Chapter 1
Business and Its
Environment
 What is business?
 Kinds of Business
 Objectives of Business
 The Environment of Business Forms
 Matching the Organization with the Environment
 Survival Strategies in Uncertain Environments
 Coping Strategies
 Environmental Controlling
What is Business?
◉Business forms and the Government are
expected to provide goods and services to the
society. The major part of this job, however, is
assigned to the private business firms.
◉Under this system, firms are free to compete with
each other and competition leads to offering new
and improves products and services to the society.
◉The standard of living is raised or lowered
depending to a large extent on the performance of
business firms.
What is
Business?
◉Business may
be defined as all
profit-seeking
activities and
enterprise that
provide goods
and services to
an economic
system
◉Profit refer to the rewards for
businesspersons who take the risk
involves in producing and marketing goods
and services.
Kinds of Business
1. Commerce
Business firms, which are engaged in buying and
selling of goods and services are classified as commerce.
Also included in this category are trading,
merchandizing, and marketing.
2. Industry
Industries are those that
are mainly engaged in the
production.
Goods 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
c.Manufacturing Industries convert raw materials
into finished products. Examples are firms
engaged in the manufacturing 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.
Kinds of Business
3. Services
A service business is one, which sells
service to the buyer. Service firms may be
classified as:
a. Recreation – movie houses, television and
radio stations, theatres for drama and stage
presentations, resorts and the like
b. Personal – restaurants, barber shops,
transportation, hotels, tailoring shops,
slimming salons, and the like and;
c. Finance – banks, insurance companies,
investment houses, financing institutions,
credit unions, savings and loans associations
and the like.
Objectives of Business
Profit - Making profit is the primary goal of
any business enterprise.
Objectives of Business
Growth - Business should
grow in all directions over a
period of time.
Objectives of Business
Power - Business houses have vast
resources at its command. These resources
confer enormous economic and political
power.
Objectives of Business
Employee satisfaction and development - Business is
people. Caring for employee satisfaction and providing for
their development has been one of the objectives of
enlightened business enterprises.
Objectives of Business
Quality Products
and Services Persistent quality of
products earns
brand loyalty, a vital
ingredient of
success.
Objectives of Business
Market Leadership - To earn a niche for oneself
in the market, innovation is the key factor.
Objectives of Business
Challenge - Business offers vast scope
and poses formidable challenges.
Objectives of Business
Service to society - Business is a part of society
and has several obligations towards it.
The Environment
of Business Firms
Business Environment
Business Environment means all of the internal
and external factors that affect how the company
functions including employees, customers,
management, supply and demand and business
regulations.
The External
Environment
The term external environment are factors
and institutions that are beyond the control of the
business and they affect the function of the
enterprise.
The external environment consists of
elements outside an organization that are relevant
to business operations.
Types of Elements in the External
Environment
1. Direct Action Elements 2. Indirect Action Elements -
The Main Function of Business Firm
Direct Action
Elements
• Consumers
• Competitors
• Labor Unions
• Suppliers
• Financial
Institutions
• Government
Agencies
Indirect Action
Elements
• Technological
Variables
• Economic
Variables
• Political-Legal
Variables
• International
Variables
Direct Action
Components
1. Customers
◉Customer patronage is very vital to the
existence of the business firm.
◉The manager must continuously strive to
keep old customers and attract new ones.
2. Suppliers
◉Business firms achieve their objectives
through a combination of activities. First
and foremost is the transformation of
production inputs like raw materials,
energy, services, equipment and labor into
usable products or services.
◉ Suppliers provide these inputs.
Note:
Business firms must maintain good
relationship with suppliers if they
want on-time deliveries of inputs.
3. Competitors
◉The target market share can be
successfully achieved through careful
analysis of competitors.
◉In determining the appropriate
marketing strategy, the manager will have
to consider not only the target customers
but also the competitors.
3. Competitors
◉ competitors are either Direct or Indirect
Example
◉Nescafe and Kopiko – Direct
Competitors
◉ Pepsi and Coke – Direct Competitors
◉Pepsi and Nescafe – Indirect
Competitors
4. 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 specialist of the business
firms.
5. Financial Institutions
◉Business Firms are concerned with
maintaining and expanding their
operations. In either case , the company
will need funds.
◉As such a company planning to expand
its business must be well regarded by
financial institutions such as commercial
banks, development banks and other
lending institutions.
6. Government Agencies
◉In many ways business organizations
are affected by change in government
policies.
◉From enactment of laws to the granting
of business permits, the viability of
business firms could be enhanced or
limited by actions of government.
The Indirect
Action Elements
1. Technological Variables
◉Technology has become widely recognized as
an important ingredient in the success of business
firms and manager who does not consider the
technological variable in his strategy faces the risk
of losing out to competitors.
◉Technology refers to the tools and ideas that
may be used by an organization to pursue its
goals.
2. Economic Variable
◉This concern will touch the health of the
economy in terms of inflation, income levels, gross
domestic product, employment and job outlook.
◉Because of the importance of economic
variables, business managers are required to
devote time and resources to forecasting the
economy and to anticipate changes in important
concerns like prices.
3. Socio-Cultural Variables
◉Business Organization can only flourish if they
consider society's customs and values in the
planning and implementation of their activities.
4. Political-Legal Variables
◉These consist of laws and regulations
promulgated and implemented at the local ,
national, and international levels.
◉Also included in the element are individuals and
organizations that attempt to influence the
political-legal environment.
5. International Variables
◉This elements includes changes occurring in
various parts of the world, which may affect
business organizations in various ways and
degrees.
Type of Business
Environment
1. Static
◉Few forces in the environment are changing to
affect the business. Among the notable features of
static environments are no new technological
breakthroughs by current competitors , and little
activity by public pressure group to influence the
organization.
2. Dynamic
◉When significant number of environmental
forces that affect the business are changing.
Among the features of a dynamic environment are
rapidly changing government regulations affecting
business, new competitors, difficulties in acquiring
raw materials, and continuously changing sociocultural aspects of the population.
Environmental
Uncertainty
This may be defined as a lack of complete
information regarding what exists and what
developments may occur in the environment. The
uncertainty makes it difficult for managers to
perform the following:
1. Analyse constituencies and their needs
2. Predict future state of affairs and
3. Understand their potential implications for the
organizations
Dimensions of Environmental
Uncertainty
1. Complexity – This refers to the number of different
factors in the environment such as information, capital,
material, people, and other organizations.
2. Rate of Change in these Factors –
These are the factors in the external environment
change from time to time. For instance, income levels
and the number of qualified teachers may increase or
decrease after a few years. Environmental uncertainty
rises as the rate of changes increases.
Designs of
Business
Organizations
1. Mechanistic Design
◉An organization with mechanistic design is
deemed appropriate for a task that is routine and
unchanging. This design is characterized by a
vertical structure that typically operates with:
a. more centralized authority
b. many rules and procedures
c. a precise division of labor
d. narrow spans of control and
e. formal means of coordination
2. Organic Design
◉An organization with an organic design is
appropriate that is non-routine and changing.
◉It is characterized by the following:
a. decentralized authority
b. fewer rules and procedures
c. less precise division of labor
d. wider spans of control
e. more personal means of coordination
2. Organic Design
◉Task in organic organizations are completed
through group efforts and are adjusted and
redefined to cope with demands made by the
changing environment.
◉Those close to the task are vested with
authority to make decisions since they have a
more immediate understanding of problems.
Organization members exchange information
about adjustments in tasks and changes that have
occurred in the environment making
communication as primarily horizontal.
Survival
Strategies in
Uncertain
Environments
1. Application of Coping Strategies
◉Coping Strategies refers to the transformation
of a part or all of the organization to make its
activities more compatible with existing
environmental conditions.
2. Adaptation of Environmental
Control Measures
◉ Environmental control refers to management
actions to identify and influence environmental
factors to obtain more positive effects on
organizational activities.
Coping Strategies
Coping Strategies are those used to protect internal operations
from the harmful effects of changes in the environment
1. Buffering
◉This refers to setting up buffers for both input
and output sides of organizational activities in
order to absorb and cope with environmental
uncertainty.
◉Programs or practices are instituted to prevent
environmental factors from upsetting the
production process.
1. Buffering
◉E.g. Input buffer is the stock file of fuel by a
shipping company to provide some assurance of
unhampered operation for a certain period.
◉When the production outputs of finished goods
are not disposed as fast as they are produced, it
may cause disruption in the production activities
of the firm. If such disruption will jeopardize
operations, management may choose to sell their
product at low prices, sometimes even lower than
production costs. This action is referred to as
buffering on the output side.
2. Smoothing
◉ Irregular demand is always a problem for many
business firms. This is so because of the
difficulty in making adjustments concerning
manpower and equipment.
◉ This is remedied by smoothing which refers to
efforts involved in reducing changes in the
environment.
◉ E.g. Offering of discounts during slack seasons
like selling raincoats at big discounts during
summer.
3. 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, the
business firm will be able to make the
necessary adjustments in its operations to meet
changes in the environment
4. Rationing
◉ This happens when the organization ignores
some operations and emphasizes others in
order to preserve the most critical functions of
the technical core.
◉ E.g. University, which temporarily deploys its
research personnel to assist in enrolment
activities. After the enrolment period, the
reassigned employees go back to their
permanent units.
5. Boundary Spanning
◉ This is the process of creating jobs or roles in
which individual employees are required to
“have a strong communication links within their
department, with people in other units, and
often with the external community.”
◉ The individuals, called boundary spanners,
gather and collect critical information, which
can be used for planning in the technical core.
The information gathered can also be used to
reduce uncertainty in some areas of operation.
6. Structural Complexity
◉
This is when the business adapts to the
environment by setting up departments or
subsystems that will respond to specific
groupings of environmental factors.
◉ E.g. The production of a book publishing
company may create another unit that will deal
with author’s concerns. Another example is the
creation of senior citizens lanes in various
government offices and large retail
establishments.
7. Executive Succession
◉ One way of adapting to uncertainty in the
environment is the adoption of an effective
executive succession. The replacement of a top
manager by another manager is referred to as
executive succession.
◉ The following advantage may be derived from
an effective executive succession:
a. enable the organization to hire executives
with the new energy and vitality;
b. Provide organization with a way to bring in
specific skills needed to analyze and
respond to the environment;
c. Provide a coordinated means of replacing
retiring executives.
Environmental
Controlling
1. Creating
Favorable
Linkages
a. Mergers
◉From a legal point of view, a merger is a legal
consolidation of two entities into one entity.
b. Joint Ventures
◉A joint venture (JV) is a business arrangement
in which two or more parties agree to pool their
resources for the purpose of accomplishing a
specific task. This task can be a new project or
any other business activity.
c. Interlocking Directorates
◉When some members of the board of directors
of one company are also members of another
company’s board of directors, such arrangement
are called interlocking directorates.
d. Executive Recruitment
◉When companies hire executives who have
prior experience in the industry, it is called
Executive Recruitment
Wilma Valle Galvante is the current head of TV5's entertainment division and
former GMA Network's senior vice president for entertainment
e. Institutional Advertising
◉This type of advertising is designed to build
goodwill for a company among stockholders,
employee, distributors, the public , and the
government.
f. Resource Flows
◉This refers to the pattern of resource
exchanges between the organization in the
environment
◉In the attempt to control the environment , the
manager can make important decisions on the
pattern of exchanges. His options fall under any of
the following:
a. FREQUENCY OF EXCHANGES
b.
QUANTITY INVOLVED IN THE
EXCHANGES
2. Manipulating
the Environment
a. Changing Elements
b. 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.
c. Forming Trade Associations
◉Members of the trade associations pool their
resources to influence government policies
affecting their business.
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