THE FIRM AND ITS ENVIRONMENT

In Chapter 1, it was emphasized that a key task of management is to adapt the organization or firm to its
changing environment. At any point in time, the products and services of a firm, the methods it uses to
produce and sell them, the size and type of its workforce, its organization structure, in fact - the total
configuration of its operations - can be viewed as representing an adaptation to the requirements of its
environment as of that point in time. If its adaptation is valid, the firm will prosper and grow. If not, the firm
will encounter difficulties and may fail to survive.

Even when the firm has successfully adapted itself to its environment over a period of time, it faces the need
to continue to change. As Soriano and Nehrt put it:

"According to an old saying, the only things which are certain are death and taxes. But that was an old saying.
Today we know that another thing is certain, namely, change".1

A firm's environment changes sometimes abruptly, sometimes more slowly and less perceptibly. And firms
which are slow to recognize the changes or to make the required adaptation to them become the victims of
change. Firms which fail to successfully adapt to environmental changes are not limited to small or
inexperienced companies. Many large and established firms have been victims of environmental change.
Examples of these include the large manufacturers of manual typewriters in the United States who lost their
markets to IBM because of their failure to recognize early enough the potentials of a (then) new competing
product - the electric typewriter.

Environment Defined
The environment of a firm can be defined as the sum of all the elements and forces present in its immediate
and remote surroundings which have a potential impact on its ability to achieve its objectives. The
environment of the firm can be viewed in terms of its different aspects-i.e., the economic, the legal political,
the technological, and the social-cultural and demographic aspects or dimensions. The firm's environment can
also be viewed at different levels - its immediate environment as against its more distant or remote
environments.

ASPECTS OF THE FIRM'S ENVIRONMENT

The Economic Aspects
Business enterprises being economic institutions, are directly influenced by many economic forces in its
environment. The rate of growth of the economy, the levels of investments, the levels of government and
consumer spending, the inflation rate, among many others, are examples of macroeconomic factors which
can affect a firm's operation both in the revenue side, (i.e., the level of demand and the prices for its products),
and/or in the cost side (i.e., the availability and prices of its inputs). The sensitivity of a firm's operations to
movements in the economic variables in its environment is one reason why business firms, especially large
ones, try to forecast the trends in many macroeconomic variables as a basis for the preparation of their
business strategies and plans.

The Legal-Political Aspects

Business firms' operations are also much affected by legal and political factors in their environment. In all
countries, government bodies issue various laws, ordinances, and regulations (e.g., wage and employment
laws, regulations on advertising, waste disposal, taxation, franchises and permits, price controls, etc.) which
directly or indirectly impact on the operations of business firms.

In the Philippines, the daily minimum wage rates are prescribed by government. As of August 28, 2007, the
minimum wage in the National Capital Region for the non-agricultural sector ranges from P325 to P362 per
day. For many small and medium-sized firms, the government prescribed wage rates have already adversely
affected profit margins.

Changes in the regulatory framework can require major adjustments in the operations of the firm. For example,
the policy of import liberalization and the resulting adjustment of tariff rates or removal of quotas of imported
products which followed Mrs. Aquino's assumption of the presidency adversely affected the operations of
many domestic firms accustomed to high tariffs on imported goods, and required them to make serious
adjustments in their operations.

The broader political trends and forces in the environment also have significance to businesses. At the most
basic level, some degree of political stability must prevail in a country if there is to be uninterrupted business
activity and a continued flow of private investment in business. Thus, the killing of Senator Benigno Aquino
in 1983 set off a disastrous chain of events which saw the Philippine economy registering negative or minimal
growth rates for three successive years.
At another level, political developments in the environment can presage changes in legislation and/or
government regulations which may have beneficial or adverse effects on certain industries or business firms.
Hence, business firms can not ignore the political factors in their environment..

The Technological Aspects

Technological developments continuously occur throughout the world. Technological developments lead to
new products and/or new ways of making the same products which can threaten pre-existing products sold
by a firm. Some industries are characterized by rapid change in products and technology (e.g., the computer
and the drug industries). Others are characterized by a greater stability in their products and production
technologies. Nevertheless, no industry is immune to the potential impact of new technologies in the long
run.

E-commerce is the latest buzz word in business management. Already business-to-business, or "B2B",
transactions are reported to be the fastest growing area in business transacted through the Internet. Among
others, the Internet offers a global reach plus speed and low transactions costs as compelling advantages when
business firms procure their raw material and other requirements through the "Web". The field of "B2C", that
is "business to customers" where firms transact. with individual (as opposed to institutional) clients through
the Internet has revolutionalized marketing and retailing worldwide.

But the Internet promises to change not merely the methods by which products are advertised and sold. It also
promises to change the products themselves. Technology pundits say that in the future, household appliances
such as washing machines and refrigerators, will "surf" the Internet seeking instructions from a homeowner
who is miles away. A fashionable jacket in the future may show a video screen in the back displaying whatever
images the wearer has programmed it to show says the Massachusetts Institute of Technology in the US.

Equally interesting is the way computers and software will automate management processes themselves. The
creation and sale of commercial computer software which record and manipulate transactions data in business
and other organizations - besides executing some preprogrammed transactions themselves - is now a very
large business in itself. Indeed, people anticipate further transformations wrought by computer and
information technology and speak of a "New Economy" which one writer characterizes as follows:
"The new economy has three distinguishing characteristics. It is global. It favors intangible things-ideas,
information, and relationships. And it is intensely interlinked. These three attributes produce a new type of
marketplace and society, one that is rooted in ubiquitous electronic networks"2

While no one can fully anticipate the way that business will be further transformed in the future by the Internet,
it is worth noting the following quote from Andy Grove, the former CEO of Intel:

"In five years, all companies will be Internet companies, or they won't be companies at all."3

The Social-Cultural and Demographic Aspects

Levels of education, lifestyles, tastes and preferences, age profile, size and geographic distribution of the
population, etc., are examples of social, cultural and demographic variables which can influence the kinds of
products and services which will be sold and the methods of selling them. In the Metro Manila environment,
for example, a combination of a growing population, increasing incomes, congestion in the inner city, and the
influence of western lifestyles have led to major changes in the type and location of many retail establishments
(e.g., restaurants and department stores) which used to be concentrated in the Quiapo-Escolta area in the
fifties and the early sixties. Similarly, the spread of television and radio among many Filipino households had
significantly affected the ways which business firms use to advertise and to inform potential users of their
products.

Social, cultural and demographic factors affect business firms in another way. People are continuously being
absorbed by business firms as workers and as managers. The levels of education, attitudes, outlook and
economic aspirations of such people can influence the types of incentives and internal working environment
which business firms must offer and maintain in order to attract and motivate their employees. As an example,
some firms which established branch operations in the provinces as a result of the growth of their market
have had to contend with employees from rural backgrounds who do not respond well to styles of
supervision/management which were found to be effective among Metro Manila workers.

Changes in the social, cultural and demographic factors are often less visible or perceptible than changes in the
other environmental aspects. But the former are clearly not less important to a business firm than the latter.
IMMEDIATE AND REMOTE ENVIRONMENTS

The environment of a firm can be viewed at three levels. We may consider the industry in which the firm
operates as its most immediate environment. The country environment is the next level of the firm's
environment in the sense that events occurring therein may have a less direct impact on the firm than the
industry environment. And finally the most remote environment of the firm is what we will call the global
environment. The latter, i.e., the global system, is also the broadest of a firm's environments. This way of
looking at a firm's environment, i.e. in terms of its different levels and aspects, is illustrated in Chart 3-1:

THE INDUSTRY ENVIRONMENT

The immediate environment of the firm is made up of its customers, competitors, suppliers, and other entities
which have direct and continuing interactions with the firm. The latter may include employee labor
organizations, special government regulatory bodies, industry pressure groups, the communities in which the
firm is located, etc. For want of a better term, we call this environment the industry environment.

Customers

The profile of the users of a firm's products or services differ from one industry to another. Some business
firms deal with few institutional customers. Others deal with large numbers of individual customers. For any
given type of business, the types, location, buying habits, size, needs, etc., of its customers are continuously
changing. Knowing who its customers are, what their buying preferences and habits are, where they are
located, and so forth are important external data that firms try to collect through different means. There is a
Western saying that the "customer is king." His needs are what business firms try to serve. Hence few firms
can afford to take their customers for granted. In fact, business is a constant battle among firms to win the
customers of their competitors.

Competitors

Different businesses, or industries, vary in their competitive structure. There are industries like the automobile
industry or the soft drink industry which are dominated by a few major competitors-i.e., they are oligopolistic.
There are industries, like the restaurant industry which are characterized by many small competitors. The
methods of competition are in part determined by the structure of the industry. Thus, large competitors
attempt large market coverage and can afford expensive forms of promotions or advertising, or multiple
service locations, or extend credit. Smaller firms often have more limited market coverage and often emphasize
such competitive weapons as unique products or more personalized service to the customer.

The competitive structure of an industry and the methods of competition used are, like other aspects of the
environment, dynamic. Some industries which began with many competitors change, over time, towards a
more oligopolistic structure as competitors merge and combine, or successful competitors grow in size and
strength at the expense of weaker competitors. This happened to some degree in the Philippine cement
industry as the depressed conditions in the market in the 70's forced many cement companies into financial
difficulties leading to a consolidation of the industry through buy-outs and mergers. The growth of dominant
firms in an industry previously characterized by small size competitors is happening in the department store
business in the major Philippine cities. SM Shoemart, for example, which started out as one of many small
department stores in Carriedo in the old downtown Manila area has acquired a commanding position in
Metro Manila today. The restaurant business has likewise seen a transformation from many small
independent establishments to one where some competitors have become relatively large and use franchised
multilocation operations.

An opposite trend is also possible. The industry deregulation program of the Ramos administration has
created more competition in the banking and the telecommunications industries, for example.

The trends in the competitive environment of the firm and the methods of competition used are forces in the
external environment which the firm continuously has to monitor, assess and cope with.

Suppliers

Suppliers are another important element in a firm's immediate environment. Some firms are large relative to
their suppliers and hence can extract price and other concessions from them. In other cases, the situation is
the reverse where many small firms buy from a few large suppliers. This appears to be the situation of the
bakery industry vis-à vis the flour millers in the Philippines, for example. The relative strengths of buyer vs.
supplier determines the extent to which one part can extract concessions from the other. This is illustrated
in Chart 3-2.
The relations of a firm with its suppliers can change in major ways. For example, firms can integrate backward
by buying out their supplier or setting up their own facilities to produce the needed supplies. The opposite case
also happens where large suppliers integrate forward by buying out some of their business customers or by
setting up their own processing or distribution network. When these changes occur, the structure of
competition and the balance of strength in an industry changes requiring the firms in the industry to adjust.

While we described a firm's relationship with its suppliers as potentially competitive, this need not be always
so. In fact, most firms try to establish cooperative relationships with their suppliers in which both parties
benefit. Some firms view their close relationship with their suppliers as a source of competitive advantage. This
is especially so in Japan where large Japanese manufacturers maintain a system of close cooperative
relationships with their various suppliers which is strengthened through the practice of the parties buying
significant amounts of each other's shares of stock. This arrangement is called a supply keiretsu and is
considered one of the sources of competitive strengths of Japanese enterprise which American firms are trying
to copy.

Other Entities

Besides customers, competitors, and suppliers, there are potentially many other entities which could exert
continuing influences on the operations of the firm in a particular industry. For example, the Central Bank is an
important entity in the Banking industry because it regulates this industry directly. Many large businesses are
unionized and must periodically conduct collective bargaining negotiations with labor organizations. And for
some firms operating in remote locations, the New People's Army (NPA) is an important element in its
immediate environment.

As we earlier emphasized, the entities in the firm's immediate environment are of continuing interest to it
since the behavior of such entities generally have a more direct impact on the activities of a firm.

THE COUNTRY ENVIRONMENT

Beyond the industry environment is the national environment, the forces within which can still have a major
impact on the firm. As in the other levels, this environment can be viewed in terms of the economic, legal-
political, technological and social-cultural demographic aspects.

There are a number of characteristics of our country environment which are of interest to business firms. Like
many countries in the region, the Philippine economy exhibits structural characteristics which are typical of
less developed countries. The most important of these, of course, is the low per capita income of the
population (see Table 3-1).

In Table 3-1, the United States, Japan and Singapore show the highest per capita income in 2006. In 1995,
the same three countries showed the highest per capità income. However, China's per capita income in 2006
is nearly five times its 1995 per capita income which can be explained by the growth in China's global business
and industrialization strategy.

1., December 15, 1995, p. 100

2.United Nations Statistics Division, http://unstats.un.org/unsd/snaama/dnllist.asp

Another characteristic which the Philippines shares in common with other developing countries is the
preponderance of agriculture and services, vis-à-vis industry, as a source of employment (see Table 3-2).
 Table 3-2 SECTORAL DISTRIBUTION OF EMPLOYMENT IN THE PHILIPPINES (in
percentage)

The large component of agricultural employment in the rural areas, the lower incomes in this sector vis-à-vis
industry in the cities, and the attendant differences in consumption habits and lifestyles between the two
sectors have led to the characterization of economies such as ours as "dualistic". This may have varied
significance for business, e.g., the types of products to be sold in each sector, pricing, selling methods, etc.

A seeming permanent feature in contemporary developing countries like the Philippines, is the high rate of
inflation. Table 3-3 shows annual inflation rates for the Philippines, Singapore and the United States since 1990
to 2006.

Table 3-3

ANNUAL INFLATION RATES

 1990-2006

High inflation rates can affect the operations of a business in many ways-increase direct input costs, increase
the amount of capital needed to conduct the same physical volume of business, increase cost of funds, etc.
- and add to the overall uncertainly and risk in the business environment.

There are other less well-publicized characteristics of the Philippines as a country environment for business.
Among these are: a) the limited size of markets for products and services; b) the high import dependence of
Philippine industry; c) limited sources of financing; and d) the high technological dependence on other
countries.

Limited Markets

Because of the size of the population and the generally low levels of household incomes, the market for various
types of consumer products in the Philippines is significantly smaller than in the more advanced countries. For
example, automobile sales in the Philippines as of October 2007 hit 95,244 units only while sales in other
countries in Asia (Indonesia, 349,260 units; Japan, 2,900,833 units; Thailand, 509,186 units; Malaysia,
401,149, and China, 7,150,000 units) reached 11,310,428 units. This is far below the market in the US which
absorbs several million new cars per year. The US market reached 13,579,274 units for October 2007.
Moreover, because of the high proportion of the population living in the rural areas, the consumer market
tends to be geographically dispersed outside of the major cities, which when taken together with the
underdeveloped state of transport and storage infrastructure in the country, poses problems to sellers in
reaching the rural market.

The size and distribution of the Philippine consumer market has many implications for businesses. In some
cases, methods of manufacturing which are used in the more advanced countries have to be modified to suit
the smaller scale of production required in this country. In other cases, market coverage is deliberately
restricted to only the major centers of population and consumer purchasing power. The limited size of the
Philippine market is sometimes used to explain the refusal of certain industries to integrate backwards to the
more basic stages of production." It is also a reason used to explain the inability of certain domestic industries
to achieve the economies of scale which their counterparts in other countries attain.

High Import Dependence

Most Philippine industries are dependent on imported raw materials and equipment. Table 3-4 below
illustrates the large proportion of our merchandise imports that are in the category of raw materials or capital
equipment.
The high import dependence of Philippine industry reflects in the limited development of basic and
intermediate industries in the country. On the other hand, this dependence makes Philippine industries
generally vulnerable to disturbances in the flow of imports and/or to currency devaluations. part

Limited Sources of Financing

Universal Banks and commercial banks provide a significant portion of funds for business enterprises in this
country (see Chart 3-3).

Chart 3-3 LOAN PORTFOLIO OF THE FINANCIAL SYSTEM

as of December 2006
As of the end of December 2006, total outstanding loans granted by this sector was distributed by purpose
of the loan as shown in Table 3-5.
Table 3-5 LOANS OUTSTANDING OF COMMERCIAL BANKS BY PURPOSE, as of December 2006 (in billion
pesos)
In terms of geographic distribution, the bulk of loans of commercial banks are granted in the National
Capital Region (see Table 3-6) suggesting that business firms are concentrated in this Region.

The stockmarket as a source of funds is still relatively underdeveloped. There are only 241 listed
companies in the Philippine Stock Exchange as of May 1, 2007 out of a total of 182,834 registered
corporations at the Securities and Exchange Commission as of June 30, 2007. As a result of this, banks
provide the major part of the funds needed by the firms. Smaller firms avail of trade credits and other
informal credit sources. Trade and informal credit sources however have high cost, approximately two to
three times more than the interest rates charged by banks.

High Technological Dependence on Industrialized Countries

The more industrialized countries have a considerable technological lead over developing countries which is
maintained through their large and continuing investments in science and technology. As a result, many
manufactured products in the less developed countries, including the Philippines, are of foreign design. In the
Philippines, many of these products are domestically manufactured and sold by multinational corporations or
by domestic firms under license or joint venture agreements with a foreign entity.

This heavy dependence on foreign technology, not only in the Philippines but also among all the developing
countries in ASEAN, has lead to a criticism of industrial development in the region as representing "ersatz
(i.e., imitation) capitalism". Critics have observed that as long as industry in the region is technologically
dependent on the advanced countries, the manufacturing sector in these countries can not achieve export
competitiveness. They advocate a heavier investment in science and technology to enable manufactured
products in the region to be competitive, quality wise, with those from the advanced countries.

Although most Filipino firms are not yet in a position to make the large investments in Research and
Development (R&D) to develop product and process innovations in the more technologically complex
industries, Filipino firms appear already capable of making innovations in the designs of simpler products,
especially those characterized by a style or fashion component such as garments, footwear and furniture.
Moreover, the inability of Philippine firms to finance the large and risky R&D investments needed to
develop "high" technology products, e.g., in electronics, synthetic materials, energy, etc., does not mean
that our industries are doomed to permanent technological backwardness. Much depends on how much
effort is exerted by the managers of our manufacturing industries to master and improve upon the low
level technologies they now buy from the advanced countries, as the experience of Japan and Taiwan after
World War II would suggest.

While the above appear to be among the salient characteristics of the Philippine environment at this time,
it is obvious that change is continuously taking place in this environment. And many firms which have
successfully adapted to this current environment will later find the need to adjust to the changes now
taking place.

THE GLOBAL ENVIRONMENT

In earlier days, events occurring in other parts of the world were probably of less concern to a businessman
in the Philippines because their impact on his business, if any, would be neither significant nor immediate.
This has become less and less so as a result of the growing competition and interdependence among the
countries in the world which was pointed out in the first chapter. An example is the oil boycott by the Arab
countries and the tenfold increase of oil prices in the 70's. This event affected the Philippines, as
virtually every other country in the world, in a profound way. Similarly, a recession in the
major industrial countries could have serious effects on our export revenues and trigger many
repercussions in the domestic economy. The same could result from an increase in
protectionist legislation in our major export markets. Though more distant and perhaps less
direct in their impact, events taking place in the environment beyond our national boundaries
have increasingly become a matter of serious concern even to firms which have no direct
transactions with parties outside the country.
The Asian financial crisis caught many firms by surprise in 1997 (see Table 3-7) this are the list
of firms that sought debt suspension). Many of these firms belong to the property and
construction sectors that borrowed funds from foreign financial institutions. When the Asian
financial crisis broke out, the Philippine currency depreciated against the US dollar from an
average exchange rate of P25 to US$1 to about P45 to $1. Foreign loans borrowed by
Philippine firms require more funds for debt servicing and amortization. Given no
corresponding increases in revenues, and cash in-flows, many firms defaulted in the payment
of their foreign and local currency denominated loans.
The US sub-prime crisis which adversely affected the US stockmarket in July 2007 also affected the Philippine
stock market. "Sub prime" generally refers to those mortgages targeted at consumers with impaired or low
credit ratings who may find it difficult to obtain loans from traditional sources.

Table 3-8 shows that for the period of July 18, 2007 to July 31, 2007, when the US sub-prime
crisis peaked, the Philippine Stock Exchange (PSE) index declined and followed the directional
change of the US Dow Jones Industrial Index.

In general therefore, national economies are today more closely interlinked than previously
because of globalization and the World Trade Organization (WTO). Because of this, Friedman'
observed in his best selling book that products now tend to be produced in countries where
they can be most cheaply produced.
ANALYZING FOREIGN COUNTRY BUSINESS ENVIRONMENT

Selecting a foreign country as the market for a firm's products or services requires an analysis of the business
environment in the foreign country. The aspects of the firm's environment discussed below are illustrative of
factors present in foreign country environments which may be important for a businessman interested in
doing business therein.

The economic aspect

The economic aspects include a foreign country's inflation rates, population data, unemployment rates,
exchange rate, size of foreign debts, balance of trade position, gross domestic product (GDP) size and per
capita, interest rates and capital markets. Analysis of these variables help in the determination of the
purchasing power of the target markets. If a country imports most of its raw material inputs for production
such as oil and other consumption goods, fluctuations in the exchange rate can have a critical impact on
the prices of these goods. And when domestic price levels increase, the purchasing power of potential
customers may be adversely affected. High unemployment rates may also limit the market for certain
products or services such as and medical services. vehicles
A large population is not necessarily good for business. Per capita income of the
country may be better indicator of the market potential population in a
particular country. The US is a good market for consumer goods because the per
capita income is high while China, with more than the US, has a much lower per
capita income. Table 3-9 shows that in 2006, the population of China is the
largest among the listed countries at 1.3 billion. However, its per capita income
is only US$2054.50 for the same year. The population data could be considered a
large market opportunity for manufacturers of low-cost consumption goods like
sodas or personal care products but may not be large enough for other
manufacturers of expensive luxury items.
Legal-Political Aspects

The political system and form of government in a foreign country can have impact on the operations of firms.
Policies on taxation, wage legislation, government expenditure plans, investment incentives, intensity of
competition and subsidies, etc., can be influenced by the political structure and culture of a country.

In Russia, for instance, some ground rules have been suggested for safe success of foreign firms: first, avoid
industries that the government considers strategic, such as natural resources; second, avoid the wrong sort
of partner, steer clear of the "oligarchs" who made shady fortunes in the 1990s; and third, make the right
friends in the local government.

In France, the 35-hour week regulation introduced in 2000-02 has generated a constant stream of labor-
court rulings. For example, the Paris Court of Appeals ruled against Euro-Disney, upholding a claim by
employees that the time they spent in full costume traveling between the dressing room and their spot
inside the theme park should count as part of their working hours.11

In some countries, prisons are increasingly privatized. More than 17% of Australia's inmates are held in
private prisons. Next comes Britain with 10%, and America at 7%. These countries are dominated by big
prison-services firms which claim that private jails are better, cheaper and more accountable in both
construction and management."

Technological Aspects

The state of Information Technology (IT) development and E commerce development in a foreign market
should be considered in order to determine the availability of personnel that will provide skills necessary for
efficient operations as well as the infrastructure needed for computer and internet technologies.

Included here is the infrastructure for the communication system in foreign markets that facilitate
information flows between companies and individuals from different countries.

For example, among the participants in the global call center industry, India outperforms all other
countries with a combination of advantages: low-cost labor, a progressive educational system
ensuring a continuous supply of highly-skilled employees, reliable low-cost infrastructure, supportive
business government, and a wealth of management experience in the call center industry.13 China is
also said to be a preferred choice as a call center location for companies targeting South Korea. China
is comparable to India in terms of size and cost of labor supply.14

Infrastructure Development

Infrastructure development impact on operations particularly on marketing and production. These include
road networks, rail systems, airports, land transportation system, shipping, etc.

Fort Dauphin, also known as Tolagnaro, a town in Southern Madagascar (Africa) is accessible only by
aircraft or by way of dirt roads. However, hundreds of people have moved in from abroad and from other
parts of the country because Rio Tinto, a global mining giant, invested $650 million in the world's "richest"
deposit of ilmenite. This mineral contains titanium oxide used to make pigments and sunscreen. But first
the company, in joint venture with government (to attract foreign investors), had to build roads, a new
port, power and water infrastructure. Fort Dauphin lacks running water and reliable electricity.15

In Europe, the Channel Tunnel, completed in 1994, links Great Britain and mainland Europe. It is the
longest undersea tunnel in the world which is 37.9 km. In 2005, 8.5 million passengers, 2 million cars and
1.3 million trucks used the Channel Tunnel. Rail freight carried through the Channel Tunnel was 1.6 million
tons during the same year. A journey through the channel lasts about 20 minutes. It cost £10 billion. The
Channel Tunnel, no doubt has increased trade and business activities, e.g., tourism, in both Great Britain
and mainland Europe.

Geographic Influences

These include the climate (seasons), natural resources, location of country and population concentration. Oil-
rich countries in the middle east have been destination of exports of goods and services. The strategic
location of Thailand as well as its resorts have likewise attracted millions of tourists from western
countries, thereby increasing the volume of business of airlines, hotels and restaurant.

Social, Cultural and Demographic Aspects

Social, cultural and demographic variables can influence the products and services that a firm intends to sell
in a foreign country.

For example, shampoo and toothpaste products are sold in smaller packs in less developed countries
like the Philippines but are sold in large packages in the US and other developed countries where per
capita income is higher.

Nestle, the world's largest food company, sells its products in 130 countries. Nestle makes about 200
different types of Nescafe ranging from 3-in-1 in Asia which contains a mix of coffee, milk and sugar to
more expensive jars of freeze-dried Columbian Nescafe for French coffee snobs. Nestle adjusts the 800
or so components that go into Nescafe to fit national preferences. Nestle boasts the biggest R&D
operation in the food industry with 3700 staffers and an annual budget of $1.4 million.16

In the case of McDonalds, European sales increased by 5.8% in 2006 and the number of customers by
3.4%. France is the most profitable market after America. Mr. Denis Hannequin, the European boss,.
established "design studio" for the restaurants' interior to adapt to local tastes. He also set up a
"food" studio where cooks devise new recipes in response to local tastes.17

THE IMPACT OF THE FIRM ON ITS ENVIRONMENT

Throughout the foregoing sections of this paper, we have emphasized the dynamic nature of the firm's
environment and the need for the firm to make continuing adaptations to it. It should also be recognized
however, that a firm is not a passive element in its environment. Firms also actively try to influence and
shape their environments. Thus, firms do not merely respond to the tastes of their customers but also
attempt to shape consumer tastes through advertising, etc. Firms innovate with products and services
previously nonexistent in the market. Firms also lobby for certain legislation to be passed. And so on.

The firm's ability to influence its environment is partly a function of its size. In fact, some companies are so
large that their actions have a significant impact on their surroundings regardless of whether they intend it
or not. For example, the Atlas Mining company was such a large presence in Toledo City that it had little
choice except to be involved in the efforts at developing its surrounding community.18 This is one reason
why many writers argue the need for managers to be socially responsible.
SUMMARY

The environment of a firm is the sum of all the elements and forces in its surroundings which have a potential
impact on its ability to achieve its objectives. All firms face an external environment which is continuously
changing. And changes in the environment can represent threats to the continuing relevance and viability of
the firm and its products or services. Changes in the environment may, on the other hand, represent new
opportunities for the firm to change and grow. Since the rate of change in broad technological and social
aspects of the environment are not expected to slow down in the future and indeed may accelerate, a high
degree of adaptability is required for organizations to continue to survive and prosper in the future.

The environment of the firm may be analyzed in terms of its different aspects and also in terms of its
different levels, i.e., its more immediate as against its more remote environments. The international or global
environment, though representing the most remote environment for most business firms in the Philippines,
has increasingly come to exert a significant impact on the Philippine economy, and hence ultimately, on
domestic business enterprises.

The Philippines as a country environment for business was characterized as one having many structural
characteristics common to developing countries. In addition to these, the Philippines has unique
characteristics and problems which will exert a major influence on the environment for business in the
country for many years to come.

REVIEW QUESTIONS

1. What are the major aspects of the external environment which may be significant to a business firm? Give
examples of each.
2. Describe some major characteristics of the Philippines as a country

environment for business.

3. What entities constitute the industry environment of a firm? Explain how each may affect the success of a
firm.

4. How do factors in the global environment affect businesses

operating domestically? Give examples.

5. How do firms influence their environment?

REFERENCES

1E.V. Soriano and L. Nehrt, Business Policy in an Asian Context. (Quezon

City:Sinag-tala, 1976).

K. Kelly, The New Economy. (New York: Penguin Books, 1998), p. 2.

3 "The Net Imperative: A Survey of Business and the Internet," The Economist, June 26, 1999, pp. 18.

M. Porter, Competitive Strategy. (New York: The Free Press, 1980). C. Ferguson, "Computers and the Coming
of the US Keiretsu," Harvard

Business Review, July - August, 1990, pp. 58-59.

E. Echanis and R. Rodriguez, "Some Explanations for the High Returns in the Philippine Pharmaceuticals
Industry," Philippine Management Review,

Vol. I, No. 1, 1990.

"Yoshihara Kunio, The Rise of Ersatz Capitalism in Southeast Asia. (Singapore: Oxford University Press,
1988).Ibid.

'T. L. Friedman. The World is Flat: A Brief History of the Twenty-First Century.

(New York: Farrar, Strauss & Giroux, 2006). 10 The Economist, Feb 39, 2007, p. 62

"Ibid., p. 50
12 The Economist, Jan. 27 - Feb 2, 2007, p. 52

13 A. Alava, "Industry Report: The Problem of Sustainable Competitive Advantage in Philippine Call Centers".
Discussion Paper, p. 27

14 Ibid., P. 9

15 The Economist, March 17-23, 2007, p. 90.

16 P. Gumbel, Same but different. Summer Journey, Time Magazine, June 13,

2007, p. 46.

"The Economist, January 27, 2007, p. 57.

18 Philippine Corporate Visions, The Philippine Futuristics Society and the SGV Foundation, Vol. I (Manila:
1990), pp. 61-65.