The Firm and Its

Environment
At the end of this lesson, you are expected to;
Be aware and discuss the fundamentals of the external and internal
environments of business organizations and
Be able to communicate and utilize environmental analysis models in
relation to present issues
Forces in the Firm’s Environment
The business firm’s environment refers to the conditions and elements
that define its operations and determine its success. There are two
types of the firm’s environment. These are the internal and external
environment.

External Environment
Microenvironment
Macroenvironment
Customers
Suppliers The Firm General
Regulatory
Agencies
Internal Environment environment of the
Employees firm
Competitors Board of Directors
Managers
Macroenvironment
It is also known as the “general environment”. It consists of the
economic, political, sociocultural and technological environment of the
business organization. The factors in this environment are beyond the
control of the firm but are important determinants of success.
Political
The Economic
FIRM SocioCultural
Technological
Political Forces
Political Forces in the environment pertain to;
Changes in tax laws
Environmental protection laws that affect or control the
Fiscal and monetary policy operations of
Import-export the firm
Local and national elections
Oil, currency and labor markets
Political conditions in foreign countries
Size of government budgets
Special tariffs

Political Forces regulate the conduct and operations of the firm to protect the interests of
the general public.
Political Forces
In the Philippines, political forces include the guidelines and
procedures for business registration, financial accounting and
auditing, labor management and contract administration.
Political forces may also pertain to certain policies or political
views of the government which may possibly restrict, block or
encourage international trade.
Economic Forces
Economic forces pertain to economic conditions relevant to the business. It includes;
•Shift to service economy
•Demand shift for products * propensity of people to spend
•Income differences by region and consumer group * interest, inflation and tax rates
•Level of disposable income * price fluctuations
•Availability of credit

It directly affects the capability of the business to generate profits.

ECONOMIC
FORCES Managers must monitor economic indicators
and market trends continually to protect the
business from any untoward financial and
operational risks.
PROFIT
SocioCultural Forces
SocioCultural forces are people’s characteristics and lifestyles that have
an effect on the operations of a firm. They pertain to social norms,
customs and values.
Apart from cultural norms, demographic forces also influence a firm.
• air and water pollution control
•Attitudes toward product quality
•Average level of education
•Life expectancy rates
•Lifestyles and buying habits
Technological Forces
Advancements in technology have led to great strides in product
innovation, process improvements and integrated systems in the
manufacturing and service sectors.
New and improved products
OTHER VARIATIONS OF PEST

Other variations of PEST ;

PEST EL– disregards the environmental and legal forces
STEEPLE – ethics is an additional factor
STEEPLED – similar to steeple with the addition of demographic factors
WORLD ECONOMIC FORUM (WEFORUM)
Twelve Pillars of Competitiveness
Institutions financial market development
infrastructure technological readiness
macroeconomic environment market size
health and primary education business sophistication
higher education and training innovation
goods market efficiency
labor market efficiency
Philippines Agencies
• Department of trade and Industry
• Department of Labor and Employment
• Department of Interior and Local Government
• Department of Public Works and Highways
• Department of Education
• Department of Health
• Commission on Higher Education
• Technical Skills and Development Authority
** Data and Reports are essential for the macroenvironmental report
used by enterprises
Environmental Scanning
Environmental scanning is the process of assessing the internal and
external environment of a firm to analyze its strengths, weaknesses,
opportunities, and threats (SWOT Analysis)
Elements of Environmental Scanning;
External Analysis examines the opportunities and threats in the firm
based on different forces in the environment (PEST).

Internal Analysis examines the strengths and weaknesses of the

conditions inside the firm, such as skills and competencies of
employees, capacities of resources, organizational culture and
teamwork.
Competitive Environment
• Also known as the “five forces of competition”, it was popularized by
Michael Porter, a prominent figure in competitive strategy formulation. The
industry environment is a competitive environment. The business,
therefore, cannot do nothing else but to compete.
• The long-term survival of the business is measured by its successful efforts
against competitive forces. The five forces competing within the industry
are;
• Threat of new entrants 4. Supplier Power
• Buyer Power 5. Rivalry among existing firms
• Threat of substitution
• The competitive forces are all threats to the profitability, growth, and
survival of the entrepreneurial venture.
PORTER’S Five Forces of Competition
1. Suppliers – establishments that supply a given industry’s
requirements for machinery, manpower, materials, money and other
resources.
• An assessment of how easy it is for suppliers to drive up prices.

2. Buyers – the population, whether industrial or consumer, that

purchases a given industry’s products and services.
• An assessment of how easy it is for buyers to drive prices down.
PORTER’S Five Forces of Competition
3. Rival Firms – existing establishments in a given industry that
compete with each other. Also called industry participants.
• The main driver is the number and capability of competitors in the
market.
4. Substitutes – establishments with faster, more accessible and/or
cheaper products that may serve as alternatives.
• Where close substitute products exist in a market, it increases the
likelihood of customers switching to alternatives in response to price
increases.
5. New Entrants – establishments that “enter” a given industry to
compete with existing firms. Profitable markets attract new entrants,
which erodes profitability.
Porter's Five Forces Matrix - PIZZA RESTAURANT
FORCES EFFECTS OF THREATS TO THE BUSINESS
HIGH MODERATE LOW
SUPPLIER POWER
BUYER POWER
COMPETITIVE RIVALRY
THREAT TO SUBSTITUTION
THREAT OF NEW ENTRY
SWOT ANALYSIS
Swot Analysis is a technique that identifies the Strengths and
Weaknesses of a company, as well as the Opportunities and Threats
it faces.

Strengths and Opportunities and

Weaknesses Threats
Internal External
environment environment
SWOT ANALYSIS

Strengths – What does your company do better than others?

Weaknesses – What aspects of your company need to be improved?

Opportunities – What trends/conditions can positively impact your company?

Threats – What trends/conditions can negatively impact your company?

SWOT ANALYSIS
Strengths Weaknesses Opportunities Threats
• Being a market/ • Lack of access to • New Markets • Entry of new
industry leader technology • Additional competitors
• Having a good • Limited sources of raw • Increase in the
brand image distribution materials price of raw
• Quality products channels • Expansion materials
and services • Poor location • High inflation
• Having a good • Lack of facilities rates
reputation and equipment
• Having skilled
staff/employees