Chapter 2: The Total Environment of the Firm

BUSINESS/ FIRM ENVIRONMENT - It refers to the surrounding conditions in which the

organization operates. It can be categorized as EXTERNAL and INTERNAL factors.
The environment in which the firm operates consists of changing factors. In order to
achieve and realize the company’s goals and objectives, all these external and internal
environmental factors must be fully understood.
Factors affecting the Environment the Firm

 Educational Factors
 Socio-cultural Factors
 Economic Factors
 Administrative and political Factors
 International Factors

I. EDUCATIONAL FACTORS

It an integral part of the environment

The literacy level and the percentages of the population that belong to the different
educational strata for one, bear upon the marketing approach or the products which the
firm is to produce.

The types-even qualities of goods will be in demand vary according to individual tastes,
which in turn are shaped by the educational backgrounds of the prospective consumers.

Percentages of literacy and educational levels also affect the type of workers and
managers the firm will be able to hire in the course of working towards its goals.
(Internal) there is little the individual firm can do to affect the external educational
environment but there is much the firm can do about the educational levels of its
workers and managers. (e.g., literacy and technical training) Personnel development
must thus be an important part of any long range plan if the firm wishes to strengthen its
ability to achieve its set goals.

Environmental Constraints:

 Literacy level
 Specialized vocational and technical training and general secondary education
 Higher education
 Special management programs
 Attitude toward education
 Education match with requirements

II. SOCIO-CULTURAL FACTORS

Socio-cultural factors that are present in the country should be given critical
consideration by top management because these influence both the firm’s external
environment as well as its internal system.

Four socio-cultural Factors.

1. The legacy of the frontier: a spirit that has fostered a sense of opportunity pervading
american industrial and community life.

2. Faith in business and in the individual: a faith refected in the high esteem the
American national community gives the businessman.

3. Belief in change: a belief whereby a successful experiment is not allowed to

crystallize into mere custom and that an unsuccessful experiment is accepted as an
occupational risk, valued for the experience that was gained in the process.

4. The idea of competition: an ideal that leads "even those companies which are not
operating in a highly competitive market to run their enterprises as though they were"
(American managers) know that their frms must maintain their competitive positions if
they are to provide their people with a continuing career.

Although, socio-cultural factors that work within the firm greatly affect management
style, practices and the contents of the operating policies, this should not preclude top
management from drawing up company policies and objectives, designing strategic
plans, organizing, formulating operating policies, controlling operations, etc.

"View Toward Change". As a country develops, its culture changes accordingly.

development, by definition, means change, and the most important aspect of change is
neither economic nor technological but the change in people. And,change in people
ultimately means change in culture, in the attitudes, in the value system.

Environmental Constraints:

 View toward industrial managers and management

 View of authority and subordinate
 Inter-organizational cooperation
 View toward achievement and work
 Class structure and individual mobility
 View toward specific method
 View toward risk-taking
 View toward change

III. ECONOMIC FACTORS

The size of the market is inevitably a critical factor. This relates to present products, as
well as to other products and/or services into which the firm might diversify. Hence,
corporate goal-setting and the strategic planning effort must depend closely on
prospects for future growth in GNP, in percapita income, and on income distribution.
Every effort must be made to look as far into the future as possible to anticipate this. A
government’s five-year plan, for instance, can be of great assistance.

Environmental Constraints:

 Market size
 Central banking system and monetary policy
 Fiscal policy -Economic stability
 Organization of capital markets
 Factor endowment
 Social ahead capital
 Competition

IV. ADMINISTRATIVE AND POLITICAL FACTORS

It is important for the manager to remember that the political climate is only a part of the
total environment acting upon his firm. Political factors operating in the environment
should not, therefore, overwhelm management. It should not prevent the utilization of
scientific management. It merely means that the goals and strategy of the firm must
take this aspect of the environment into proper perspective in order to be realistic and
effective as possible.

Environmental Constraints:

 Relevant legal rules of the game

 Defense policy
 Foreign policy
 Political organization
 Government attitudes toward private enterprise
 Political stability

V. INTERNATIONAL FACTORS

International environmental factors are those which affect a firm¶s ability to most
efficiently import equipment and goods, to export part or all of its production, and to
enter into agreements with foreign companies so as to gain access to technology,
patent rights, management know-how, financing and markets.

Environmental Constraints:
 View toward foreigners
 Nature and extent of nationalism
 General balance of payments position
 International trade patterns
 Memberships and obligations in international financial organizations
 International organization and treaty obligations
 Power or economic bloc grouping
 Relevant legal rules for foreign business
 Import-export restrictions
 International investments restrictions
 Profit remission restrictions
 Exchange control restrictions