CHAPTER 2

THE FIRM AND ITS

ENVIRONMENT
BY: CLAIRE ANN LINOGO
AND
RIZA JOY TORRES
 The Firm and Its Environment
 All managers, without exception, must
consider their organizations external and
internal environments before planning and
anything. Responding to the various forces/
elements of the firm’s external and internal
business environment is a must because
failure to do so may bring about negative
effects. However, managers must make sure
that they respond based on the proper
identification and evaluation of these forces/
elements in their surrounding environments.
 Objectives
 Identify the various forces/ elements of the
firms’ environment and summarize these
forces using the SWOT analysis;
 Describe the local and international business
environment of a firm; and
 Explain the role of business in relation to the
economy, discuss the different phases of
economic development, and differentiate the
various forms of business organizations.
 Environmental Forces and
Environmental Scanning
Business Environment- refers to the factors or
elements affecting a business organization.
It may be divided into External and Internal
Business Environments.

• External Business Environment- includes

the factors and elements outside the
organization which may affects its
performance, either positively or negatively.
 Internal Business Environment- refers to
the factors or elements within the
organization which may also affect its
performance, either positively or negatively.

The environment in which a business operates

is a major consideration in determining an
organizations’ design or structure.
Considerations such as uncertainty,
procurement, and competition are linked with
the external environment.
 Definition of terms
 Environmental scanning- seeking for and sorting
through data about the environment.
 External business environment- refers to the factors/
elements outside the organization which may affect, either
positively or negatively, the performance of the
organization
 Internal business environment- refers to the factor/
elements within the organization which may affect, either
positively or negatively, the performance of the
organization
 Inflation- a period of above normal general price
increases, as reflected in the consumer and wholesale price
indexes
 Interest rates- the total amount that
amount that borrower must pay annually to
the lender and above the total amount
borrowed
 Changing options- the consumers change
in preference of goods and services offered.
 People’s spending habits- consumers’ changing
ways of spending their money on goods and
services.
 Economic situations- includes inflation rates
of interest, people’s spending habits, changing
options etc.
 COMPONENTS OF
THE INTERNAL
BUSINESS
ENVIRONMENT
 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:
ECONOMIC
SOCIO-CULTURAL
POLITICO-LEGAL
DEMOGRAPHIC
TECHNOLOGICAL
WORLD AND ECOLOGICAL SITUATIONS

 MANAGERS PLAN, ORGANIZE, STAFF,

LEAD AND CONTROL THEIR RESPECTIVE
ORGANIZATIONS
 INFLATION, RATES OF INTERES,
CHANGING OPTIONS IN STOCK
MARKETS, AND PEOPLE’S
SPENDING HABITS ARE THE
EXAMPLES OF FACTORS/ ELEMENTS OF
ECONOMIC SITUATIONS. Economic
situations may affect management
practices in organizations.

 SOCIO-CULTURAL SITUATIONS include

the customer’s changing values and
preferences; customs could also affect
management practices in companies.
 POLITICO-LEGAL SITUATIONS- refer to
national or local laws, international laws, and rules
and regulations that influence organizational
management.
 DEMOGRAPHIC SITUATIONS- such as
gender, age, education level, income, number of
family members, geographic origin, etc., may also
influence some managerial decisions in
organizations.
 TECHNONOLOGICAL SITUATIONS- of
companies involve the use of varied types of
electronic gadgets and advanced technology such as
computers, robotics microprocessors, and others
that revolutionized business management.
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.
=Meanwhile, the specific business environment
focuses on stakeholders, pressure groups, and
investor’ or owners and their employees.
 STAKEHOLDERS- are parties likely affected
by the activities of the organization, while
customers are those who patronize the
organization’s products and services.
 SUPPLIERS- are those who ensure the
organization’s continuous flow of needed and
reasonably priced inputs or materials required for
producing goods and rendering services.
 PRESSURE GROUPS- are special- interest
groups that try to exert influence on the
organization’s decisions or actions.
The organization’s investors or owners provide
the company with the financial support and
needs. The company, of course, 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
Are comprised of those who
work for another or for an
employer in exchange of salaries/
wages or other considerations.
Employees execute the
company’s stability.
Components of the internal business
environment
An organization’s internal
business environment is
composed of its resources,
research and development,
production, procurement of
supplies, and the products
services it offers.
The organization’s internal Environment
must also subjected to internal analyses.
Internal strengths and weaknesses,
opportunities and threats (SWOT) with
regards to its resources (financial, physical,
mechanical, technological, and human
resources), research and development
endeavors, production of goods,
procurement of supplies (materials, inputs,
and finance), and products and services
must all be considered prior to
organizational planning.
Components of environmental
scanning: developing a
competitive mindset,
considering future business
scenarios, business prediction,
swot analysis, and
benchmarking
Adapting to environment 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 for and sorting
through data about the environment, you
may 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 be
helpful in developing a competitive
mindset.
You must also consider future
business scenarios. By realistic
consideration of both worst- case
scenario of unfavorable future
conditions, as well as middle-
ground possible conditions, you
will have an idea of what to do in
the future.
Business prediction
 Is also known as business forecasting, is a method of
how predicting variables in the environment will alter of
the future of business. It could be used in making
decisions regarding offshoring, branching out locally, and
expanding or downsizing the company.

Benchmarking
 Is defined as the process of measuring or comprising
one’s own products, services, and practices with those
of the recognized industry leaders in order to identify
areas for improvement.
THE LOCAL AND
INTERNATIONAL
BUSINESS
ENVIRONMENT
OF THE FIRM
Cultural Intelligence-
Is an individual’s ability to
favorably receive and adjust
to an unfamiliar way of doing
things. This will enable them
to develop their ability to
accept and adapt to different
cultures, both local and
international.
 Definition of terms
 Inflation rate- rate reflected during a period of
above normal general price increases.
 Gross national product (GNP)- total
domestic and foreign output claimed by the
residents of country.
 Gross domestic product (GDP)- total final
output of goods and services produced by the
country’s economy, within the country’s
territory.
 Currency exchange product- the rate at
which central banks will exchange the country’s
currency for another.
Anthropologist Edward T. Hall, as cited by
Schermerhon (2008)
 He noted that the way people approach and deal
with time varies across cultures.
Monochromic cultures
 Refers to cultures wherein people tend to do one
thing at a time; also this culture emphasize
punctuality and sticking to set rules.
Polychromic cultures
 Are more flexible regards time; accomplishing
many different things at once is also common for
these cultures.
GEERT HOFSTEDE, also cited by
SCHERMERHORN (2008), showed how
selected countries ranked on the five cultural
dimensions he studied:
Power Distance- the degree to which a society
accepts or rejects the unequal distribution of power
among people in organizations and the institutions
of society.
Uncertainty Avoidance- the degree to which
society is uncomfortable with risk, change, and
situational uncertainty.
Individualism- Collectivism- the degree to which a
society emphasizes individual accomplishments
versus collective accomplishments.
Masculinity- Femininity- the
degree to which a society values
assertiveness and feelings of
material success versus concern for
relationships.
Time Orientation- the degree to
which a society emphasizes short-
term thinking versus greater
concern for the future or long-
term thinking.
MANAGING IN A
WOLRDWIDE
ENVIRONMENT:
CULTURAL, POLITICO-
LEGAL, AND ECONOMIC
ENVIRONMENTS
 The call for businesses to go to global is hard
to resist as this is the trend prevailing in the
21st century. The economic and social benefits
that come with globalization are said to be
among the positive outcomes. Globalization
advocates, however, fail to realize the very
serious challenges faced by managers in
adjusting to the cultural differences among
different countries where they intend to do
business. The culture of different countries are
rooted in their history, religion, traditions,
beliefs, and deep- seated values, and because
of these, managing globally can be very
complicated.
 Politico- legal environment- refers to the
laws and political climate of different
countries.

Definition of terms:
Worldwide environment- refers to the
external (i.e. sociocultural, natural, politico-
legal, and economic technological factors)
around the world.
Globalizations – refers to changes in the
dimensions of external environment that
result to increased interdependence and
integration among people and organizations
around the world
 THANK YOU AND GOD
BLESS!