which is one of strategically managing all operations involving an organization's resource
suppliers from purchasing, delivery and distribution. This process is done to achieve efficiency while
ensuring that resources are available to meet the demands of customers.
ORGANIZATIONAL EFFECTIVENESS
One of the indicators of successful organization is organizational effectiveness which measures

sustainable high performance in using available resources to accomplish objectives of the group. This
can be done through evaluating the inputs of a firm, its internal process and operations, and its
strategies to enable it to deliver performance results and achieve company goals.
INTERNATIONAL ENVIRONMENT OF THE FIRM
In this modern age and time, companies and businesses are now transcending geographical barriers in an
effort expand their resources and industry and find ways to better their performance. With the advent of various new
technologies, the study of business and management now considers the effects of companies going global and how
businesses thrive in an international, multinational, and global setting.
The internalization of management is an offshoot of the enter worlds becoming global, with resource sand
technologies interacting harmoniously beyond national and international boundaries. Globalization, which is the
worldwide interdependence of economies and the process of international integration arising from the interchange
of world views, products, ideas, and culture, obviously has a major impact in the way businesses operate all over the
world.
Some of the components of the global business environment include international legal and political
systems, trade agreements and trade barriers between countries, regional economic alliances and global outsourcing.
In addition, some of the challenges faced by organizations and firms in relation to internationalization are
development of global leadership skills, currency fluctuations, balance of trade problems, human rights, cultural
differences, differences in negotiation styles , intellectual property, and product differences.
GLOBAL READINESS
To be successful in the working environment of the 21st century, one must be comfortable with
the global economy and the cultural diversity of the workplace. This requires three elements: (1) global
mindset, which enables one to be receptive to and respectful of cultural differences, (2) global
knowledge, which includes a personal and continuing quest to know and learn more about other nations
and cultures, and (3) global work skills, which allow one to work effectively across cultures and borders.
THE LEGAL FORMS OF BUSINESS ORGANIZATIONS
The legal forms of business organizations
Businesses may be classified according to two aspects:
1. According to nature or activity

2. According to ownership
THE LEGAL FORMS OF BUSINESS ORGANIZATIONS: BUSINESSES ACCORDING TO NATURE OR ACTIVITY
According to nature or activity, businesses may be classified as (1) service businesses, (2)
merchandising, or (3) manufacturing.
Service-type businesses offer services, including not only personal services but also those which
are essential to other business activities, to clients, or to customers in exchange for a fee. Examples of
these are salons, accounting firms, telecommunications companies, business process outsourcing
companies, and the like.
Merchandising businesses engage in the buy and sell of commodities without altering their
form. Examples of these are sari-sari stores, grocery stores, department stores, hardware stores, general
merchandise, and the like.
Manufacturing businesses convert raw materials into finished goods through various production
processes, thereby altering their form and transforming ingredients to finished products.
BUSINESSES ACCORDING TO OWNERSHIP
From a legal point of view, the organization of a business enterprise is made up of its form of
ownership. Under this concept, businesses are classified as (1) sole proprietorship, (2) partnership, and (3)
corporation.
Sole Proprietorship
A sole proprietorship, also known as a "one-man business," is a business entity that is conceived,
established, owned, and managed by one individual. The owner of the business, the sole proprietor, assumes
all the risks and obtains all the returns of the business.
The advantages of a sole proprietorship are as follows:
1. The sole proprietor can make decisions without any delay or interference.
2. When the business succeeds, the sole proprietor is entitled to all the profits.
3. There is a personal feeling of camaraderie between the proprietor and his employees.
4. The management of the enterprise is quite flexible.
5. A sole proprietorship is easy to organize.
6. The sole proprietorship does not entail complicated financial operations.
On the other hand, a sole proprietorship also has disadvantages, some of which are as follows:
1. There is limited source of capital.

2. The owner take up a heavy risk by himself.
3. A sole proprietorship oftentimes lacks stability.
4. The sole proprietor undertakes all the losses should the business fail.
Partnership
When two or more persons are willing to try their luck and ability in a business undertaking, they
may form a partnership. A partnership, by legal definition, is a "contract in which two or more persons bind
themselves to contribute money, property, or industry to a common fund, with the intention of dividing the
profits among themselves." The business entity that is created by the partnership contract is called the
partnership business.
The following are the essential elements of a partnership:
1. There must be a valid contract.

2. There must be two or more persons with the legal capacity to enter into a contract.
3. Partners must mutually contribute money, property, or industry to a common fund.
4. There must be intent to engage in lawful business, trade, or profession.
5. The purpose is to obtain profits and to divide the same among partners.
6. The objective must be lawful.
Corporation
The corporate form of organization is by far the most predominant in terms of discussions in the
study of business and management. As compared with sole proprietorships and partnerships, a corporation is
the largest source of capital and is authorized by statutory legislation for either a long-lasting existence or a
definite and considerable span of years.
Five to fifteen persons may form a corporation and be recognized as incorporators. The owners of
the corporation are the stockholders who are considered investors in the corporation through the purchase
of shares of stock issued by the corporation. The stockholders in turn elect among themselves the members
of the Board of Directors who shall oversee into the affairs and policies of the corporation. The management
of the corporation, on the other hand, is in charge of the day-to-day operations of the business of the
corporation. They report to the Board of Directors and stockholders as to their stewardship function of the
resources of the corporation.
REFERENCE:
Ng, M.F. G. 2019. Organization and management. Anvil Publishing Inc. 7th Floor Quad Alpha
Centrum, 125 Pioneer Street, Mandaluyong City, 1550 Philippines
THANK YOU!
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ORGANIZATION

CHAPTER 2: THE FIRM

Management should give emphasis to the organization‘s relationship with forces

The elements of the specific environment include:

PEST Analysis is useful for four main reasons:

In addition to identifying strengths and weaknesses, an organization should also identify

One of the indicators of successful organization is organizational effectiveness which measures

The legal forms of business organizations

Businesses may be classified according to two aspects:

1. According to nature or activity

The advantages of a sole proprietorship are as follows:

1. There is limited source of capital.

The following are the essential elements of a partnership:

1. There must be a valid contract.

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