CHAPTER 2

THE FIRM AND ITS ENVIRONMENT

ORGANIZATIONAL ENVIRONMENT – is the set of forces surrounding an organization that have the potential to affect the way it
operates and its access to scarce resources. Organizational environment consists of both external and internal factors.
1. Internal Environment – consists of organization’s owners, board of directors, regulators, physical work environment and
culture; it includes strengths and weaknesses of an organization
2. External environment – consists of legal, physical, economic, technology, social, political culture; it includes opportunities and
threats of an organization
- outside forces affecting the business operation that are beyond the control of the business, and it directly or indirectly
affects how the business enterprise functions

ENVIRONMENTAL SCANNING – refers to possession and utilization of information about occasions, patterns, trends and relationships
within an organization’s internal and external environment.
- searching the environment for important events or issues that might affect an organization
- organizational environment must be scanned so as to determine development and forecasts of factors that will influence
organizational success. Managers scan the environment to stay up to date on important factors in their industry.
3 Kinds of Environmental Scanning
i) Ad hoc scanning – short term, infrequent examinations usually initiated by a crisis
ii) Regular scanning – studies done on a regular schedule (e.g. once a year)
iii) Continuous scanning – continuous structured data collection and processing on a broad range of environmental factors

THE EXTERNAL ENVIRONMENT

1. Directly interactive: This environment has an immediate and firsthand impact upon the organization.
Directly interactive forces include owners, customers, suppliers, competitors, employees, and employee unions.
a) Owners expect managers to watch over their interests and provide a return on investments.
b) Customers demand satisfaction with the products and services they purchase and use.
c) Suppliers require attentive communication, payment, and a strong working relationship to provide needed resources.
d) Competitors present challenges as they vie for customers in a marketplace with similar products or services.
e) Employees and employee unions provide both the people to do the jobs and the representation of work force concerns to
management
2. Indirectly interactive: This environment has a secondary and more distant effect upon the organization. These forces include
sociocultural, political and legal, technological, economic, and global influences.
a) Sociocultural or social and cultural forces are especially important because it determines the goods, services, and standards
that society values. The sociocultural force includes the demographics and values of a particular customer base.
i) Demographics are measures of the various characteristics of the people and social groups who make up a society. Age,
gender, and income are examples of commonly used demographic characteristics.
ii) Values refer to certain beliefs that people have about different forms of behavior or products. Changes in how a society
values an item or a behavior can greatly affect a business.
b) Political and Legal dimensions include regulatory parameters within which an organization must operate. It includes the
political form, the government policies, set of laws and legalities that affect the business operations.
c) Technological dimension of the external environment impacts the scientific processes used in changing inputs (resources,
labor, money) to outputs (goods and services).
d) Economic dimension reflects worldwide financial conditions. It refers to economic growth, interest rates, foreign exchange
rates, inflation rates, unemployment rates, globalization, etc.
i) Macroeconomic – factors that affect the entire economy, not just your business, like inflation rates, interest rates,
unemployment rates, currency exchange rates, recession
ii) Microeconomic – market size, demand, supply

THE INTERNAL ENVIRONMENT

1. Organizational mission statements - describe what the organization stands for and why it exists. Mission statement explains the
overall purpose of the organization and includes the attributes that distinguish it from other organizations of its type. It should
reveal a company’s philosophy, as well as its purpose. \
2. Company policies are guidelines that govern how certain organizational situations are addressed. They should coincide with its
mission statement.
3. Formal structure is the hierarchical arrangement of tasks and people. This structure determines how information flows within the
organization, which departments are responsible for which activities, and where the decision-making power rests.
4. Organizational culture is an organization’s personality. The culture of an organization distinguishes it from others and shapes the
actions of its members.
Main Components
a) Values - the basic beliefs that define employees’ successes in an organization.
b) Heroes - a hero is an exemplary person who reflects the image, attitudes, or values of the organization and serves as a role
model to other employees.
c) Rites and rituals - routines or ceremonies that the company uses to recognize high-performing employees.
d) Social network - the informal means of communication within an organization. This network, sometimes referred to as the
company grapevine, carries the stories of both heroes and those who have failed.
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5. Organizational climates - a byproduct of the company’s culture is the organizational climate. The overall tone of the workplace and
the morale of its workers are elements of daily climate.
6. Resources are the people, information, facilities, infrastructure, machinery, equipment, supplies, and finances at an organization’s
disposal.
7. Managerial philosophies - the manager’s set of personal beliefs and values about people and work and as such, is something that
the manager can control.
8. Managerial leadership styles - the number of coworkers involved within a problem-solving or decisionmaking process reflects the
manager’s leadership style.
Empowerment means delegating to subordinates decision-making authority, freedom, knowledge, autonomy, and skills.
.
SWOT ANALYSIS
The SWOT is a powerful planning tool. It stands for "Strengths, Weaknesses, Opportunities, and Threats:"
"Strengths" refer to internal competencies possessed by an organization that will enable it to achieve its objectives. These are the
advantages or the internal attributes that support a positive result, or the edge that you have over the competitors.
"Weaknesses" are areas that limit or inhibit an organization's overall success. These are the disadvantages or internal
characteristics that work against a successful outcome compared to he competitors.
"Opportunities" refer to trends and events that could significantly benefit an organization in the future.
"Threats" are trends and events that are potentially harmful to an organization's present and future competitive position.

A SWOT Analysis should be prepared for each of your company business/product activities. It works efficiently during the planning
stage. The results of SWOT analysis will guide you in making the action plans:
 Capitalize on "Strengths"
 Reduce "Weaknesses"
 Use "Opportunities"
 Neutralize, Convert "Threats" into Opportunities

PEST ANALYSIS
It refers to Political, Economic, Social and Technological that describes the framework of macro-environmental or the
uncontrollable external factors used in doing an environmental scanning for market research as part of strategic management. It gives
an overview of the environmental forces that the company has to consider to understand better the market growth.

THE LOCAL BUSINESS ENVIRONMENT

Local Business Environment can be defined as the environment in the domestic / local setting
It is driven by specific local conditions and market characteristics. Yet, it also operates in a larger economic context. At the
local level, the business must compete for employees, resources from suppliers at a competitive price, local advertising and marketing
channels. The most successful businesses are well-managed creating a compelling value proposition relative to its local competitors.
So, business intelligence and local community buyer values are critical for management pricing, inventory, and marketing strategies.
Still, a local business operates in a larger economic context. The mood and sentiment of the overall economy influences local
businesses dramatically. Many of these forces are beyond the control of local businesses, yet, often determine success and failure.
Access to capital, levels of consumer spending, the overall health of the economy, ability to lease space and equipment, unusual
weather, all present challenges to local businesses. Finally, the regulatory environment places controls, regulations, and taxes on local
businesses that directly affect profitability and business sustainability.

THE INTERNATIONAL BUSINESS ENVIRONMENT

The international business environment is the environment outside the Philippines and in different sovereign countries, with
factors that are distinct to the home environment of the organization and the foreign country where the organization operates.
For the most part, economic factors have a huge impact on companies working in an international business environment. The
foreign country's monetary system, inflation and interest rates are some of the items that organizations have to look into when putting
up businesses in other countries outside the Philippines. Then we have the political environment which influences government
legislations, rules and regulations that can either be friendly or unfriendly to businesses.

DIFFERENCES BETWEEN LOCAL/DOMESTIC AND INTERNATIONAL BUSINESS

- Currencies
- Natural and geographical conditions
- Mobility of factors of production
- Sovereign political entities (imposition of tariffs and custom duties on imports and exports; quantitative restrictions like
quotas; exchange control; imposition of more local taxes, etc.)

THE ROLE OF BUSINESS IN RELATION TO THE ECONOMY

The critical role that business plays in the economy cannot be overemphasized. Imagine a world where we have to produce
everything that we consume-food, clothes, vehicle, furniture, etc. It not only takes time and effort but oftentimes huge resources in order
to build or manufacture what we consume. Business obtains such resources as materials, labor, and equipment to be able to produce
goods and services. As a result of business, commerce, and markets, consumers are able to live more comfortably and improve their
standard of living conditions. Consumers are able to enjoy a variety of goods and services because procedures and suppliers compete
for markets and regularly attempt to improve their products and services so that the same will be patronized.

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PHASES OF ECONOMIC DEVELOPMENT
Stage 1 Traditional Society – subsistence, barter, agriculture
Stage 2 Transitional Stage – specialization, surpluses, infrastructure
Stage 3 Take Off – industrialization, growing investment, regional growth, political change
Stage 4 Drive to Maturity – diversification, innovation less reliance on imports, investment
Stage 5 High Mass Consumption – consumer oriented, durable goods, flourish, service sector becomes dominant

FORMS OF BUSINESS ORGANIZATIONS

1. Single or Sole Proprietorship - a single person holds the entire operation as his personal property, managing it on a day-to-day
basis. Most businesses are of this type.
Advantages:
a) Formation: easy to start up; less complicated in preparation of documents and cheaper compared to starting a formal
corporation.
b) Tax benefits: no requirement to file a separate business report. One will list the business information and figures within his/her
individual tax return.
c) Decision making: Business decision remains the responsibility of the owner. The owner can also fully transfer the sole
proprietorship at any time as he/she deems necessary.
d) Profit: the owner is entitled to all the profits that the sole proprietorship collects.
Disadvantages:
a) Liability: The business owner will be held directly responsible for any losses, debts, or violations coming from the business.
b) Taxes: While there are many tax benefits to sole proprietorships, a main drawback is that the owner must pay self-
employment taxes.
c) Lack of "continuity": The business may discontinue if the owner becomes deceased or incapacitated.
d) Difficulty in raising capital: Generating the capital or the initial funds is usually provided by the owner.

2. Partnership - a single business with two or more people sharing its ownership. Each partner contributes to all aspects of the
business, including money, property, labor or skill. In return, each partner shares in the profits and losses of the business.
Advantages:
a) Easy and Inexpensive: Partnerships are generally an inexpensive and easily formed type of business structure.
b) Shared Financial Commitment: Each business partner has equally invested in the success of the business. Partnerships have
the advantage of pooling resources to obtain significant capital.This could be beneficial in terms of securing credit, or by
simply doubling your initial money or capital in the business.
c) Complementary Skills: A good partnership should be able to utilize the strengths, resources, and expertise of each partner
d) Partnership Incentives for Employees: Partnerships have an employment advantage over other entities if they offer employees
the opportunity to become a partner.
Disadvantages:
a) Joint and Individual Liability: Similar to sole proprietorships, partnerships retain full, shared liability among the owners.
Partners are not only liable for their own actions, but also for the business debts and decisions made by other partners. In
addition, the personal assets of all partners can be used to satisfy the partnership's debt.
b) Disagreements Among Partners: With multiple partners, in the business, there can disagreements like management styles,
salary schemes, etc.
c) Shared Profits: Because partnerships are jointly owned, each partner must share the successes and profits of their business
with the other partners.

3. Corporation - a type of business that keeps the dealings, assets, and bank accounts separate from his/her personal assets.
Advantages:
a) Separate legal personality: A corporation, once registered with the Securities and Exchange Commission and is issued a
certificate, has acquired a legal personality separate and distinct from its stockholders.
b) Ease of raising funds: In a corporation, it is easy to raise additional funds since It has the option to sell shares of the
corporation.
c) Continuity: It can have a perpetual existence, which means it can outlive its owner because it is a separate person in the
eyes of the law.
d) Ease of transfer of ownership: It's easy to transfer ownership interests in a corporation. The board of directors can authorize
the issue of shares of stock in exchange for investors' capital infusion into the company.
e) Credibility: A business with an Incorporation or Inc: sign after its name often sounds more credible in the business context.
One most likely attracts more partners, customers, and attention from the community.
Disadvantages:
a) More time and money spent in organizing: In a corporation, it will require more time and money than forming other sole and
partnership business type.
b) More paperwork: Several documentations and paper works required by governmental agencies monitor corporations.
c) Higher tax: Corporate profits may be subject to higher overall taxes since the government imposes taxes on profits at the
corporate level and again at the individual level, if such profits are distributed to the shareholders.
d) More costly: There are required number of board meetings and annual shareholder meetings/sessions. All of these
meetings/sessions will incur expenses.