BMSH2001

THE FIRM AND ITS ENVIRONMENT

I. Environmental Forces and Scanning

Environmental Forces

Systematic monitoring of the major external forces influencing organizations is necessary to improve
the management of companies. Failure to consider a company’s general and specific business
environments may affect the strategies that management will make and use.

The general business environment includes the economic, socio-cultural, politico-legal,

demographic, technological, and the world and ecological situations. All these must be considered
as managers’ plan, organize, staff, lead, and control their respective organizations.

The environmental factors are explained as follows (Altarejos et. al., 2016):
• Economic situations include factors/elements such as inflation, rates of interest, changing
options in stock markets, and people’s spending habits. Economic situations may affect
management practices in organizations. For example, companies may postpone expansion
plans if bank loan interest rates are too high.
• Sociocultural situations include the customers’ changing values and preferences; customs
could also affect management practices in companies. For example, Filipino customers are
now conscious about the importance of avoiding fatty foods, so many food companies now
make sure that the products they offer are cholesterol-free or are low in cholesterol. In
doing so, they avoid losing their customers.
• Politico-legal situations refer to national or local laws, international laws, and rules and
regulations that influence organizational management. For example, labor laws related to
preventing employers from firing their employees without due process require the former
to allow the latter to exercise their right to present their position during disciplinary action
before their employment can be terminated.
• Demographic situations such as gender, age, education level, income, the number of family
members, geographic origin, etc. may also influence some managerial decisions in
organizations. For example, decisions regarding the hiring of human resources may be
affected by an organization’s management policy that shows prejudice to the hiring of
married females who are in the child-bearing age. This may be because they would like to
minimize the payment of maternity leave benefits.
• The technological situations of companies involve the use of varied types of electronic
gadgets and advanced technology such as computers, robotics, microprocessors, and others
that have revolutionized business management; e-commerce, teleconferencing, and
sophisticated information systems have rapidly changed the ways that business is
conducted in the 21st century.
• World and ecological situations are related to the increasing number of global competitors
and markets, as well as the nature and conditions of the changing natural environment.
Products produced by companies, of course, must cater to the changing needs of people in
the global community, while, at the same time, considering their impact on the natural
environment. For example, car manufacturing managers must give the go signal for the
development of vehicles that are environment-friendly instead of only being focused on the
product’s speed, fuel economy, and design.

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Meanwhile, the specific business environment focuses on stakeholders, suppliers, pressure groups,
and investors or owners and their employees as follows (Altarejos et. al., 2016):
• Stakeholders are parties likely to be affected by the organization's activities, while
customers patronize the organization’s products and services. Increasing customer
sophistication makes it necessary for managers of organizations to make crucial decisions
regarding developing products with higher value and improving their services to meet their
patrons’ increasing demands. Also, this has prompted companies to solicit feedback from
their customers to avoid dissatisfaction that may lead to patronizing another company
offering similar products and services instead.
• Suppliers ensure the organization’s continuous flow of needed and reasonably priced inputs
or materials required for producing their goods and rendering their services. Inputs
mentioned also include financial and labor supply. Managers decide what, where, and when
to buy their supplies and which supplier to favor with their organization’s supply orders.
• Pressure groups are special-interest groups that try to influence the organization’s decisions
or actions. For instance, pressure from the Food and Drug Administration (FDA) on some
department and drug stores led them to stop selling beauty products containing lead and
ordering or importing such products from their suppliers.
• Investors or owners provide the company with the financial support it needs. The company
cannot exist without them; thus, they greatly influence organizational management. Top-
level, middle-level, and lower-level managerial decisions are all influenced, in one way or
another, by the investors or owners of organizations. Branching out, offering new products
and services, and applying for needed loans are all affected by the investors’ or owners’ way
of thinking.
• Employees work for an employer in exchange for salaries/wages or non-monetary benefits.
Employees execute the company’s strategies and are important for the maintenance of the
company’s stability. For example, managerial decisions are influenced by the company’s
knowledge workers.
In a more specific context, a widely used tool to identify the external forces that may affect an
organization both positively and negatively is the PESTEL Analysis. This tool is composed of the
following factors (Bamford et al., 2018):
1. Political. These factors determine the impact of government and government policy on a
particular organization or a specific industry. It includes trade, fiscal, and taxation policies,
among others.
EXAMPLE: McDonald's may capitalize on the opportunity for increased international trade
agreements because it enables easier business expansion to foreign countries. The company
also needs to consider governmental guidelines for diet and health and evolving public health
policies as an opportunity to innovate their products or as a threat if they fail to innovate.

2. Economic. These factors determine the impact of the economy and its performance, to an
organization and its profitability. These include interest rates, employment or unemployment
rates, raw material costs, and foreign exchange rates, among others.
EXAMPLE: McDonald's may capitalize on the opportunity for slow but stable growth of
developed countries and the rapid growth of developing countries.
3. Social. These factors determine the impact of the social environment and emerging trends to
the business profitability of an organization. These also help marketers to further understand

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the changing preferences of the customers. These include changing family demographics,
education levels, cultural trends, attitude changes, and changes in lifestyles, among others.
EXAMPLE: McDonald's may capitalize on the opportunity for rising disposable incomes and
busy lifestyles in urban communities since it will increase their sales growth. On the other
hand, the company needs to consider increasing cultural diversity and healthy lifestyle trends
as both an opportunity and a threat.
4. Technological. These factors determine the impact of technological innovation and
development on a particular market or industry. These include changes in digital or mobile
technology, automation, research, and development. Moreover, these also include
technological influence on methods of distribution, manufacturing, and logistics.
EXAMPLE: McDonald's may capitalize on the opportunity for increasing business automation
and increasing customer preferences on ordering food using their mobile devices.
5. Environmental. These factors determine the influence of the surrounding environment and
the impact of ecological aspects to a market or industry. These include climate, recycling
procedures, carbon footprint, waste disposal, and sustainability.
EXAMPLE: McDonald's may capitalize on the opportunity for increasing emphasis on
sustainable business strategies while considering the threat of changes in climate conditions in
some regions where their business operates.
6. Legal. These factors determine the importance of understanding legal laws and procedures on
a given territory where a business operates. These include employment legislation, consumer
law, health, and safety, international as well as trade regulation and restrictions.
EXAMPLE: McDonald's needs to review the threat brought by increasing health regulations in
workplaces and schools and rising legal minimum wages imposed by some countries where
their business operates.

Environmental Scanning

Adapting to environmental uncertainties must start with developing a competitive mindset.

Ignorance of present-day realities may cause individuals or organizations to do certain things that
they may regret in the future; hence, environmental scanning is necessary. By seeking and sorting
through data about the environment, you may be able to understand and predict the various
changes, opportunities, and threats that may affect organizations in the future. Knowing the
present-day competitors, the possible number of barriers to entering your chosen business industry,
the existence or nonexistence of substitutes to your planned product or service, and possible
dependence on powerful suppliers and customers will help develop a competitive mindset.
In preparation for future conditions that may influence your planned business endeavor, you must
also consider future business scenarios. By conditions and best-case scenarios or favorable future
conditions, as well as middle-ground possible conditions, you will have an idea of what to do in the
future. Meanwhile, business predictions, also known as business forecasting, is a method of
predicting how variable in the environment will alter the future of business. It could be used in
making decisions regarding offshoring, branching out locally, and expanding or downsizing the
company. However, the accuracy of such business predictions cannot always be assured.
Another component of environmental scanning involves gauging the performance of the
organization concerning those of others; this is called benchmarking. Benchmarking is defined as
the process of measuring or comparing one’s products, services, and practices with those of the
recognized industry leaders to identify areas for improvement. Best practices of said industry

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leaders are observed so that understanding their competitive advantage would be easier. This is
followed by gathering information about the company’s operations and those of the other company
to identify gaps; this, in turn, could be used to find out the underlying reasons for the performance
differences. For these reasons, a set of best practices in one’s own company will be listed down, and
that, ultimately, leads to the company’s improved performance (Altarejos et. al., 2016).
Porter's Five (5) Forces is a common tool used to assess and evaluate the competitive strength and
position of a business. It is developed by Michael E. Porter using the following components (Bamford
et al., 2018):
1. Supplier power. This force analyzes how suppliers can easily influence price increases. This is
driven by the following factors: number of suppliers of each essential input; uniqueness of
their product or service; relative size and strength of the supplier; and cost of switching from
one supplier to another.
EXAMPLE: According to Gregory (2018), the bargaining power of suppliers in the case of
McDonald's is weak based on a large number of suppliers and the high overall supply of raw
materials.
2. Buyer power. This force analyzes how buyers can easily influence price decreases. This is
driven by the number of buyers in the market, the importance of each buyer to the
organization, and cost to the buyer of switching from one supplier to another. For instance, a
few powerful buyers of a business are often able to dictate terms.
EXAMPLE: According to Gregory (2018), McDonald’s must address the power of their
customers on business performance since consumers have a strong bargaining power based
on low switching costs (relatively small amount of money that consumers would pay if they
would switch to another brand, McDonald’s to Jollibee, for instance), a large number of
providers, and high availability of substitutes.
3. Competitive rivalry. This force examines the intensity of competition in the market place. This
is driven by the number and capability of competitors in the market. Rivalry competition is
high when there are few businesses equally selling a product or service, when the industry is
growing, and when consumers can easily switch to a competitor's product for a cheaper cost.
When rivalry among competitors is high, advertising and price wars can ensue, which can pose
a negative impact on the business in the long run.
EXAMPLE: According to Gregory (2018), McDonald’s faces tough competition because the
fast-food restaurant market is saturated. The strong force of competitive rivalry is influenced
by the high number of firms, high aggressiveness of firms, and low switching costs.
4. Threat of substitution. This force is threatening when buyers can easily find substitute
products with attractive prices or better quality, and when buyers can switch from one
product or service to another with little cost. For example, switching from coffee to tea does
not cost anything, unlike switching from car to bicycle.
EXAMPLE: Gregory (2018) stated that the high substitute availability and the low switching
costs make the threat of substitution a strong force in the case of McDonald’s.
5. Threat of new entrants. This force determines how easy or difficult it is to enter a particular
industry. If an industry is profitable and there are few barriers to enter, rivalry soon
intensifies. When more organizations compete for the same market share, profits start to fall.
Existing organizations need to create high barriers to enter to deter new entrants.

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EXAMPLE: Gregory (2018) stated that the moderate threat of new entrants in the case of
McDonald's is based on the low switching costs (strong force), highly variable capital cost
(moderate force), and high cost of brand development (weak force).

II. The Business Environment of the Firm

An organization’s internal environment must also be subjected to internal analyses. Internal

strengths and weaknesses, opportunities, and threats about its resources such as financial, physical,
mechanical, technological, and human resources, researches and development endeavors,
production of goods, procurement of supplies like materials, inputs, and finance, and products and
services must all be considered before organizational planning. A SWOT Matrix, which is a
framework used to evaluate a company's competitive position must be executed to examine
important stakeholders like suppliers and customers within the firm’s environment. The following
are the components of the SWOT Matrix (Bamford et al., 2018):
1. Strengths. These are the internal areas where an organization excels and the factors which
separate an organization from its competitors. These include a strong brand image, a loyal
customer base, a strong balance sheet, and unique technology, among others.
EXAMPLE: McDonald's has the following strengths: distribution potential, world-class facilities,
strong brand image, and standardized processes (Greenspan, 2017).
2. Weaknesses. These are the internal areas that hinder an organization from performing at its
optimum level. These are areas where the business needs to make some improvements to
remain competitive. These include a weak brand, higher-than-average turnover, high levels of
debt, an inadequate supply chain, or lack of capital, among others.
EXAMPLE: McDonald's has the following weaknesses: limited food options and low process
flexibility due to standardization (Greenspan, 2017).
3. Opportunities. These are favorable external factors that could give an organization a
competitive advantage. For instance, if a country cuts tariffs, a car manufacturer can export its
cars into a new market, which will lead to increased sales and a larger market share.
EXAMPLE: McDonald's has the following opportunities: development of innovative and
healthier menu, partnership with other brands, and expansion on emerging markets.
4. Threats. These are the factors that may pose potential harm to an organization. For instance, a
drought is a threat to a wheat-producing company, as it may destroy or reduce the crop yield.
Other common threats include rising costs for materials, increasing competition, tight labor
supply, and disruption through emerging technologies that may drive products or services
obsolete.
EXAMPLE: McDonald's faces the following threats: changing customer preferences in terms of
healthy food consumption, economic downturn, and strong competition.

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III. Phases of Economic Development

Walt Whitman Rostow took a historical approach in suggesting that developed countries have
tended to pass through five (5) stages to reach their current degree of economic development.
These are the following (Altarejos et. al., 2016):
1. Traditional society. This is an agricultural economy of mainly subsistence farming, little of
which is traded. The size of the capital stock is limited and of low quality resulting in very
low labor productivity and little surplus output left to sell in domestic and overseas markets.
2. Pre-conditions for take-off. Agriculture becomes more mechanized and more output is
traded. Savings and investment grow although they are still a small percentage of national
income or Gross Domestic Product (GDP). Some external funding is required - for example in
the form of overseas aid or perhaps remittance incomes from migrant workers living
overseas.
3. Take-off. The manufacturing industry assumes greater importance, although the number of
industries remains small. Political and social institutions start to develop - external finance
may still be required. Savings and investment grow, perhaps to 15% of GDP. Agriculture
assumes lesser importance in relative terms although the majority of people may remain
employed in the farming sector. There is often a dual economy apparent with rising
productivity and wealth in manufacturing and other industries contrasted with stubbornly
low productivity and real incomes in rural agriculture.
4. Drive to maturity. Industry becomes more diverse. Growth should spread to different parts
of the country as the state of technology improves - the nation shifts toward a diverse
economy, with massive growth in many sectors as influenced by the use of innovation that
uplifts the individual income of the citizens.
5. Age of mass consumption. Output levels grow, enabling increased consumer expenditure.
There is a shift towards tertiary sector activity and the growth is sustained by the expansion
of a middle class of consumers.

IV. Forms of Business Organizations

The form of a business organization may depend on the purpose, nature of operations, and
resources of the company. However, a business organization’s form changes along with the
changing times and demands of the present.
Change is constant and organizations continue to undergo various changes in form to ensure
effectiveness, efficiency, and relevance in the world of business. Business organizations may be
traditional or open/flexible in form. The traditional form of business organizations includes the
following (Altarejos et. al., 2016):
• Simple business organizations have few departments, centralized authority with a wide span
of control, and with few formal rules and regulations.
• Functional business organizations are those that group together those with similar or
related specialized duties that introduce the concept of delegation of authority to functional
managers like the personnel manager, sales manager, or financial manager but allow CEOs
to retain authority for strategic decisions.
• Divisional business organizations are made up of separate business units that are semi-
autonomous or semi-independent, with a division head responsible for his/her unit’s
performance. In other words, each division has its functional organization and its general

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manager. However, the central headquarters management maintains responsibility for the
delineation of organizational goals of the individual divisions.
• Profit business organization is designed to achieve their organization’s mission, vision, goals,
and objectives and maintaining their organizational stability through income generation and
profit-making activities.
Immediate revenues or cost factors account for business success or failure. The non-profit
organization is designed to achieve their organizations’ mission, vision, goals, and objectives,
providing service to clients without expecting monetary gains or financial benefits for their
endeavors. Their success or failure may be measured by the high or low evaluation scores they
obtain. On the other hand, an open/flexible business organization is formed to meet today’s
changing work environment. These types of business organization have evolved into other forms as
follows: (Altarejos et. al., 2016):
• Team structures where the organization as a whole is made up of small teams that work
together to achieve the organization’s purpose; popular in a collective culture. Collective
culture refers to an organization that emphasizes the needs and goals of the group as a
whole over the needs and desires of each individual (Morin, 2020).
• Matrix business organizations are those which assign experts or specialists belonging to
different functional departments to work together on one (1) or more projects; exhibit dual
reporting relationships in which managers’ report to two (2) superiors – the functional
manager and the divisional manager.
• Project business structure is a business organizational form with a flexible design, where the
employees work on a project assigned to them within a definite time frame; projects may be
short-term or long-term and members disband when the project is completed.
• Boundaryless business organization is a business organization whose design eliminates
vertical, horizontal, or external boundaries, and is described to be flexible and unstructured;
there are non-barriers to information flow and therefore, completion of work is fast.
• Virtual business organization is made up of a small group of full-time workers and outside
experts who are hired temporarily to work on assigned projects; members are physically
dispersed and usually communicate electronically.
Different organizations have different preferences as to the business form that is appropriate for
their need/s and purpose. The manager, therefore, must be creative in finding ways to structure or
design and organize work in their respective firms.

References:
Altarejos, A., Cabrera, H., & Riaz, B. (2016). Organization and management. Vibal Group, Inc.
Bamford, C., Hoffman, A., Hunger, D., & Wheelen, T. (2018). Strategic management and business policy: Globalization,
innovation, and sustainability (15th ed.). Pearson Education Limited.
Frias, S. & Orjalo, V. (2016). Organization and management: Concepts, caselets, and exercises. Phoenix Publishing House,
Inc.
Greenspan, R. (2017). Mcdonald’s swot analysis & recommendations. http://panmore.com/mcdonalds-swot-analysis-
recommendations
Gregory, L. (2018). Mcdonald’s five forces analysis (porter’s model) & recommendations.
http://panmore.com/mcdonalds-five-forces-analysis-porters-model.
Morin, A. (2020). Understanding collectivist cultures. https://www.verywellmind.com/what-are-collectivistic-cultures-
2794962
Rostow-Five Stages of Economic Growth Model. (2015). In Tutor 2u.
http://www.tutor2u.net/economics/reference/rostow-five-stages-of-economic-growth-model

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