Chapter 2: The Firms

and Its Environment

 Lesson 1:
Environmental Forces
and Environmental
Scanning
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 factors/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.
 People’s spending habits –
consumer’s changing ways of
spending their money on goods and
services.
 Economic situations – includes

inflation rates of interest, people’s

spending habits, changing options
and etc.
 Interest rates – the total amount that
a 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.
Business Environment
 Refers to the factors or elements affecting a
business organization. It may be divided into the
External and Internal Business Environments.
The External business environment includes the
factors and elements outside the organization which
may affect its performance, either positively or
negatively while the internal business environment
refers to the factors and elements within the
organization which may also affect its performance,
either positively or negatively.
 Components of the
External Business
Environment : General
and Specific
 Systematic monitoring of the major external
forces influencing organizations is necessary
to improve the management of companies.
 The general business environment includes the

economic, sociocultural, politico-legal,

demographic, technological, and world and
ecological situations. All these must be
considered as managers plan, organize, staff,
lead, and control their respective
organizations.
 Inflation, rates of interest, changing options in
stock markets, and people’s spending habits are
some examples of factors or elements of
economic situations. Economic situations may
affect management practices in organizations.
For example, companies may postpone
expansion plans if bank loan interests 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 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, number of family

members, geographic origin, etc., may also
influence some managerial decisions in
organizations.
 Forexample, decisions regarding 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
because they would like to minimize
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.
 For example, car manufacturing managers

must give the go signal for the development of

vehicles that are environmental friendly
instead of only being focused on the product’s
speed, fuel economy, and design
Meanwhile, the specific business
environment focuses on
stakeholders, customers, pressure
groups , and investors or owners
and their employees.
Stakeholders are parties
likely to be 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 their
goods and rendering their
services. Inputs mentioned also
include financial and labor
supply..
 Pressure groups are special-interest
groups that try to exert influence on the
organization’s decisions or actions. For
instance, pressure from the Food and
Drug Administration on some department
stores and drug stores led them to stop
selling beauty products containing lead
and to stop ordering or importing such
products from their suppliers
 The organization’s investors or owners
provide the company with the financial
support it 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 strategies and are important
for the maintenance of the company’s
stability. For example, managerial
decisions are influenced by the
company’s knowledge workers
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 and services it offers.
 The organization’s internal business environment

must also be subjected to internal analysis. Internal

strength 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 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 for and sorting through data about
the environment, you may be able to
understand and predict the various
changes, opportunities, and threats that
may affect the organizations in the future.
 You must also consider future
business scenarios. By realistic
consideration of both worst-case
scenario or unfavorable future
conditions and best-case scenario 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 prediction, also
known as business forecasting, is a
method of predicting how variables in the
environment will alter the future
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 may not always
be assured.
Benchmarking
 Is defined as the process of measuring or comparing
one’s own products, services, and practices with
those of the recognized industry leaders in order to
identify areas for improvement. Best practices of said
industry leaders are observed so that understanding
their competitive advantage would be easier. This is
followed by gathering information about the
company’s own operations and those of the other
company in order to identify gaps; this in, turn, could
be used to find out the underlying reasons for
performance differences.
From these said 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.