CHAPTER FIVE

Business Environment

Section One: Organizations Environment

 Environment is all the people, organization, system and other forces
that have potential to influence the organization
 The organization environment is composed of external and internal
factors or elements that influence the way it functions.
 An organization is a managed system designed and operated to
achieve a specific set of objectives.

 The organization receives inputs from the environment, adds value to

them through some transformation process, then offers the resulting
outputs to customers in the environment.

 In exchange for the outputs, customers provide more input for the
organization to continue the process.
 Inputs include labor, parts or materials, information, technology,
equipment, and a place to operate.

 Transformation process involves manufacturing goods or providing

services

 Outputs are the result of transformation process and can be classified

in to two categories:
 Desirable outputs: are goods or services to sell, customer
satisfaction, high employee morale, profit etc.
 They are intentionally produced by the organization and enable the
organization to survive.
 Non-desirable outputs: are other outputs such as pollution, employee
exhaustion, customer dissatisfaction, unsafe product, employee
discontent.
 A closed system does not interact with the outside environment.
 However, all organizations are open systems.

 open system model says that organization dependent on inputs from

the outside world, such as raw materials, human resources, and
capital, and out puts to the out side world that meet the market’s
needs for goods and services.
This model is based on two assumptions:
1) Organization are influenced by the environment
2) Organizations are social systems.
 External environment

 are all relevant forces outside a firm’s boundaries, such as

competitors, customers, the government, and the economy.

 There are two types of external environment:

1. Macro environment:

 is the most general elements in the external environment

that can potentially influence strategic decisions.

 The main macro environments that influences businesses

are:
A. Economic environment
 The economic condition in which an organization operates affects the
organizations access to capital, the price you charge and the demand
for its product.

 when the economy shifts downward (as in a recession) demand falls,

unemployment rises, and profits shrink.

 The global economy, business cycle and economic system are

aspects of the economic environment of the business enterprises.
I. The global economy:-
 the economy of the world are interdependent.
 I.e. economies around the world are connected.
 Changes in one country’s economy affect the economy of
the others.
 Interest and inflation rates affect the availability and cost
of capital, the ability to expand, prices, costs, and
consumer demand for products.
 Unemployment rates affect labor availability and the
wages the firm must pay, as well as product demand.
 Example: Petroleum products which can be used by business
enterprise for major source of energy have great effect on every
business.

 When the price and quantity supply of petroleum product changes the
whole business of any country will be affected.

 When the price of petroleum decrease, the price of goods and service
decrease since cost of energy is low.
 Therefore, we can say that global economic environment has a direct
impact on the activity of any business.
II. The business cycle:
- is the up and down movement of an economy’s ability to generate
wealth.
- No economic system works perfectly all the time under all
circumstances.

- Apart from the ability of the business to generate profit, their

activities could be affected by the business cycle.

- For example: if the business cycle were on depression, the income of

the business enterprise would be low.

- In other words when the cycle is on prosperity it gives wide

opportunity for businesses enterprise to generate income from
different sources because the economy is at a rising period.

- Hence, business cycles have direct impact on the activities of business

enterprises.
III. The economic system:
 Includes the basic economic rules that a given country follows in
order to operate the business activities.

 In our country, the economic setting is guided by free market

economic system.
B. Technological environment
 Is second component of macro environment
 Technology is defined as all the tools and ideas available for
extending the natural, physical and mental reach of humankind.

 Technology can be viewed as the methods, processes, systems, and

skills used to transform resources in to products.

 a company can not succeed without incorporating into its strategy the
surprising technologies that exist and continue to evolve.
 Every technology replaces an older technology. Fore example,
computers replace type writers.
 If we find a better product, process, or procedure to accomplish our
task, we have an innovation.
 Innovation can be classified in to two fundamental types:

a) Product innovation:
 are changes in the actual outputs themselves.
 The out put may be tangible product or services.

b) Process innovation:
 In contrast, Process innovations are changes that affect
the methods of producing outputs.
 Understanding the forces driving technological development and the
patterns they follow can help a manager anticipate, monitor, and
manage technologies more effectively.
 Steps to use technology:
 First, there must be a need, or demand, for the technology.
 Second, meeting the need must be theoretically possible, and
the knowledge to do so must be available from basic science.
 Third, we must be able to convert the scientific knowledge
into practice, in both engineering and economic terms.

 Fourth, the funding, skilled labor, time, space, and other

resources needed to develop the technology must be available.
C. Legal and political environment
 Elements of legal and political environment include: the extent and
content of laws, regulations spelling out how to comply those laws
and the stability of political system.
 Legislation regulating business for the following purposes
 To prohibit monopolies
 To protect companies from unfair competition
 To protect customers from unfair business practice
 For packing and labeling activities
 To get safety standards
 Noise control
 To control pollution
 To prevent discrimination
 • Political system environment:
• Unstable, bad, and dishonest political system may affect the
business decision very badly.
• Stable and honest government:
 Establish laws and regulation for the success of operation of the
business
 It provides infrastructure facilities
 Issues licenses to competent business establishment
 Conduct inspection and assure quality products to consumers
 To protect business from foreign competition
 To develop home industries government grants incentives and
subsidies.
D. Demographics
 Demographics are measures of various characteristics of the people
comprising groups or other social units.

 Work groups, organizations, countries, markets, or societies can be

describe statistically by referring to their members’ age, gender,
family size, income, education, occupation, and so forth.

 When any companies formulate their human resources strategies

they must consider workforce demographics.
 Strategic plans must be made for recruiting, retaining, training,
motivating, and effectively utilizing people of diverse demographic
backgrounds with the skill needed to achieve the company’s mission.
E. Social issues and the natural environment
 Is the societies and cultures where an organization operates.
 It plays a major role in shaping the skills, values, and customs
of the organization human resources.
 Important measure of culture include values, lifestyles, and
practices, including the way people work together.
 These differences affect the way organization select their
employees, employee motivation and behavior, and
customer needs and preferences.
 It also determines the type of good and services to be
produced.
 Another issue of growing concern is the protection of our natural
environment.
 Generally business environment will cause damage to the
environment.

 Among them disposal of chemical wastes in the soil and food

supply and the trashing of the environment with plastics and other
packaging materials are some examples.

 Therefore business enterprises must understand and accept the

consequences of their actions on ecology.
2 The competitive environment
o Refers to the dimensions of the environments that directly interacts
with and influence the organization.

o Power of customers, rival among current competitors, threat of new

entrant, treats of substitute and power of suppliers are component of
competitive environment.
i. Customers
 are client of the organizations.
 Purchase an organization’s products or services.
 There are two types of customers.
 The first one is individual customers who by organizational product in
order to consume. Some times they are known as final consumers.

 They differ in many characteristics, such as age, education, income,

and lifestyle.

 The second one is organizational customers who by product or service

for further processing or to use as a raw material for other
organization.

 They are also known as intermediate consumers

o Customer service means giving customers what they want or need, the
way they want it, the first time.

o Excellent customer service includes:

 Speed of filling and delivering normal orders.
 Willingness to meet emergency needs.
 Merchandise delivered in good condition.
 Readiness to take back defective goods and supply quickly
 Availability of installation and repair services and parts.
 Service charges (that is, whether services are “free” or
priced separately)
ii. Competitors
o They are an organization’s opponents, the companies against which
the organization compete for customer and needed resources in the
external environment.
o Generally we can classify competitors in to two types:
o Intra-type: are competitors companies that produce the same or
similar product or service as the organization.

o Intertype: are competitors distinctly different and competing

organizations.
o Example: Coca-Cola Company and Pepsi Company.
o The organization must identify their competitors.
o Competitors may include
a) small domestic firms, especially their entry into tiny,
premium markets;
b) oversea firms, especially their efforts to solidify positions
in small niches;
c) big new domestic companies exploring new markets;
d) strong regional competitors;
e) unusual entries such as internet shopping.
o After identifying competitors, the next step is to analyze how they
compete.
o The following are among the tactic that can be used by competitors:
 price reduction,
 new product introduction,
 advertising, and etc.
iii. Suppliers:
o Suppliers can raise their price or provide poor quality goods and
services.
o Their out puts are the buyer organization’s inputs and can therefore
significantly affect the quality, cost, and timeliness of buyer’s
product or service.
o Suppliers will be powerful if one of the following conditions is
fulfilled
 The buyer has few other sources of supply;
 The suppliers has many other buyers;
 Switching costs are high. switching costs are fixed costs
buyers face when they change suppliers;

o Therefore choosing the right supplier is an important strategic

decision
o Organization can reduce the power of suppliers by:
 Reduce their dependence on any one source by spreading
their purchase of raw materials and other needed resources
across several suppliers;
 Vertical integration: - means being ones own supplier.
 Having some agreement with suppliers to do goods and
service in low cost by collaborating.
vi. Threat of new entrants:
o New entrants into an industry compete with established companies.
o If barriers to entry are low the threat of new entrants is more serious.
o And if barriers to entry are high, the threats of new entrant are very
low or negligible.
o Some major barriers to entry are government policy, capital
requirements, brand identification, cost disadvantage, and distribution
channels.
o The government can limit or prevent entry.
o Patents are also entry barriers.
v. Threats of substitutes: -
o Substitutes are products that can be used instead of other product.
o Customers may shift from one product to other product that can give
them the same satisfaction if the quality of the product decrease or
the price grows up.

o Substitute product or service can limit another industry’s revenue

potential.
o Organizations have to think about potential substitute that may be
viable in the near future in addition to current substitutes.
o If the product is coffee, typewriter the substitute might be soft
drinks, personal and computer respectively.
 The Internal Environment
 Internal environments also affect the business organization positively
or negatively.
 From this internal environment we will discuses about management.
Means about the relation ship between manager and the organization.
 Level of Management: - most organization function three distinct but
overlapping levels, each requiring a different managerial focus and
emphasis.
These are: a) operational level
b) Technical level
c) Strategic level
 Managers at each level must plan, organize, lead, and control.
 A)Operational level
 Every organization, whether it produces a physical product or a
service has an operations function.
 Focuses on effectively performing whatever the organization produces
or does.

 A physical product, for instance, requires a flow of materials and

supervision of the operations.
 The operation function is at the core of every organization.

 The managerial task here is to develop the best allocation of resources

that produces the desired output.
 B) Technical level
 As an organization increase in size, some one must coordinate the
activity at the operations level as well as decide which product or
service to produce.
 These problems are the focus of the technical level.
 A sale manager mediates disagreements between customers and sales
people.
 Technical level manager’s task can be categorized in to two.

 These are managing the operations function and serving as liaison

between those who produce the product and those who use the
output.
C) Strategic level
 Every organization operates in a broad social environment.
 As a part of the environment, an organization is also responsible to it.

 The strategic level must make sure the technical level operate within
the bounds of the society.

 The strategic level determines the long range objectives and

direction for the organization; in other words, how the organization
interacts with its environment.
Figure -3 managers and the level of management

Strategic level
Top management
Technical level
Middle management

Operating employees Operations level

 Skills of managers

Level of basic management skills

management.
Lower level
Human skills: - the ability to work with,
manager
communicates with, and understands other people.

Middle level Technical skills: - the ability to use specific

managers knowledge, techniques, and resources in
performing work.
Top- level
Conceptual skills:-the ability to see the overall
managers
organization and to integrate all part of the system
Role of managers
A) Interpersonal roles- focus is on interpersonal relationships.
• figurehead, leader, and liaison
b) Informational role: monitor, disseminator and spokesperson.
c) Decision Role: - entrepreneur, disturbance handler, resource allocator,
and negotiator are a manager’s most important duties.

Interpersonal
roles

Decision
Informatio
roles
nal roles
 Responding to the environment
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• Organization respond to the environment can be grouped into three
categories:

• 1- adapting to the environment, 2- influencing the environment, and

3- selecting a new environment.
1. Adapting to the environment: changing yourself
• In the case of uncertainty arises from environmental complexity,
organizations tend to adapt by decentralizing decision making.

• For example, if a company face a growing number of competitors in

various markets, then it may be impossible for the chef executive to
keep abreast of all activities and understand all the operational details
of a business.

• In this case, the top management team is likely to give authority to

lower level managers to make decisions that benefit the firm
• In respond to change in the environment, organization tends to
2) Influencing the environment
 Organization can influence the environment by developing proactive
responses aimed at changing the environment.
 The two general types of proactive responses are independent action
and cooperative action.
a) Independent actions
• are strategies that organization acting on its own uses to change some
aspect of its current environment.
The following are independent action strategies:
 Improving internal efficiency for competitive advantage. For
example, aggressive pricing: comparative advertising.

 Public relations: is establishing and maintaining favorable images in

the mind of those making up the environment. For example
sponsoring sporting events.

 Voluntary actions to various interest groups, causes, and social

problems.

 Political action: is effort to influence elected representatives to create

a more favorable business environment or limit competition.
b) Cooperative action
 In some situations, two or more organizations work together using
cooperative strategies to influence the environment
 At a more organizational level, organizations establish strategic
alliances, partnerships, joint ventures, and mergers with competitors
to deal with environmental uncertainties.

 Cooperative strategies such as these make most sense when

(1)taking joint action will reduce the organizations’ costs and risks and

(2)Cooperation will increase their power (that is, their ability to

successfully accomplish the changes they desire).
3. Changing the environment
• By making a conscious effort to change the boundaries of its
competitive environment, firms can maneuver around potential
threats and capitalize on arising opportunities

• Organizations engage in strategic maneuvering when they move into

different environments.

• Aggressive companies continuously change the boundaries of their

competitive environments by:
 seeking new products and markets,
 diversifying, and merging or acquiring new
enterprises.
 QUIZ

1. Discuss the three level of management

2. List the skills of managers with appropriate level of

management