THE ENVIRONMENT

OF BUSINESS FIRM
■ Organization will succeed or fail depending on the
environment that confronts them. The manager of a
particular business organization is not entirely
helpless. He can do something about the
environment, or make some adjustments in the
organization. Managing the environment requires a
clear orientation and an understanding of factors that
affect business and the application of the right
strategies to harness these factors to a business
firm’s advantage.
 The environmental factors that affect the activities of
the organization may be internal or external
■ The External Environment

The External Environment consist of elements outside an

organization that are relevant to business operations.
These elements play important roles in business
operations because these are the sources of the inputs
required by business firms for conversion into outputs
which in turn are required by the external environment
The Main Function of the Business Firm
 The
Business
Firm
Outputs
-Product
-Services

Inputs
-raw materials
-money
-labor
-energy External
Environment
Types of Elements in the
External Environment
There are two elements that compose the external
environment

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 Element- These do not affect the
organization directly. Instead they affect the climate in which
the operations of the organization take place. These 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.
For example the duplication service business may be an
indirect- action element of schools, but it may be considered
as a direct action element of publishers of books
Elements in the External
Environment of Business Firm
 Business Firm

Indirect Action Element

Direct Action Element -Technological Variables
-Consumers -Economic Variables
-Competitors -Political-Legal Variables
-Labor Unions -Socio-Cultural Variables
-Suppliers -International Variables
-Financial Institutions
-Government Agencies
The Direct Action Components of the
External Environment
■ What the organizations can achieve will depend much on
the direct- action components of the external
environment. However the organization’s strategy and
tactics may modify the influence of the elements. These
elements are:
1. Customers- Customer patronage is very vital to the
existence of the business firm. The manager must
continuously strive to keep old customer and attract new
ones. It is not easy to deal with many customer because
they are different in many ways. A customer should be an
individual, an institution like a school, a government
agency, a business firm or a social club
2. Suppliers- Business firms achieve their objectives
through a combinations of activities. First and foremost is
the transformation of production inputs like raw materials,
services, energy, equipment and labor into a usable
products or services. Suppliers provides these inputs. As
such business firms must maintain good relationship with
suppliers if they want on-time deliveries of input.
3. Labor Supply- The services of managers and
employees are indispensable requirements of a business
operations. These services are in a way produced through
recruitment and hiring by the human resource specialist of
a business firm. As need for worker skills and experiences
vary different means are used in locating qualified
workers.
4. Competitors- In determining the appropriate
marketing strategy, the manager of a business firm will
have to consider not only the target customers but also
the competitors. The target market share can be
successfully achieved through careful analysis of
competitors.
Competitors may either be direct or indirect.
Nescafe and Great Taste Coffee are direct
competitors, and Coke, but Nescafe and Pepsi
are indirect competitors. Each of them will have
reckon with the competitive abilities of each
other.
 The intensity of competitions will differ from one situation to
another. As such as the marketing strategy of any business
firm will depend on any of the fallowing situations.

■ Monopoly- where there is only a single producer or seller

■ Oligopoly- when there are only a few producers or sellers of
similar products
■ Pure Competitions- when there are many producers or
sellers of similar products
■ 5. Financial Institutions- Business firms are
concerned with maintaining or expanding their
operations. In either case, the company will need
funds. The expansion option could be opening a new
branch, adding a new product to its line, or
purchasing a lot or a new 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 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 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 government
agencies. For instance, a local ordinance imposing a
higher sales tax could pressure business firms to
relocate their offices in more business friendly cities.
The Indirect Action Elements of the
External Environment
The business organization is affected indirectly by elements
in the external elements

These elements are the following:

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 goal. A business firm may use a new
invention or an innovation to increase its market share or
to develop a new market for its products.
Examples of innovation are those happening in the
telecommunications industry. These include advances
in communication technology such as calling, text
services using cellular phones.
The Service Providers in the industry:

 Globe Telecom
 Smart Communications
 Sun Cellular
2. Economic Variables- The economy is very important
element in a business pursuits. Even if the company
has the edge in technology and financial capability
over its competitors it may not be so successful if the
economy does not allow it. Because of the importance
of the 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 organizations can
only flourish if they consider society 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.
4. 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 organization that attempt
to influence the political- legal environment
■ In the Philippines, activities of lobbyist and protest groups
are concentrated in Metro Manila where most of the offices
of the national government are located and the latest
targets of protest are the mining and logging industries
which are considered by many as responsible for the
destruction of the environment.
5. International Variables- These element includes
changes occurring in various parts of the world, which
may affect business organizations in various ways and
degrees. For local businesses, what happens overseas
may be a little concern to them, unless they plan to
operate globally.
■ For instance, a foreign government may ban the entry of
products coming from countries like the Philippines. If that
is the case, some of the Filipino exporters may be affected