BUSINESS AND ITS ENVIRONMENT Objectives At the end of this chapter, the students are expec ted to: 1. discuss the meaning and nature of business; 2. identify the various kinds of business; 3. recognize the objectives of business; s the impacts of various business environments; 4 ass 5. appraise the business environment and match with the organization, 6. _ evaluate the survival strategies in uncertain environments; 7. examine the application of coping strategies; and 8 examine the application of environmental control measures. INTRODUCTION Knowledge about management and organization is very useful especially in. human endeavors like operating a business firm. This will be more significant, however, if such is supplemented by a basic knowledge of business and its environment. This chapter attempts o provide such requirement. WHAT IS BUSINESS? Under the free enterprise system, the growth of the economy lies in the ability of private individuals to achieve economic objectives. The quest for profit is usually undertaken by engagement in business operations. Business firms and the government are expected to provide goods and services to the society. The major Part of this task, however, is assigned to the private business firms. Under the system, firms are free to compete with each other and competition leads to the offering of new and improved products and services to the society. Sa tals : : ‘ oe dad ot living is raised or lowered depending to a large extent on the performance ot Business is largely responsible for bringing i t s : - r n ging into the market a wide array of products, which were hot made available in the past. High technology items like colored television, video omer ae Phones, and computers are sold Openly in the market. This happens eve" vsness firms continue to provide mankind with basic necessities like fret od shel! Even amusement centers like Disneyland of business, ‘Yland and resorts like Boracay are made possible becal* Business Defined profitsecking activities and enterprises that provide g00% odlicin sn Profits refer to the rewards for businesspers0™ B and marketing goods and services and services necessary to an econoi who take the risks involved in prChapter 2: Business and is Environment KINDS OF BUSINESS According to the nature of the principal activity performed, busi into three main divisions: wusiness may be classified 1. Commerce. Business firms, which are engaged in buyi " : ing and sell : services, are classified as commerce. Also included in this ig aca merchandizing, and marketing. Examples of commerce as a kind of bustnens ee supermarkets, dry goods stores, peddlers, sari-sari stores, importers, and m. i others. i : - 2, Industry. Industries are those, which are mainly engaged in producti "4 s e , production. Good: 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. Industry business may be further classified into: a. Genetic industries are those involved in agriculture, forestry, and fish culture. b. Extractive industries are those involved in the extraction of goods from natural resources, which include mining, lumbering, hunting, and fishing. Manufacturing industries convert raw materials into finished products. Examples are firms engaged in the manufacture of drugs, plastics, food, liquor, footwear, motorcars, tools, office supplies, etc. d. Construction industries are those engaged in building infrastructures like airports, seaports, dams, and highways and dwelling units. 3. _ Services. A service business is one, which sells service to the buyer. Service firms may be classified as: a. _ Recreation -moviehouses, television and radio stations, stage presentations, resorts, and the like; b. Personal — restaurants, barber shops, transportat slimming salons, and the like; and banks, insurance companies, investment houses, financing institu- ‘ons, savings and loans associations, and the like. theaters for drama and tion, hotels, tailoring shops, c. Finance — tions, credit uni OBJECTIVES OF BUSINESS ‘Apbusiness firm is established primarily for profit. There are other reasons, however, why anyone would want to start a business. Some of these are to do work that is enjoyable, to do something for pleasure and pride, and to achieve financial independence. 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 owntt salaries and other compensation for executives, wages and other compensa 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.Business Organization and Management THE ENVIRONMENT OF BUSINESS FIRMS Organizations will succeed or fail depending on the The manager of a particular business organization is not entire! about the environment, or make some adjustments in the environment requires a clear orientation and an understanding of that affect business and the application of the right strategies ( business firm’s advantage. The environmental factors that affect the activities of external. oO The External Environment The external environment consists of ele! e business operations. These elements play important roles in are the sources of the inputs required by business firms for cot turn, are required by the external environment (Figure 4). ments outside an orgai as transformer as recipient INPUTS — raw materials = money = labor = energy as provider Figure 4 ‘The Main Function of the Business Firm ‘Types of Elements in the External Environment RNAL (tt) ENVIRONMENT environment that confronts them, Ly helpless. He can do something ganization. Managing, the f factors in the environmen, » harness these factors to 4 f the organization may be internal or nization that are relevant to business operations because these nversion into outputs which, in ‘as recipient ‘There are two elements that compose the external environment (Figure 5). 1. Direct Action Elements. These directly influence the organization. These include the consumers, competitors, labor unions, suppliers, financial institutions, and government agencies. They are often referred to as stakeholders of the organization. 2. Indirect Action Elements, These do not affect the organization directly. Instead, they affect the climate in which the operations of the organization take place. Thes? are the technological, economic, socio-cultural, political-legal and international variables. There are instances, however, when an indirect-action element of one industry is regarded as a direct action element of another.The Direct Action Components of What the organizations can achi influence of the el ‘Chapter 2: Business and is Environment the duplication service business may be an indirect-action element of For example, schools, but it may be considered as a direct-action element of publishers of books. Direct Action Elements Indirect Action Elements = consumers = technological variables = competitors = economic variables = labor unions = poltica-legal variables = suppliers socio-cultural variables = financial institutions international variables — government agencies Elements in the External Envifonimen, A ars the External Enviftinment™ eve will depend much on the direct-aghi n components naif modify the * of the external environment. However, the organization(s strategy tat lements, These elements are: iy 0” ee - i. The i Customers. Customer patronage is ve! ‘ital to the existence.of manager must continuously strive to keep 0) Gistomers and attract new ones. It is ot easy to deal with many customers because they aré different in many ways. A vo tomer could be an individual, an institution like a school, a government agency, a business firm, or a social club. The differences among customers and approaches in selling. The modern manager oP pased on his findings, he makes decisions on the: appropriate marketing strategy. Suppliers. Business firms achieve their objectives through a combination of activities. Fit and foremost is the transformation of production inputs like raw materials, services, energy, equipment, and labor into usable products or services. Suppliers provide these inputs. As such, business fms must maintain good relationship with suppliers if they want on-time deliveries of inputs. Business firms compete with each other in obtaining these inputs in the same manner that suppliers compete with ‘each other to get supply contracts. The business firm, through its purchasing officer, takes ‘advantage of the competition among suppliers to ‘obtain lower prices, better quality of products and services, faster deliveries, and better after sales service. Labor Supply. The services of managers ‘and employees are indispensable requirements ‘of business operations. These services are in a way procured through recruitment and hiring by the human resource specialists of business firms. As the need for worker skills and experiences vary, “different means are used in locating qualified workers. market situations will require varied ‘makes careful analysis of the market aBusiness Organization and Management ions, collective bargaining vorker members of unions, fire In companies where workers are ee ent an ob nt become a corhnon undertaking. In this activity, aan Oa raced wae wages, benefits, working conditions, working hours, on. oting, strategy, the manager og 4. Competitors, In determining the appropriate marke ba deiphi ciate but alse it © a business firm will have to consider not only (ob qrmiey nian sh c et market share can be succes: competitors, The target marl analysis of competitors, i Great Taste Cof Competitors may either be direct or indirect. ee Pepsi peel = are direct competitors, and so are Pepsi and Coke, Sapa competitors Each of them will have to reckon with the ce ituati nother. As such, The intensity of competition will differ from ee ae . oot me the marketing strategy of any business firm will depen Z situations: i ler; 2. Monopoly ~ where there is only a single producer or seller; imilar products, b. Oligopoly when there are only a few producers or sellers of similar p: and < Pure Competition - when there are many producers or sellers of similar products. 5. Financial Institutions. Business firms are concerned with ainiainlng or os ” thelr operations. In either ease, the company wil need funds-1 : — n o jan tld be opening a new branch, adding a new produ toits line, chasing a cca equipment. Any of these moves will require financing through borrowing money on a short-term or long-term basis. As such, a company planning to expan its business must be well regarded by financial institutions such as commercial © Government Agencies, In many ways, business organizations are affected by changes 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 spvernament agencies. For instance, a local ordinance imposing a higher sales tax could pressure business firms to re i locate their offices in more business friendly Cities, Another example is the passage of the Senior Citizens Law, which placed some burden on business firms because of the extra clerical and administrative work involved in its implementation The Indirect Action Elements of the External Environment The business organization is affected indirectly by elemer These elements are the following: nts in the external environment. 1. Technological Variables, Technology has become widely Tecognized as an important ingredient in the success of business firme and manager who does not consiter the 2Shaphen 2 Bininns sed ts Ervecemant technological ae his strategy faces the risk of losin Technology refers to the tools and ideas that may be used yan onpetiaten "Y aN organization 7 lon to sch sons A business frm, for instance, may ase Prpovation to inerease its market share, oF to develop a ii ae invention or an ianees oF nnovaions an those happening in the telocommuniene rodce Fear he vanes 8 omni technology wich ie cate ana Thee sing cellar phones, The service providers dct ee Telecom smart San and Sun Cellular, attempt aa ry namely lobe with the use of newer technologies like the transmission of photog ae photographs and documents (0 other parties. ome Variables The economy isa very important element in business pursuits pa iethe company has the edge in technology and financial capabli | over i competitors, it may not be so successful if the economy does not allow: ri te When managers make business decisions, economic conditions must be jnto consideration, This concern will touch on the health of the aaa jose se ulation, income levels, 08s domestic product, employment, Seba Scause of the importance of the economic variables, prio ean required to devote time and resources to forecasting the economy and to antic ete Spanges in important concems like prices. cio-Cultural Variables. Business organizations can only flourish if they consider society’s customs and values in the planning and implementation of their activities. For instance, employers in the Philippines must integrate in their annual financial plan the tradition of cash advances required by employees in times of need like enrolment in school of children, baptism of child, marriage, etc. “Many years ago in the Philippines, the barber shop was the only place where ‘men can go for getting a haircut without being ridiculed. Things have changed since then. Men have started patronizing beauty parlors that were once exclusive for women. The barbers did not mind such developments and they lost their customers. The barbershops were forced to hibernate for many years and when they finally realized their error, they started operating again. This happens not only with ‘mall business organizations but with big business firms as well. Business literature abounds with stories of such misadventures. Political:Legal Variables. These consist of laws and regulations promulgated and implemented at the local, national, and international levels. Also included in this element are individuals and organizations that attempt to influence the political- legal environment. They consist of lobbyists and a number of protest groups: In the Philippines, activities of lobbyists and protest groups are concentrated in Metro Manila where most of the offices of the ‘national government are located, The Iatest targets of protests are the mining and logging industries, which are considered by many as responsible for the destruction of the environment. Business firms that are engaged in such industries have to contend with protest grOUPS OPPOS!NE their operations. International Variables. This element includes changes occurring in various paris of the world, which may affect business organizations in various ways and degrees Farlocal businesses, what happens overseas may be ‘oflittle concern to them, unless they plan to operate globally. ‘There are so! shen this element cannot me instances Wl Ee be disregarded. For instance, a foreign government may ban the entry of productsS coming from countries li ro exporters may [aoe the Philippines. If that is the case, some Of the Filiping It is wise for the 1¢ manager of a business organization 2 elopments around the world. In doing so, he may haves whatever will affect his business. B usiness Organization and Management 0 pay some attention 4, sufficient time to prepay MATCHING THE ORGANIZATION WITH THE ENVIRONMENT ana NY do some organizations thrive in certain environments where o1hers i? Th ansrrer sy be derived from determining whether the organization in question i ited i environment where it operates. Not all environments are. similar in terms of busing, considerations. One environment may be friendly to one pasticular {Pe oe another may be hostile to that business type. Types of Business Environment The environment of business may be classified 1. Static. Few forces in the environment are notable features of staticenvironments arenoneW COMP t breakthroughs by current competitors, ‘and litle activity by public pressure Groups to influence the organization. 2. Dynamic. When significant number of environmental forces that affect busines arb changing. Among the features of a dynamic ‘environment are rapidly changing difficulties in government regulations affecting business new competitors, acquiring raw materials, and ec ously changing socio-cultural aspects ofthe population. aseither static or dynamic. affect business. Among the Environmental Uncertainty mation regarding what exists and what This may be defined as a lack of complete info: developments may occur in the environment. This uncertainty ‘makes it difficult for managers | to perform the following: 1. analyze constituencies and their needs; f 2, predict future state of affairs; and } 3, understand their potential implications for the organization. | pimensions of Environmental Uncertainty There are two important dimensions of environmental 1. Complexity. This refers to the number of different factors in the environment such as information, capital, material, people, and other organizations. For example: t consider a university situated in a city about a hundred kilometers from Man! consider ® ronmental factors to consider would be the availablity of qualified teachers in the area and the income of the people in the area. Environmen uncertainty rises as the number of factors increases. 2. Rate of Change in these Factors. These are the factors in the external environm change from time to time. For instance, income levels and the number of qu uncertainty: entpesi appropriate org (Chapter 7 Burons we ts Ervrrmraet vachers may increase or deere teache T decrease after a few years. Envire as the rate of change increases Drmenital uncertainty riers igns of Business Organizations Uncertainties in the environment make it necessa = Bei ceseaty for managers to co anization design for each type of environment (Figure ~ comaider the Significant nuribar of DYNAMIC ENVIRONMENT forces ara charging ORGANIC ORGANIZATION the appropriate: organization the appropriate ‘organization Figure 6 Environments and Organizations mechanistic design is deemed appropriate 1. Mechanistic Design. An organization witha This design is characterized by a vertical fora task that is routine and unchanging. structure that typically operates with: more centralized authority; many rules and procedures; a precise division of labor; narrow spans of control; and formal means of coordination. The best example of an organizati government, which is largely bureaucratic. Si for static environments. Since decision making is centralized, from top to bottom levels and vice versa. 2. Organic Design. An organization with an onganic design is appropri that is non-routine and changing. It is characterized by the following: decentralized authority; fewer rules and procedures; less precise division of labor; wider spans of control; and eans of coordination. ceo TP on with a mechanistic design is the tuch a design is more or less appropriate communication flows te for a task Pao FP more personal miBusiness Organization and Management Tasks in organic organizations are completed through group eHorts and yy adjusted and redefined to cope with demands made by the ¢ hanging ENVIroricH en, Those close to the task are vested with authority to make decisions SN they have a more immediate understanding of problems. Organization mem? me “chan i nave occurred jn information about adjustments in tasks and changes that haw on environment making communication as primarily: horizontal SURVIVAL STRATEGIES IN UNCERTAIN ENVIRONMENTS general options are available w To survive and grow in uncertain environments, (we business organizations (Figure 7). These are the following 1s refer to the transformation of 4 1. Application of Coping Strategies. Coping strategies rt Te ible with existing part or all of the organization to make its activiti environmental conditions. Adaptation of Environmental Control Measures. management actions to identify and influence envi positive effects on organizational activities. Environmental control refers ty ronmental factors to obtain more SURVIVAL STRATEGIES CONTROLLING ‘Manipulating the bufferi Creating favorable “3 linkages ‘environment ‘smoothing L forecasting rationing merger ‘changing elements boundary spanning joint ventures structural complexity interlocking ‘executive succession directorates lobbying executive recruitment institutional advertising resource flows forming trade associations Figure 7 Survival Strategies in Uncertain EnvironmentsChagter 7: Businass aed ts Eméroneert oPinG gTRATEGIES oping, strategies are those used to protect internal ope conte rat et These sateen are a ink on rations from the harmful effects of pange® fo ‘ This refers to setting up buffers for both input and output sides Manat activities in onder to absorb and cope with env , a Programs of practices are instituted to prevent sialon ht e from upsetting the reduction process. An example input buffer isthe ia factors I bya shipping company to provide some assurance of unhampered operation tuel fora certain’ period. When the production outputs of finished goods are as fast as sey ant tay enuse disruption in Se cies the fem. the gh aruption will jeopardize operations, management may choose to sell their products at low prices, sometimes even lower than production costs. This action is referred to as butfering on the output side. ‘ning, Iregular demand is always @ problem for many business firms. This ‘of the difficulty in making adjustments concerning manpower and remedied by smoothing which refers to efforts involved in in the environment. An example of smoothing is the offering Tike selling raincoats at big discounts during i equipment. This is reducing changes of discounts during slack seasons summer. Forecasting. This refers to making predictions, projections, or estimates of future events or conditions in the environment in which the organization operates. If forecasting is effective, adjustments in its operation to meet changes in the newspaper publisher who was able to forecast and determine a steady decline in newspaper readership, will have the advantage of considering other options before the event actually happens. Rationing. This happens when the organization ignores some operations and ost critical functions ofthe technical core, tmphasizesothers inordertopreservethe versity, which temporarily deploys its research personnel to ‘An example is the uni sist in enrolment activities. After the enrolment period, the reassigned employees go back to their permanent units. jobs or roles in which individual Boundary Spanning. This is the process of creating j employees are required to “have strong, sreamunication links within their department, with people in other units, ind often with the external community.” The individuals, called boundary spanners, gather and collect critical information, ier clean be used for planning in the technical cof, “The information gathered can also be used to reduce uncertainty in some areas of operation. Structural Complexity. ‘This is when the business adapts to the environment by setting up departments or subsystems that will respond to specific groupings cnvirenmental factors. For example; the production of a book publishing company may create another unit that will deal with authors’ concerns. ‘Another example is mt offices and large retail ey creation of senior citizens lanes in various govern™® establishments.Business Organization and Management inty in the environment is th, | jacement of a top Manager b, 7. Executive Succession. One way of adapting to uncerta “The following advantage, adoption of an effective executive succession. The rep another manager is referred to as executive succession. may be derived from an effective executive succession: te nena ene! : a. enables the organization to hire executives with new pienso, ific skills o b. provides organization with a way to bring in specific 5 ve and respond to the environment; and i Ss a scutives. ea provides a coordinated means of replacing retiring © ENVIRONMENTAL CONTROLLING : ; fs iness firms can apply specific strategies So far, the discussions have focused on how business smother option, however j to cope with changes in the environment. The business firm has vironment consist of two may make some moves to control the environment. Controlling the em categories. They are as follows: i ie “oct is ible linkages is to reduce 1. Creating Favorable Linkages. The objective of creating favoral . environmental uncertainty This can be achieved by using any of the following methods: Mergers. There are times when the activities of one business firm cause ‘uncertainty to another. For instance, a certain manufacturer of grocery products failed several times in its commitment to deliver items that were purchased earlier by a big retailing firm. To reduce or eliminate this uncertainty, the big retailer decided to acquire the supplier company. Such move is called merger, and it constitutes a method for controlling the environment. b. Joint Ventures. There are also times when a company finds it difficult to operate ne Particular market, especially those located overseas, A car manufacturer, for instance, may create a favorable linkage by forming a temporary busines partnership with a local distributor. Such rT = Linersbiutiter pn cenaigtoe method of reducing environmental © Interlocking Directorates. When some member . 7 : company are also members of the board ofenoth, carpal of directors of ane coaauted interlocking directorates. Thishappens when oe sesh arrangement sanpany sa current member of the board of aneahar Pett Reed by the executive, for instance, may be reerattag eet, CORP OTALi @ company even ithe is currently « menbe onde pond Card of directors of ‘e board of another company. a in the ind ri a i i industry. For instance, itis not hard to deteionine ae Por eee i : ‘efits that may Sci lipo eins, Nurse; wo ere decla: . nce (Philippine Star March 4 251g walter, a inemotchars inthe ner . oratory2M environment by using any or all of a Chapter 2: Businass a ae and Its Environment. Resour Flos. Tis term refers tothe = the organization and other onpanizatig no Of Fesource exch to control the environment, the pattern of exchanges, His option i, Frequency of Exchanges, relationships with man For inst ance, a Universi ' ¥ book diate tMetsly may decide i to set abun Ose he tor , 7 tril a Onee the telationship is established fee oh one choose to buy books more often uf occasionally, MUTE may ii, Quantity Involved in the ; i Exchanges, i quantity of books that will be — otth aan tated onthe the interest of better perf “All of the above wil ‘ormance in the organization, = "ganization may attempt i efoto pt to manipulate the fanipulating the Environment. ©, Changing Elements. A business environment by changing one i it operates. For example, a large distributor at ements in which exclusive distribution contract with placed in jeopardy. To avoid the consequence of | declining sales, the distributor changed its competitive element of a single brand dealership to a multi-brand dealership. This change brought the distributor back to its former competitive strength. Lobbying. This term refers to the act of attempting to influence business and government to create legislation or conduct an activity that will help a particular organization. Lobbying . usually involves paying an individual to represent the interests of the organization to decision-makers in the government. The lobbyists may be employees of the organization or may be hired by the organization on a full-time or part-time basis. An example of lobbyist in the Philippines is PROGUN which “became heavily involved in political lobbying and advocacy...to protect firearm rights for Filipinos’ Forming Trade Associations. One way of manipulating the environment is _ through trade associations, which are composed of member organizations that share a common interest. Members of trade associations pool their resources to influence government policies affecting their business. There are many trade associations existing in the Philippines. Some of them are as follows: i. Philippine Petroleum Sea Transport Association, Inc. ii, Association of Petrochemical Manufacturers of the Philippines iii, Cement Manufacturers Association of the Philippines iv. Association of Flexible Packaging Manufacturers of the Philippines v. Philippine Appliance Industry Association