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ABMM 2121: BUSINESS ENVIRONMENT - 45 Contact Hours

Prerequisite: None

Purpose of the course

The aim of this course is to examine the relationship between business organizations, their functional areas,
and the environment that affect them.

Course Objectives

By the end of this course, students should be able to:

1. Describe the basic conceptual themes and ideas of the interaction of business and its environment.
2. Identify and analyze environmental factors that interact with a business organization.
3. Explain how changes in the environment affect business decisions.

Course Description

Introduction: framework of business, various definitions of business, objectives of business, importance of

profit to a business firm; Environmental influences on Business operation: Internal environment: value system,
mission, vision and objectives, company policies, management structure and nature, organization cultures,
organization climate, managerial leadership and styles, managerial philosophies, physical assets and facilities;
External (Task/Micro): suppliers, customers, marketing intermediaries, financiers, publics, competitors;
External (Macro/General): Global environment, Social/Cultural, Natural, Technological, Political/Legal, and
Demographic; Internal and External analysis of business environment: strengths, weaknesses, threats, and
Opportunities (SWOT); Risks factors that affect business performance: political risks and currency risks,
environmental risks and specific risks, market risks and sectoral risks; Corporate Social Responsibility:
Specific responsibility to the Public and Government, Responsibilities to Customers, Owners and Current
problems.

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TIME MAIN TOPIC SUB TOPICS

Week 1&2 Introduction:

● framework of business

● various definitions of business

● objectives of business

● importance of profit to a business firm

Week Environmental influences on

● Internal environment
3,4,5& 6 Business operation
● value system

● mission vision and objectives,

company policies

● management structure and nature

● organization cultures organization

climate

● managerial leadership and styles

managerial philosophies

● physical assets and facilities

CAT

Week External (Task/Micro)

● Suppliers
8,9&10
● Customers

● marketing intermediaries

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● financiers

● publics competitors External

(Macro/General)

● Global environment

● Social/Cultural Natural, Technological,

Political/Legal, and Demographic

Week 11 SWOT
● Internal and External analysis of

business environment: strengths,

weaknesses, threats, and Opportunities
(SWOT);

Week 12 Risks factors that affect

● political risks and currency risks
business performance
● environmental risks and specific risks,

● market risks and sectoral risks;

CAT

Week 14 Corporate Social Specific responsibility to the Public and

Responsibility Government, Responsibilities to Customers,
Owners and Current problems.

Teaching Methodologies

Lectures, Class discussions, Group activities, Case studies

Instructional Materials/Equipment
LCD Projector, Whiteboard, Textbooks

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Course Assessment
Continuous Assessment 30%
Examination 70%

Course Textbooks

1. Wetherly, P & Otter, D. (2011). The Business Environment. Oxford: Oxford University Press. 978-
0982056929
2. Campbell-Hunt, C., Elkin, G., Geare, A. J., & Greatbanks, R. (2009). Management, Organisations, and the
Business Environment: A New Zealand Focus. Australia: McGraw-Hill.
3. Worthington, I. & Britton, C. (2009). The Business Environment. Canada: Pearson Education. ASIN
B002AHF1PA
4. Adrian, P. & Hartley, B. (2007). The Business Environment. Toronto: McGraw Hill. ASIN
B004HSYVGK

Course Reference Textbooks

1. Baron, D. P. (2010). Business and its environment. Upper Saddle River, NJ: Prentice Hall ASIN
B000RTBCR4
2. Gopal, N. (2009). Business environment. New Delhi: Tata McGraw-Hill Education. 2011520907
3. Kotler P. & G. Armstrong. (2012). Principles of Marketing (14th Ed.). Prentice Hall 0136912478
4. Palmer, A & Hartley, B. (2006). The Business Environment, (5th Ed.). London: McGraw-Hill.

Course Journals

1. African Journal of Business Management. 2078-5585

2. International Journal of Business Environment (IJBE)
3. Business Intelligence Journal 1547-2825

Course Reference Journals

1. Journal of Academic and Business ethics

2. Journal of Small Business Management
3. Strategic Management Journal 1043-2095

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INTRODUCTION TO BUSINESS

Business is an important institution in society. Be it for the supply of goods or services,

creation of employment opportunities, offer of better life, or contribution to the economic
growth of a country, the role of business is crucial. So the first question arises in anyone’s
mind is what really a business is ?

“A Business is nothing more than a person or group of persons properly organized to

produce or distribute goods or services. The study of business is the study of activities
involved in the production or distribution of goods and services-buying, selling,
financing, personnel and the like”.

Business can be accurately defined by K. Ashwathapa as “Complex field of commerce

and industry in which goods and services are created and distributed in the hope of profit
within a framework of laws and regulations”.

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ROLE OF BUSINESS

1. Creation of form, time and place utility : All business activities create
utilities for the society. Form utility is created, when raw materials are converted
into finished goods and services

2. Regularity and Continuity in Dealings : Regularity of economic transactions is

the essence of business. There should be continuity, or regularity of exchange of
goods and services for money.

3. Profit Motive : Another important feature of a business activity is its objective.

The chief objective of a business is to earn reasonable profits or 'surplus' as it is
called in case of public enterprises. The survival of a business depends upon its
ability to earn profits. Every businessman wants to earn profits, to get return on
his capital and to reward himself for his services. Actually, profit is the spur that
helps in the continuation of the business. Profit is also essential for growth.
Recreation clubs and religious institutions cannot be called business enterprises,
as they have nothing to do with the profit motive

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The scope of business is very wide. It should not be confused with trade. 'Trade' simply
denotes purchase and sale of goods, whereas 'business' includes all activities from
production to distribution of goods and services. It embraces industry, trade and other
activities like banking, transport, insurance, and warehousing which facilitate
production and distribution of goods and services. According to F.C. Hooper, "The whole
complex field of commerce and industry, the basic industries, processing and
manufacturing industries, the network of ancillary services : distribution, banking,
insurance, transport and so on, which serve and inter-penetrate the world of business as a
whole, are business activities."

The business activities may be grouped under two broad headings, viz.,

(1) Industry and (2) Commerce. A business undertaking, which deals with growing,
extracting, manufacturing, or construction is called an industrial enterprise. On the other
hand, a business undertaking, which is concerned with exchange (buying and selling) of
goods and services, or with activities that are incidental to trade, like transport,
warehousing, banking, insurance and advertising, is called a commercial enterprise.

Industry : The activities of extraction, production, conversion, processing of products

are described as industry. The products of industry may fall in any one of the following
three categories :

(a) Consumers' Goods : Goods used by final consumers are called consumers'
goods. Edible Oils, Cloth, Jam, Television, Radio, Scooter, Refrigerator, etc.
come under this category.

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(b) Producers' Goods : Goods used for the production of other goods are described
as producers' goods. Machine tools and machinery used for manufacturing other
products come under this heading. These are also called capital goods.

(c) Intermediate Goods : There are certain materials, which are the finished
products of one industry and become the intermediate products of other industries.
A few examples of this kind are the copper industry, aluminum industry, and
plastic industry, the finished products of which are used in manufacturing
electrical appliances, electricity wires, toys, baskets, containers, and buckets.

Broadly speaking, industrial activities may be classified into primary and

secondary industries. Primary industry may be either extractive, or genetic, and
secondary industry may be either manufacturing, or construction.

(i) Extractive Industries : They extract, or draw out products from natural sources,
such as earth, sea, air. The products of such industries are generally used by
manufacturing and construction industries, for producing finished goods.
Farming, mining, lumbering, hunting, fishing, etc, are some of the examples of
extractive industries.

(ii) Genetic Industries : Genetic means parentage, or heredity. Genetic industries

are engaged in breeding plants and animals, for their use in further reproduction.
For breeding plants, the nurseries are typical examples of genetic industries. In
addition,

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the activities of cattle-breeding farms poultry farms and fish hatchery come under
the category of genetic industries.

(iii) Manufacturing Industries : These are engaged in producing goods through the
creation of form utility. Such industries are engaged in the conversion, or
transformation of raw materials, or semi-finished products into finished products.
The products of extractive industries generally become the raw materials of
manufacturing industries. Factory production is the outcome of manufacturing
industry.

(iv) Construction Industries : They are concerned with the making or construction
of buildings, bridges, dams, roads, canals, etc. These industries use the products
of manufacturing industries, such as iron and steel, cement lime, mortar, etc. and
also the products of extractive industries, such as stone, marble etc. The
remarkable feature of these industries is that their products are not sold in the
sense of being taken to the markets. They are constructed and fabricated at fixed
sites.

(v) Service Industry : There are several services such as transport, banking,
insurance and warehousing, which are very important for satisfying human
needs. They facilitate the production and distribution of business activity. A large
number of business firms are engaged in transport, insurance and storage of goods
and provision of banking and financial facilities to business units.

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Business Environment : It refers to all external forces which have a bearing on the
functioning of the business. According to Barry M. Richman and Melvgn Copen
“Environment consists of factors that are largely if not totally, external and beyond
the control of individual industrial enterprise and their managements. These are
essentially the ‘givers’ within which firms and their management must operate in a
specific country and they vary, often greatly, from country to country”.

William F. Glucck defines business environment “as the process by which

strategists monitor the economic, governmental, market, supplier, technological,
geographic, and social settings to determine opportunities and threats to their firms.

Business Environment is “The total of all things external to firms and industries which affect
their organization and operation”—Bayard O. Wheeler According to Arthur M. Weimer,
business environment encompasses the ‘climate’ or set of conditions, economic, social, political
or institutional in which business operations are conducted.

Objective of Businesses

Survival -The main objectives that a business might have are: Survival – a short term objective,
probably for small business just starting out, or when a new firm enters the market or at a time of
crisis.

1. Getting and Staying Profitable

Maintaining profitability means making sure that revenue stays ahead of the costs of doing
business. Focus on controlling costs in both production and operations while maintaining the
profit margin on products sold.

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2. Productivity of People and Resources

Employee training, equipment maintenance and new equipment purchases all go into company
productivity. Your objective should be to provide all of the resources your employees need to
remain as productive as possible.

3. Excellent Customer Service

Good customer service helps you retain clients and generate repeat revenue. Keeping your
customers happy should be a primary objective of your organization.

4. Employee Attraction and Retention

Employee turnover costs you money in lost productivity and the costs associated with recruiting,
which include employment advertising and paying placement agencies. Maintaining a productive
and positive employee environment improves retention.

5. Mission-driven Core Values

Your company mission statement is a description of the core values of your company. It is a
summary of the beliefs your company holds in regard to customer interaction, responsibility to
the community and employee satisfaction. The company's core values become the objectives
necessary to create a positive corporate culture.

6. Sustainable Growth

Growth is planned based on historical data and future projections. Growth requires the careful
use of company resources such as finances and personnel.

7. Maintaining a Healthy Cash Flow

Even a company with good cash flow needs financing contacts in the event that capital is needed
to expand the organization. Maintaining your ability to finance operations means that you can
prepare for long-term projects and address short-term needs such as payroll and accounts
payable.

8. Dealing with Change

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Change management is the process of preparing your organization for growth and creating
processes that effectively deal with a developing marketplace. The objective of change
management is to create a dynamic organization that is prepared to meet the challenges of your
industry.

9. Reaching the Right Customers

Marketing is more than creating advertising and getting customer input on product changes. It is
understanding consumer buying trends, being able to anticipate product distribution needs and
developing business partnerships that help your organization to improve market share.

10. Staying Ahead of the Competition

A comprehensive analysis of the activities of the competition should be an ongoing business

objective for your organization. Understanding where your products rank in the marketplace
helps you to better determine how to improve your standing among consumers and improve your
revenue.

NATURE OF BUSINESS

Business may be understood as the organized efforts of enterprise to supply consumers with
goods and services for a profit. Businesses vary in size, as measured by the number of employees

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or by sales volume. But, all businesses share the same purpose to earn profits. The purpose of
business goes beyond earning profit. There are:
1. It is an important institution in society.
2. Be it for the supply of goods and services
3. Creation of job opportunities

4. Offer of better quality of life

5. Contributing to the economic growth of the country.

Hence, it is understood that the role of business is crucial. Society cannot do without business. It
needs no emphasis that business needs society as much.

CHARACTERISTICS OF BUSINESS ENVIRONMENT

1. Business environment is compound in nature.

2. Business environment is constantly changing process.
3. Business environment is different for different business units.
4. It has both long-term and short-term impact.
5. Unlimited influence of external environment factors.
6. It is very uncertain.
7. Inter-related components.
8. It includes both internal and external environment.

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IMPORTANCE OF BUSINESS ENVIRONMENT

There is a close and continuous interaction between a business and its environment. This
interaction helps in strengthening the business firm and using its resources more effectively. The
business environment is multifaceted, complex, and dynamic in nature and has a far-reaching
impact on the survival and growth of the business. To be more specific, proper understanding of
the social, political, legal, and economic environment helps the business in the following ways:

Determining Opportunities and Threats.

The interaction between the business and its environment would identify opportunities for and
threats to the business. It helps the business enterprises in meeting the challenges successfully.

Giving Direction for Growth.

The interaction with the environment leads to opening up new frontiers of growth for the business
firms. It enables the business to identify the areas for growth and expansion of their activities.
Continuous Learning.

Environmental analysis makes the task of managers easier in dealing with business challenges.
The managers are motivated to continuously update their knowledge, understanding, and skills to
meet the predicted changes in realm of business.

Image Building

Environmental understanding helps the business organisations in improving their image by

showing their sensitivity to the environment within which they are working. For example, in view
of the shortage of power, many companies have set up Captive Power Plants (CPP) in their
factories to meet their own requirement of power.

Meeting Competition.
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It helps the firms to analyse the competitors’ strategies and formulate their own strategies
accordingly.

Importance of Understanding the Organisational Environment

a) The environment provides resources that an organiz

ation needs to create goods and
services.

b) The environment is a source of opportunities and thr

eats for an organization. Executives
therefore, must realize that virtually any environm
ental trend or event is likely to create
opportunities for some organizations and ns and thr
eats for others.

c) Failure to understand the environmental factors for

business can create a number of
problems, which in fact may be difficult to solve. It
can reduce the profit margin in
addition t n to reducing the opportunities for expans
ion. On the contrary, proper appreciation
of the environmental factors can bring many benefit
s.

d) Successful business means that losses are minimize

d, the firm can widen its financial
base and face competition more effectively. All these
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finally lead the business venture to operations. When the business climate is favourabl
a success a success. e, new ideas, schemes and ventures
may be put into action. The firm can utilize its res
e)
ources advantageously and derive the
Opening of new avenues paves way for the
maximum benefits.
xpansion of new entrepreneurial

Factors Influencing the Organizational Environment

The organizational environment denotes internal and external environmental factors influencing
organizational activities and decision-making. Every organization, whether business or non-
business, has its environment, which is always dynamic and ever-changing. The forces that
drive t ve this change in e in the business are known as n as internal and ex d external environmental fa
ctors.

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b)

The internal environment

The internal environment of an organization refers to events, factors, people, systems,

structures and conditions inside an organization that are generally under the company's direct
control. Corporate mission, culture, and leadership style are factors typically associated with an
organization's internal environment. As such, the internal environment will influence the
organizational activities, decisions, behaviours and attitudes of employees. Changes in
leadership style, corporate mission or culture can e can significantly impact the organization.

Internal corporate env e environmental factors

The staff

Employees are an essential part of the internal environment of an organization. Managers must,
therefore, be able to manage lower-level employees and, at the same time, supervise the other
factors of the internal environment. Indeed, even when everyone is competent and talented,
politics and in d internal conflicts can destroy a good a good organization from within.

The corporate culture

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The internal corporate culture consists of the values, attitudes and priorities that employees live
with every day. A ruthless culture in which every employee competes with his colleagues
creates a different and more toxic environment than a company that emphasizes collaboration
and t d teamwork.

The external environment

The external environment is composed of factors that occur outside the organization but can
cause internal changes and are, for the most part, beyond the company's control. Customers,
competition, economy, technology, resources, and political and social conditions are common
external factors that influence the organization. Even if the external environment occurs outside
an organization, it can significantly influence its current operations, growth and long-term
sustainability. Ignoring external forces can be a damaging mistake for managers. As such,
managers must continue to monitor and adapt to t o the external environment. The key is to have
a
proactive approach to handling problems rather than a reactive approach to sol o solving problems.
External corporate env e environmental factors

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The economy in a bad economy, even a well-managed organization, may not be able to
survive. If customers lose their jobs or take jobs that can barely support them, they will spend
less on ess on sports activities, recreation, gifts, luxury goods, and new cars. It is not possible to con
o control
the economy, but understanding it can help id p identify threats and opportunities.

The competition

Unless the organization is a monopoly, there will always be competition. When a company is
newly opened, it will have to fight against the established and more experienced organizations
in the same sector. On the other hand, when a company has established itself, it will find itself
fighting against new organizations trying to steal a slice of the market. In short, competition
never dies.

c) Politics

Changes in government policy can have a considerable impact on business activities. A classic
example is the tobacco industry, where, since the 1950s, cigarette manufacturers have been

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asked to put warning labels on their products. They have also, over time, lost the right to
advertise on television. Smokers, on the other hand, have fewer and fewer places where they
are allowed to smoke. Therefore, the percentage of people who smoke is diminished, with a
corresponding effect on the sector's revenues.

d) Customers and suppliers

Apart from employees, customers and suppliers are, in most cases, the most important people
with whom an organization has to deal. Suppliers have a huge impact on costs. The weight of a
given supplier depends on the scarcity of his service or product and, consequently, on the
possibility of negotiation with him. The power of customers depends on the fact that they are
free to choose between a specific organization and its competition.

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What is a vision?
A vision gives a sense of direction, enables flexibility to exist in the context of the guiding idea.
It is an orientation that guides a manager in specific direction. A vision should be clear. A
strategyis drawn from the vision. It will provide boundaries for the firm’s direction. It involves
answering the questions:

⮚ What the business is now?

⮚ What it could be in an ideal (perfect, best, model) world?

⮚ What the ideal world would be like?

Problems with Vision

⮚ Ignores real practical problem.

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⮚ Can degenerate into wishful thinking.

A vision is meant to stimulate motivation and enthusiasm throughout the company by guiding
activities and behaviour and providing a sense of common destiny. so that we can all pull in the
same direction.e.gThe Kenya Power & Lighting Co. Ltd – An exercise example
‘To achieve world class status as a quality services business enterprise so as to be the first
choice supplier of electrical energy in a competitive’.

1. A MISSION STATEMENT
A company mission is the fundamental purpose that sets a firm from other firms of its type and
identifies the scope of its operations in products and market terms. A mission is cultural glue. It
enables an organization to function as a unity.
It is the statement that expresses the purpose of our organization in line with the expectations of
all stakeholders. It sets the scope and the boundaries of the business activities. It defines the
business we are in. A mission statement is important because it clarifies for both the internal and
the external stakeholders what our business is seeking to achieve.
A company mission is designed to accomplish seven outcomes:

⮚ 2. To ensure un-amity of purpose within the organization.

⮚ To provide a basis for motivating the use of the organization resources.

⮚ To develop a basis, or standard, for allocating organizational resources.

⮚ To establish a general tone or organizational climate; for example, to suggest a

businesslike operations.

⮚ To serve as focal point for those who can identify with the organization’s purpose and

direction and to deter those who cannot do so from participating further in its activities.

⮚ To facilitate the transformation of objectives and goals into a work structure involving

the assignment of tasks to responsible elements within the organization.

⮚ To specify organizational purposes and the translation of these purposes and the

translation of these purposes into goals in such a way that cost, time, and performance
parameters can be assessed and controlled.

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Elements Of Mission
(a) Purpose. Why does the company exist?
-To create wealth for shareholders.
-Satisfy needs of all stakeholders.
-To reach some higher goals.
(b) Strategy
- Provides the commercial logic for the company.
- Business the company is in
- The competition by which it hopes to prosper
(c) Policies
Converts the mission into everyday performance. This includes simple matters
such as politeness to customers, speed at which phone calls are answered etc.
Importance of Mission

■ Communicating internally

■ Values and feeling are integral element of consumers’ buying decision.

■ Suggest that employees are motivated by more than money.

Mission statements are formal statements of an organization, they should be brief for ease of
remembrance, flexible to accommodate change and distinctive to make the firm stand out.

Planning begins with a mission or a purpose statement. It is difficult for managers to master
mission statement because of its philosophical and qualitative nature. Many organizations find
their departments and sometimes even their groups pulling in different directions and often with
disastrous results simply because the organization has not defined the boundaries of the business
and the way they wish to do business.
(d) Values – They can include:

i. Principles of business-Commitment to suppliers, staff and customers.Social policy.

ii. Loyalty and commitment – this can inspire employees to sacrifice their own personal
interests for the good of the whole.

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iii. Guidance for behavior – Mission helps create a work environment where there is a
sense of common p

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EXTERNAL ENVIRONMENT

Market environment
This consist of factors related to the group and other organizations that compete with and
have an impact on an organization markets and business. This include;

1. Customer’s factors like their need, preference, perceptions, attitudes, values, buying
behavior, and satisfaction of customers.
2. Product factors like demand, image, features, utility, lifecycle, price promotion place,
availability of substitutes etc.
3. Marketing intermediary factors, such as level and quality of customer service,
middlemen, distribution channels, logistics, costs and delivery systems and financial
intermediaries.
4. Competitor related factors such as types of competitors relative strategic position of
major competitors

The marketing environment depends on the type of the industrial structure. In monopolies and
oligopolies, the concern for the market environment is lesser than the case of the pure
competition. In recent times the government policy has moved towards allowing some degree of
competition within the public sector like banks, radio and TV stations etc. This has made the
market environment more important in strategic management.
Political and Legal Environment
Marketing decisions and activities are restrained and controlled by multitude of laws and
regulations established by the political institutions. Laws have been enacted to preserve a
competitive atmosphere or to protect the consumers. Extent of the impact of these laws on
marketing mix variables will depend on how marketers and the court interpret such provisions.
Other sources of regulations include the local authorities etc.
Some industries are subjected to heavy regulation e.g. electricity, water, rail transport – This
gives company’s operating in this environment monopoly and prices are restricted. This is
justified by the large sum of money that needs to be invested in the industries.

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Changes in law can be anticipated from governing party’s manifestos to guide the firm’s political
priorities. Also the government publishes papers to consult on plan on issues like green issues,
employment, wages etc.
The government is also responsible for creating a stable framework for which business can be
done e.g. in terms of physical infrastructure, social infrastructure and market infrastructure.
Some political changes can make planning of company activities difficult and there are political
risks that can damage the firm e.g. wars, political chaos (Mageuzi and Mungikietc).
The concern is the stability of the political system, the government commitment to the rule of
game, expectation of change in government and expected changes in the business practices etc.
Government policy in particular industry is important.

The Economic Environment

Economic forces affect the firm’s strategic decisions. Strategic require purchasing power as well
as people. The available purchasing power in the market depends on current income, prices,
savings, debts and credit availability.
The industrial structure of the economy will determine the level and distribution of income and
this will in turn impact on the business of organization. Some of the important factors include;
1. The economic stage at which the country is in at a given point.
2. The economic structure adopted, such as capitalist, socialist, or mixed economy
3. The economic policies, such as industrial, monetary and fiscal policies.
4. Economic policies such as five-year plan, annual budget and so on.
5. Economic indices like national income, distribution of income, rate and growth of
GNP, per capita income, disposable income, rate of savings, balance of income etc.
6. Infrastructure factors such as financial institution, banks, modes of transport,
communication facilities, and so on

Economic factors like GDP, inflation, interest rates (cost of borrowing), tax levels, government
spending and business cycle need to be considered. During periods of boom, premium prices can
be charged, during recession, demand for goods and services are low and prices depressed. Refer
to UK economy. Impact of EC and E-currency price transparency. In some countries goods are
more expensive than others. (Cars – UK). Interest rates will be uniform.
Culture Environment
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The society in which people grow shapes their beliefs, values and norms. People absorb almost
unconsciously a worldview that defines their relationship to themselves, to others, to nature and
to the universe.
People living in a particular society hold many core beliefs and values that tend to persist e.g.
American believe in work, getting married, in giving charity in being honest etc. These core
beliefs and values are passed on from parents to children and are reinforced by major institutions
like schools, churches, businesses and government.
People’s secondary beliefs are more open to change i.e. belief in institution of marriage is a core
belief but believing that people ought to get married early is a secondary belief.
Family planning strategist could make headways by arguing that people should not get married at
all i.e. strategist can change the secondary values but have little chance of changing the core
values.
Think about drinking and accidents. Those advocating – no drinking have little chance because
people have cultural freedom to drink. The idea of using a tax driver when drunk. Can be a good
strategy, also they can lobby to rise legal drinking age.
Cultural discipline and habits can make consumers boycott some products e.g. Muslim and pork.
Knowledge of culture is of value to business because strategist can adapt their producers
accordingly and gain sizeable markets. Human resource management can tackle cultural
difference in recruitment e.g. interpretation of body language.

Sub-cultures
Each society contains subcultures – various groups with shared values emerging from their
special life experience or circumstance. Sub cultural groups exhibit different wants and
consumption - marketers can choose sub-cultures as their target markets.
There are benefits that come from targeting a subculture i.e. marketers have always loved teens
because they are society’s trend setters in fashion, music, entertainment, ideas and attitudes. Also
they know if they attract a youth, there are good chances of keeping him/her in future. Sub-
culture can come due to:
(a) Age
(b) Class
(c) Ethnic background
(d) Religion
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(e) Geography/region
(f) Sex
(g) Work

Shift of Secondary Cultural Values through times.

Core values are fairly persistent but cultural swings takes place. Advent of break dance, hip-hop,
Lingala etc. and other cultural phenomena had a major impact on young people’s lifestyle,
clothing, sexual norms and life goals. Today young people are influenced by new heroes and fads
etc. Marketers need to spot cultural shift that might bring marketing opportunities and threats.
There is need to forecast cultural trends.
Business Ethics Environment
Organizations management and employees conduct will be measured against ethical standards by
the customers, suppliers and publics. There are ethical problems in:

3. Production practices e.g. child labour, dangerous work conditions, safe products etc.
4. Gifts – way of doing business
5. Social responsibility – accounting for pollution and human right issues.
6. Competitive behavior - competing aggressively or unethically.
Social Environment
This involves the study of demographic factors i.e. study of population and population trends. The
factor important includes – growth of population, age of the population, geographical distribution,
ethnicity, household and family structure, employment, social structure and wealth. Implications
– changes in the patterns of ad location of ad, recruitment policies wealth and tax. The concern is
the worldwide population growth, the age mix ethnic risks, educational groups, household
patterns and shift from mass markets to micro markets.
Technology Environment
Technology affects and changes our lifestyles. Technology in areas like communication,
transport, computer, energy, fabrics, metal and packaging has influenced the types of products
produced. It has also influenced advertising, personal selling, market research, pricing,
packaging, transport and use of credit. Technology has led to invention of new products.

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Technology to apparatus or equipment – techniques and organizations. Technology contributes to

overall economic growth. The total output can increase through increase in productivity, reduced
cost and new types of products.
Effects of Technology
Types of products and services made and sold, the way products are made, services provided,
market identified, firms managed and communication with external clients via websites, e-mail
etc. E.g. Internet phones charged at the local rates – undermines price per distance.
Social Effects:
(a) Home working – will be possible and will become more important.
(b) Intellective skills – relate to interpretation of data and information process. More valued
than physical skills.
(c) Services – Manufacturing productivity increases – more work human resources released
for service jobs.
(d) Database marketing
(e) Using the internet
(f) Implication of internet

ECOLOGY
In many cities, air and water pollution has reached dangerous levels. There is great concern about
certain chemicals causing air, soil and water pollution. In W. Europe “green” parties have pressed
for public action to reduce industrial pollution. New legislation passed as a result of the activities
of environmentalism has hit certain industries very hard. Some companies have to invest billions
of shillings in pollution control equipment and more environmental friendly fuels. Ecology will
affect business in that;

1. They will ad for less pollution from the industry

2. Greater government regulation
3. Polluter pays – business will be charged external cost of their activities.
4. Need for ecology audit.
5. Opportunities to develop products and technologies that are ecologically friendly.
Importance of the Physical Environment
1. It is the source of inputs – oil and mining companies.
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2. It is present logistical problem or opportunities to the organization e.g. proximity to

roads or rail.
3. This environment is under heavy control of other organizations like the local and
central governments.
4. Disasters – the physical environment pose a major threat to organizations.

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Corporate social responsibility (CSR)

corporate social responsibility (CSR) is a type of business self-regulation with the aim of being
socially accountable. There is no one "right" way companies can practice CSR; many corporate
CSR initiatives strive to positively contribute to the public, the economy or the environment. In
today's socially conscious environment, employees and customers place a premium on working
for and spending their money with businesses that prioritize CSR.

"What the public thinks of your company is critical to its success," Schmidt told Business News
Daily. "By building a positive image that you believe in, you can make a name for your company
as being socially conscious."

It is the use of corporate responsibility expands, it is becoming increasingly important to have a

socially conscious image. Consumers, employees and stakeholders prioritize CSR when choosing
a brand or company, and they are holding corporations accountable for effecting social change
with their business beliefs, practices and profits.

"A robust CSR program is an opportunity for companies to demonstrate their good corporate
citizenship … and protect the company from outsized risk by looking at the whole social and
environmental sphere that surrounds the company," said Jen Boynton, CEO of B Targeted
Marketing Co.

1.

Building a socially responsible business

While startups and small companies don't have the deep financial pockets that enterprises have,
their efforts can have a significant impact, especially in their local communities.

"Even 5%, though it might not sound like a lot, can add up to make a difference," said Schmidt.
"When thinking of ways to donate and give back, start local, and then move from there."
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When identifying and launching a CSR initiative, involve your employees in the decision-making
process. Create an internal team to spearhead the efforts and identify organizations or causes that
may be somewhat related to the business or that employees feel strongly about. Contributing to
something your employees are passionate about can increase engagement and success. Involving
your employees in the decision-making process can also bring clarity and assurance to your
team.

"If decisions [about CSR] are made behind closed doors, people will wonder if there are strings
attached and if the donations are really going where they say," Cooney said. "Engage your
employees [and consumers] in giving back. Let them feel like they have a voice."

Regardless of which strategies you use for sustainable development, Boynton said it is important
to be vocal. Let your consumers know what you are doing to be socially conscious.

"Consumers deserve to share in the good feelings associated with doing the right thing, and many
surveys have found that consumers are inclined to purchase a sustainable product over a
conventional alternative," she said. "Announcing these benefits is a win-win from both a
commercial and sustainability perspective."

What to avoid when creating a socially responsible business model

Becoming a socially responsible business can be simple, though there are a few caveats.

First, businesses should avoid participating in charitable efforts that are not related to their
core business focus or that violate a company's ethical standards in any way. Instead of
blindly sending money to a completely unrelated organization, find a nonprofit that your
company believes in or a project in your community.

Second, don't use CSR opportunities solely for marketing purposes. Schmidt said running a
corporate responsibility campaign as a quick marketing scheme can backfire if your business
doesn't follow through. Instead of employing a one-time act, you can adopt socially responsible
business practices over time. Schmidt said employees and consumers react positively to
companies that embrace long-term social responsibility.

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Last, if you are considering sustainable activities that aren't legally required yet, don't wait.
By adopting socially responsible norms early on, you set the bar for your industry and refine your
process.

Undertaking CSR initiatives is a win for everyone involved. The impact of your actions will not
only appeal to socially conscious consumers and employees but can also make a real difference in
the world.

WHY CSR

Many companies view CSR as an integral part of their brand image, believing that customers will
be more likely to do business with brands that they perceive to be more ethical. In this sense, CSR
activities can be an important component of corporate public relations. At the same time, some
company founders are also motivated to engage in CSR due to their personal convictions.

PRINCIPLESOF CSR

● Human Rights Policy Principle 1 Businesses should support and respect the protection of
internationally proclaimed human rights

● Principle 2 Businesses should make sure they are not complicit in human rights abuses

● Principle 3 Businesses should uphold the freedom of association and the effective recognition of
the right to collective bargaining

● Principle 4 Businesses should uphold the elimination of all forms of forced and compulsory
labour.

● Principle 5 Businesses should uphold the effective abolition of child labour

● Principle 6 Businesses should uphold the elimination of discrimination in respect of employment

and occupation

● Principle 7 Businesses should support a precautionary approach to environmental challenges.

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● Principle 8 Businesses should undertake initiatives to promote greater environmental

responsibility

● Principle 9 Businesses should encourage the development and diffusion of environmentally

friendly technologies.

● Principle 10 Businesses should work against corruption in all its forms, including extortion and
bribery.

Four Types of Corporate Social Responsibility

All businesses must do more than seek strong profit margins for success; being socially
responsible is part of business survival in today's economy. Companies should take a stance on
important social issues to build a brand that consumers trust and respect. As a business leader,
consider these four types of corporate social responsibility and how you can implement programs
that are good for the community and good for your company.

Tip

The four types of Corporate Social Responsibility are philanthropy, environment conservation,
diversity and labor practices, and volunteerism.

Philanthropic Efforts

The largest companies in the world are aligned with philanthropic efforts. Microsoft works
closely with the Bill and Melinda Gates Foundation to bring technology to communities around
the world. The company understands that its success requires not just continued innovation, but
building a next generation capable of understanding, using and improving technology.

Even small companies benefit from aligning with philanthropic causes. A local car wash might
offer schools a platform to host fundraisers for sports teams. Restaurants have fundraising nights
when proceeds benefit a local school or charity. Supporting these causes happens to also be good
marketing, because the community is invited into the business, has a good experience and sees the
company in a positive light.

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Environmental Conservation

Environmental concerns regularly make the headlines, whether a long-term problem like global
climate change or a more local issue such as a toxic chemical spill. Companies that align
themselves in these efforts help minimize environmental problems by taking steps such as
reducing their overall carbon footprint. Although major corporations get most of the attention for
their environmental commitments — General Mills has committed to a 28 percent reduction in
greenhouse gas emissions, for example — there are plenty of opportunities for small and mid-
sized business as well.

Does your business have an active recycling program on site? Have you considered using
alternative energy sources like solar and wind to help power your operations? There are plenty of
"green cleaning" alternatives that can help reduce your use of harsh toxic cleaning chemicals. All
these steps can make a small but significant contribution to improving the environment. You can
also ask your suppliers to do the same, letting them know that their environmental measures will
be a factor in your purchasing decisions. By doing so, your environmental commitments are
multiplied along the supply chain.

Company Diversity and Labor Practices

Business leaders realize that diversity in the workplace is beneficial when everyone is getting
along and working as a team. However, labor policies must apply to all employees, even those at
the highest levels of the company. The scandals with Harvey Weinstein and Steve Wynn show
that no company is impervious to the ramifications of sexual harassment. This movement has also
given rise to other diversity issues in the workplace that need attention and consistent action. As a
business leader, review your own diversity policies and protocol to address any complaints and
violations. This is not only good for your company image, it also helps build a positive company
culture with good morale and high productivity.

Supporting Volunteer Efforts

Local communities and charities always need help. Smart business leaders know that being
involved in the community in a productive way is good for the company too. Give employees the
opportunity to help a local school plant trees or work with the city council on addressing
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homelessness in the area. Business leaders have the opportunity to choose where to spend
volunteer efforts to best help the local area along with the company. The important thing for
businesses is to choose a cause and contribute time.

What Are Some Problems That Businesses Face in Social Responsibility?

Name the biggest social issue facing businesses today. Perhaps you said global warming, safe
workplace practices, preventing child labor, or protecting vanishing ecosystems. The fact is, there
are numerous social responsibility issues in today's business world. Each company must identify
the concerns that are relevant to its operations, based on the priorities of managers and staff, as
well as issues that your customer base is concerned with and the communities in which your
business operates. Awareness of these priorities is the first step in addressing social issues in
business management.

Global Climate Change

Human activities are dumping billions of tons of carbon dioxide and other greenhouse gases into
the atmosphere. This pollution is altering the earth's climate in significant ways, a process
sometimes referred to as global warming. Businesses are a major source of such pollution, both
directly by burning fuels and emitting other greenhouse gases, and indirectly by using and
producing products that also contribute to climate change. Petroleum refiners, for example, not
only release greenhouse gases from their operations, they also sell gasoline and heating fuel,
which makes an additional contribution when burned in cars, trucks, homes and office buildings.

Other Environmental Concerns

There are many other types of pollution that originate from businesses, in addition to greenhouse
gases. Almost every business, large or small, uses toxic chemicals of some sort, even if they're
nothing more exotic than bleach to clean countertops or lye (sodium hydroxide) to clear clogged
drains. Cleaning solvents, metal shavings, fats, oils, grease and other materials all contribute to
business waste streams and can have a negative impact on the environment.

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Business operations also effect ecosystems. A new factory, for example, might be built on cleared
forest land or a wetland that has been drained to recover usable property. Your businesses raw
materials also impact ecosystems, often indirectly. A food manufacturer may use palm oil that
was grown by slash-and-burn agricultural practices that destroy native forests, eliminate habitats
for endangered species and create enormous amounts of air and water pollution.

Worker Health and Safety

Your own business facility may be a model of safe workplace practices. But that is not
necessarily true for the workplaces that are in your supply chain. You've certainly heard news
stories of common products made in sweatshops, unsafe factories with blocked fire exits, or small
children doing dangerous jobs that endanger their health and even their lives. Abusive workplace
practices are considered by many to be one of the most serious categories of social problems in
business, and are a major challenge to businesses that want to conduct themselves with greater
social responsibility.

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BUSINESSES AND ITS STAKEHOLDERS

What is a Stakeholder?

In business, a stakeholder is any individual, group, or party that has an interest in an organization
and the outcomes of its actions. Common examples of stakeholders include employees,
customers, shareholders, suppliers, communities, and governments. Different stakeholders have
different interests, and companies often face trade-offs in trying to please all of them.

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Types of Stakeholders

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1 Customers

Stake: Product/service quality and value

Many would argue that businesses exist to serve their customers. Customers are actually
stakeholders of a business, in that they are impacted by the quality of service/products and their
value. For example, passengers traveling on an airplane literally have their lives in the company’s
hands when flying with the airline.

2 Employees

Stake: Employment income and safety

Employees have a direct stake in the company in that they earn an income to support themselves,
along with other benefits (both monetary and non-monetary). Depending on the nature of the
business, employees may also have a health and safety interest (for example, in the industries of
transportation, mining, oil and gas, construction, etc.).

3 Investors

Stake: Financial returns

Investors include both shareholders and debtholders. Shareholders invest capital in the business
and expect to earn a certain rate of return on that invested capital. Investors are commonly
concerned with the concept of shareholder value. Lumped in with this group are all other
providers of capital, such as lenders and potential acquirers. All shareholders are inherently
stakeholders, but stakeholders are not inherently shareholders.

4 Suppliers and Vendors

Stake: Revenues and safety

Suppliers and vendors sell goods and/or services to a business and rely on it for revenue
generation and on-going income. In many industries, suppliers also have their health and safety
on the line, as they may be directly involved in the company’s operations.

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5 Communities

Stake: Health, safety, economic development

Communities are major stakeholders in large businesses located in them. They are impacted by a
wide range of things, including job creation, economic development, health, and safety. When a
big company enters or exits a small community, there is an immediate and significant impact on
employment, incomes, and spending in the area. With some industries, there is a potential health
impact, too, as companies may alter the environment.

6 Governments

Stake: Taxes and GDP

Governments can also be considered a major stakeholder in a business, as they collect taxes from
the company (corporate income taxes), as well as from all the people it employs (payroll taxes)
and from other spending the company incurs (sales taxes). Governments benefit from the overall
Gross Domestic Product (GDP) that companies contribute to.

Ranking/Prioritizing Stakeholders

Companies often struggle to prioritize stakeholders and their competing interests. Where
stakeholders are aligned, the process is easy. However, in many cases, they do not have the same
interests. For example, if the company is pressured by shareholders to cut costs, it may lay off
employees or reduce their wages, which presents a difficult tradeoff.

Jack Ma, the CEO of Alibaba, has famously said that, in his company, they rank stakeholders in
the following priority sequence:

1. Customers
2. Employees

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3. Investors

Read more about Jack Ma’s stakeholder priorities here.

Many other CEOs tout shareholder primacy as their number one interest.

Much of the prioritization will be based on the stage a company is in. For example, if it’s a startup
or an early-stage business, then customers and employees are more likely to be the stakeholders
considered foremost. If it’s a mature, publicly-traded company, then shareholders are likely to be
front and center.

At the end of the day, it’s up to a company, the CEO, and the board of directors to determine the
appropriate ranking of stakeholders when competing interests arise.

What is Business Risk?

Business risk refers to a threat to the company’s ability to achieve its financial goals. In business,
risk means that a company’s or an organization’s plans may not turn out as originally planned or
that it may not meet its target or achieve its goals.

Such risks cannot always be blamed on the owner of the company, as risk can be influenced
by various external factors, which may include rising prices of raw materials for production,
growing competition, or changes or additions to existing government regulations.

How to Identify Business Risks

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Risks are inherent to every environment and business. They cannot be avoided and, therefore,
must be addressed head-on to minimize their impact. The first step in risk management is to
identify the risks in order to come up with a risk management strategy.

1. Analyze the sources that may trigger problems

It is important to identify and analyze the sources that can cause a problem. Risk triggers can be
internal or external.

2. Act now

Managers shouldn’t wait for potential problems to become actual problems before they start
doing something. The moment a problem is deemed to be a threat, it should immediately be dealt
with by the company’s executives by devising a plan of action in the event that the risk becomes
an actual full-blown concern facing the company.

3. Involve employees

Identifying risks is not the sole responsibility of the managers and top-ranking officials.
Management should involve their employees in identifying the risks that they see in their
respective departments and train them to handle such risks at their level.

4. Make a list of industry-specific risks

By looking into the industry where the company operates, managers will be able to identify the
possible risks that the business may face. If the same risks happen to other companies in the same
industry, there is a likely chance that it will happen to your company as well. Therefore,
businesses should be ready with a list of solutions or steps to address the risks.

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5. Create a record of risks

Sometimes, the same risks arise over and over. By creating a record of all the risks experienced
by the company since it started, management will be able to do a regular review of past events in
order to detect patterns that may better prepare the company for future risks.

Types of Risks in Business

Risks come in different forms. Below are the different types of business risks:

1. Strategic risk

Strategic risks can occur at any time. For example, a company manufacturing an anti-mosquito
lotion may suddenly see a decline in its sales because people’s preferences have changed, and
they now want a spray mosquito repellent rather than a lotion. To deal with such risks, companies
need to implement a real-time feedback system to know what its customers want.

2. Compliance risk

Compliance risk involves companies having to comply with new rules that are set by the
government or by a regulatory body. For example, there may be a new minimum wage that must
be implemented immediately.

3. Financial risk

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Financial risk is about the financial health of the company. Can the company afford to offer
installment payments to its customers? How many customers can it offer such an installment
scheme? Can it handle business operations when two or three of these customers are not able to
make their payments on time?

4. Operational risk

Operational risk occurs within the business’ system or processes. For example, one of its
production machines may break down when the target output is still unmet. What will the
company do if one of its machine operators has an accident during work hours?

Causes of Business Risks

There are basically three causes of business risk:

1. Natural causes

Natural causes of risk include flooding, earthquakes, cyclones, and other natural disasters that can
lead to the loss of lives and property. For example, a delivery truck is on its way to deliver the
order of a customer but is met with a cyclone along the way, causing an accident. In order to
counter such causes, businesses need to take out comprehensive insurance coverage.

2. Human causes

Human causes of risk refer to negligence at work, strikes, work stoppages, and mismanagement.

3. Economic causes

Economic causes involve things such as rising prices of raw materials or labor costs,
rising interest rates for borrowing, and competition.

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How to Manage Business Risks

Business risks may be inevitable, but there are several ways to minimize their impact, such as:

1. Avoid the risk

It may sound ironic to suggest avoiding the risk when we say that it is inevitable. But what is
meant here is that companies should avoid specific risks when possible. Managers should think of
alternatives in order to not have to face the risk.

2. Prevent the risk

In the example of the delivery truck above, it would help prevent the risk if companies check on
the weather prior to sending out deliveries in order to make sure they reach their destination
safely. If there is a deemed risk, then they should act to prevent it from happening – for example,
by halting deliveries during severe weather.

3. Contain the risk

Sometimes, there are risks that cannot be avoided or prevented. Companies can choose to contain
said risks while putting up safety nets. For example, since all businesses need to access the
internet, where hackers abound, they may put stronger firewalls and other protective measures in
place to ensure their company’s safet

Business Risk Factors

1) Market Fluctuations

Semiconductor market fluctuations, which are caused by factors such as economic cycles in each
region and shifts in demand of end customers, affect the Group. Although the Group carefully

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monitors changes in market conditions, it is difficult to completely avoid the impact of market
fluctuations due to economic cycles in countries around the world and changes in the demand for
end products. Market downturns, therefore, could lead to decline in product demand and increase
in production and inventory amounts, as well as lower sales prices. Consequently, market
downturns could reduce the Group’s sales, as well as lower fab utilization rates, which may in
turn result in worsened gross margins, ultimately leading to deterioration in profits.

2) Fluctuations in foreign exchange and interest rates

The Group engages in business activities in all parts of the world and in a wide range of
currencies. The Group continues to engage in hedging transactions and other arrangements to
minimize exchange rate risks, but it is possible for our consolidated business results and financial
condition, including our sales amount in foreign currencies, our materials costs in foreign
currencies, our production costs at overseas manufacturing sites, and other items, to be influenced
if exchange rates change significantly. Also, the Group’s assets, liabilities, income, and costs can
change greatly by showing our foreign currency denominated assets and debts converted to
amounts in Japanese yen, and these can also change when financial statements in foreign
currencies at our overseas subsidiaries are converted to and presented in Japanese yen.

Furthermore, since costs and the values of assets and debts associated with the Group’s business
operation are influenced by fluctuations in interest rates, it is also possible for the Group’s
businesses, performance, and financial condition to be adversely influenced by these fluctuations.

3) Natural Disasters

Natural disasters such as earthquakes, typhoons, and floods, as well as accidents, acts of terror,
infection and other factors beyond the control of the Group could adversely affect the Group’s
business operation. Especially, as the Group owns key facilities and equipment in areas where
earthquakes occur at a frequency higher than the global average, the effects of earthquakes and
other events could damage the Group’s facilities and equipment and force a halt to manufacturing
and other operations, and such events could consequently cause severe damage to the Group’s
business. The Group sets and manages several preventive plans, Business Continuity Plan, which
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defines countermeasures such as contingency plans and at the same time the Group is subscribed
to various insurances; however, these plans and insurances are not guaranteed to cover all the
losses and damages incurred.

4) Competition

The semiconductor industry is extremely competitive, and the Group is exposed to fierce
competition from competitors around the world in areas such as product performance, structure,
pricing and quality. In particular, certain of our competitors have pursued acquisitions,
consolidations, and business alliances, etc. in recent years and there is a possibility to have such
moves in the future as well. As a result, the competitive environment surrounding the Group may
further intensify. To maintain and improve competitiveness, the Group takes various measures
including development of leading edge technologies, standardizing design, cost reduction, and
consideration of strategic alliances with third parties or possibility of further acquisitions but in
the event that the Group cannot maintain its competitiveness, the Group’s market share may
decline, which may negatively impact the Group’s financial results.

In addition, fierce market competition has subjected the products of the Group to sharp downward
pressure on prices, for which measures to improve profitability, such as price negotiations and
efforts at cost price reduction, have been unable to fully compensate. This raises the possibility of
a worsening of the Group’s gross margin. Furthermore, in cases where customers for the Group’s
products for which the gross margin is low have difficulty switching to other products or require a
certain amount of time to secure replacements, it may be difficult for the Group to halt or reduce
production in a timely manner. This may result in a reduction in the profitability of the Group.

5) Implementation of Management Strategies

The Group is implementing a variety of business strategies and structural measures, including the
development of “The Mid- Term Growth Strategy” and reforming the organizational structure of
the Group, to strengthen the foundations of its profitability. Implementing these business
strategies and structural measures requires a certain level of cost and due to changes in economic
conditions and the business environment, factors which the future is uncertain, and unforeseeable
factors, it is possible that some of those reforms may become difficult to carry out and others may

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not achieve the originally planned results. Furthermore, additional costs, which are higher than
originally expected, may arise. Thus, these issues may adversely influence the Group’s
performance and financial condition.

6) Business Activities Worldwide

The Group conducts business worldwide, which can be adversely affected by factors such as
barriers to long-term relationships with potential customers and local enterprises; restrictions on
investment and imports/exports; tariffs; fair trade regulations; political, social, and economic
risks; outbreaks of illness or disease; exchange rate fluctuations; rising wage levels; and
transportation delays. As a result, the Group may fail to achieve its initial targets regarding
business in overseas markets, which could have a negative impact on the business growth and
performance of the Group.

7) Strategic Alliance and Corporate Acquisition

For business expansion and strengthening of competitiveness, the Group may engage in strategic
alliances, including joint investments, and corporate acquisitions, etc.; for example, in February
2017, the Group acquired Intersil Corporation, and in March 2019, the US based semiconductor
company IDT. With regard to such alliances and acquisitions, the Group examines the likely
return on investment and profitability from a variety of perspectives. However, in cases where
there is a mismatch with the prospective alliance partner or acquisition target in areas of
management strategy such as capital procurement, technology management, and product
development, or there are financial or other problems affecting the business of the prospective
collaboration partner or acquisition target, in addition to the time and expense required for
integration of aspects such as business execution, technology, products, personnel, systems and
response to antitrust laws and other regulations of the relevant authorities, there is a possibility
that the alliance relationship or capital ties will not be sustainable, or in the case of acquisitions
that the anticipated return on investment or profitability cannot be realized. Furthermore, there is
a possibility that the anticipated synergies or other advantages cannot be realized due to an
inability to retain or secure the main customers or key personnel of the prospective alliance
partner or acquisition target. Thus, there is no guarantee that an alliance or acquisition will
achieve the goals initially anticipated.
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8) Financing

While the Group has been procuring business funds by methods such as borrowing from financial
institutions and other sources, in the future it may become necessary to procure additional
financing to implement business and investment plans, expand manufacturing capabilities,
acquire technologies and services, and repay debts. It is possible that the Group may face
limitations on its ability to raise funds due to a variety of reasons, including the fact that the
Group may not be able to acquire required financing in a timely manner or may face increasing
financing costs due to the worsening business environment in the semiconductor industry,
worsening conditions in the financial and stock markets, and changes in the lending policies of
lenders. In addition, some of the borrowing contracts executed between the Group and some
financial institutions stipulate articles of financial covenants. If the Group breaches these articles
due to worsened financial base of the Group etc., the Group may lose the benefit of term on the
contract, and it may adversely influence the Group’s business performance and financial
conditions.

9) Notes on Additional Financing

After implementing of the allocation of new shares to a third party based on a decision at the
Meeting of the Board of Directors held on December 10, 2012, we received an offer from the
former Innovation Network Corporation of Japan (business name changed to Japan Investment
Corporation as of September 25, 2018) that they are willing to provide additional investments or
loans with an upper limit of 50 billion yen. However, former Innovation Network Corporation of
Japan underwent restructuring, forming a separate subsidiary entity as of September 21, 2018,
leading to the new subsidiary, INCJ, Ltd., to take over the contract initially undertaken with the
former Innovation Network Corporation of Japan. Currently, no specific details regarding the
timing of or conditions associated with these additional investments or loans have been
determined, and there is no guarantee that these additional investments or loans will actually be
implemented. If investments occur based on this offer, further dilution of existing stock will
occur, and this may adversely impact existing shareholders. In addition, if loans are made under
this offer, the Group’s outstanding interest-bearing debt will increase, and this may impose
restrictions on some of our business activities. Furthermore, if fluctuations in interest rates occur

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in the future, the Group’s businesses, performance, and financial condition may be adversely
affected.

10) Relationship with Largest Shareholder, INCJ

As a result of the allocation of common stock to the former Innovation Network Corporation of
Japan and others by way of third-party allotment on September 30, 2013, the former Innovation
Network Corporation of Japan now holds a majority share of voting rights held in association
with Renesas Electronics’ share. From June 2017 onward, the former Innovation Network
Corporation of Japan gradually divested itself of its holdings of common stock in the Company,
and as of September 21, 2018, formed a separate subsidiary entity. As a result of this
restructuring, all shares owned by the former Innovation Network Corporation of Japan were
passed on to the new subsidiary, INCJ, Ltd., which is presently the largest shareholder in the
Company. Thus, the business operations of the Group are potentially subject to a substantial
influence through the exercise by INCJ of its voting rights at General Meetings of Shareholders.
In addition, should INCJ at some future date sell all or part of Renesas Electronics’ share which is
currently held for investment purpose, this could potentially have a substantial effect on the
market value of Renesas Electronics’ share, depending on factors such as the market climate at
the time of the sale.

11) Rapid Technological Evolutions and Other Issues

The semiconductor market in which the Group does business is characterized by rapid
technological changes and rapid evolution of technological standards. Therefore, if the Group is
not able to carry out appropriate research and development, the Group’s businesses, performance,
and financial condition may all be adversely affected by product obsolescence and the appearance
of competing products.

12) Product Production

a. Production Process Risk

Semiconductor products require extremely complex production processes. In an effort to increase

yields (ratio of nondefective products from the materials used), the Group takes steps to properly

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control production processes and seeks ongoing improvements. However, the emergence of
problems in these production processes could lead to worsening yields. This problem, in turn,
could trigger shipment delays, reductions in shipment volume, or, at worst, the halting of
shipments.

b. Procurement of Raw Materials, Components, and Production Facilities

The timely procurement of necessary raw materials, components and production facilities is
critical to semiconductor production. To avoid supply problems related to these essential raw
materials, components and production facilities, the Group works diligently to develop close
relationships with multiple suppliers. Some necessary materials, however, are available only from
specific suppliers. Consequently, insufficient supply capacity amid tight demand for these
materials as well as events including natural disasters, accidents, worsening of business
conditions, and withdrawal from the business occurred in suppliers could preclude their timely
procurement, or may result in sharply higher prices for these essential materials upon
procurement. Furthermore, defects in procured raw materials or components could adversely
influence the Group’s manufacturing operations and additional costs may be incurred by the
Group.

c. Risks Associated with Outsourced Production

The Group outsources the manufacturing of certain semiconductor products to external foundries
(contract manufacturers) and other entities. In doing so, the Group selects its trusted outsourcers,
rigorously screened in advance based on their technological capabilities, supply capacity, and
other relevant traits; however, the possibility of delivery delays, product defects and other
production-side risks stemming from outsourcers cannot be ruled out completely. In particular,
inadequate production capacity among outsourcers or operation shutdown of the outsourcers as a
result of a natural disaster, could result in the Group being unable to supply enough products.

d. Maintenance of Production Capacity at an Appropriate Level

The semiconductor market is sensitive to fluctuations in the business climate, and it is difficult to
predict future product demand accurately. Thus, it is not always possible for the Group to
maintain production capacity at an appropriate level that matches product demand. In addition,
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even if the Group engages in capital investment to boost production capacity, there is generally a
certain amount of time required before the actual increase in production capacity takes place.
Therefore, if demand for specific products substantially exceeds the Group’s production capacity
at a certain point and the state of excess demand continues over time, there is a possibility that the
Group will be unable to supply customers with the products they desire, that opportunities to sell
the products in question will be lost, that the Group will lose market share as customers switch to
competing products, and that the relationship of the Group and its customers will suffer. On the
other hand, if in response to a rise in demand for specific products the Group undertakes capital
investment with the aim of increasing production capacity, there is no guarantee that demand for
the products in question will remain strong once production capacity actually increases and
afterward. There is a possibility that actual product demand may turn out to be less than
anticipated, in which case it may not be possible to recover the capital investment with the
anticipated earnings.

13) Product Quality

Although the Group makes an effort to improve the quality of semiconductor products, they may
contain defects, anomalies or malfunctions that are undetectable at the time of shipment due to
increased sophistication of technologies, the diversity of ways in which the Group’s products are
used by customers and defects in procured raw materials or components. These defects,
anomalies or malfunctions could be discovered after the Group products were shipped to
customers, resulting in the return or exchange of the Group’s products, claims for compensatory
damages, or discontinuation of the use of the Group’s products, which could negatively impact
the profits and operating results of the Group. To prepare for such events, the Group has
insurance such as product liability insurance and recall insurance, but it is not guaranteed that the
full costs of reimbursements would be covered by these.

14) Product Sales

a. Reliance on Key Customers

The Group relies on certain key customers for the bulk of its product sales to customers. The
decision by these key customers to cease adoption of the Group’s products, or to dramatically
reduce order volumes, could negatively impact the Group’s operating results.
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b. Changes in production plans by customers of custom products

The Group receives orders from customers for the development of specific semiconductor
products in some cases. There is the possibility that after the Group received orders the customers
decide to postpone or cancel the launch of the end products in which the ordered product is
scheduled to be embedded. There is also the possibility that the customers cancel its order if the
functions and quality of the product do not meet the customer requirements. Further, the weak
sales of end products in which products developed by the Group are embedded may result in
customers to reduce their orders, or to postpone delivery dates. Such changes in production plans,
order reductions, postponements and other actions from the customers concerning custom
products may cause declines in the Group sales and profitability.

c. Reliance on Authorized Sales Agents

In Japan and Asia, the Group sells the majority of its products via independent authorized sales
agents, and relies on certain major authorized sales agents for the bulk of these sales. The
inability of the Group to provide these authorized sales agents with competitive sales incentives
or margins, or to secure sales volumes that the authorized sales agents consider appropriate, could
result in a decision by such agents to review their sales network of the Group’s products,
including the reduction of the network, etc., which could cause a downturn in the Group sales.

15) Securing Human Resources

The Group works hard to secure superior human resources for management, technology
development, sales, and other areas when deploying business operations. However, since such
superbly talented people are of limited number, there is fierce competition in the acquisition of
human resources. Under the current conditions, it may not be possible for the Group to secure the
talented human resources it requires.

16) Defined Benefit Obligations

Net defined benefit liability and net defined benefit asset are calculated based on actuarial
assumptions, such as discount rates of returns on assets. However, the Group performance and
financial condition may be adversely affected either if discrepancies between actuarial
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assumptions and business performance arise due to changing interest rates or a fall in the stock
market and defined benefit obligations increase or our plan assets decrease and there is an
increase in the pension funding deficit in the retirement benefit obligations system.

17) Capital Expenditures and Fixed Cost Ratio

The semiconductor business in which the Group is engaged requires substantial capital
investment. The Group undertakes capital investment in an ongoing manner, and this requires it
to bear the associated amortization costs. In addition, if there is a drop in demand due to changes
in the market climate and the anticipated scale of sales cannot be achieved, or if excess supply
causes product prices to fall, there is a possibility that a portion or the entirety of the capital
investment will not be recoverable or will take longer than anticipated to be recovered. This could
have an adverse effect on the business performance and the financial condition of the Group.

Furthermore, the majority of the expenses of the Group are accounted for by fixed costs such as
production costs associated with factory maintenance and R&D expenses, in addition to the
abovementioned amortization costs accompanying capital investment. Even if there is a slump in
sales due to a reduction in orders from the Group’s main customers or a drop in product demand,
or if the factory operating rate decreases, it may be difficult to reduce fixed costs to compensate.
As a result, a relatively small-scale drop in sales can have an adverse effect on the profitability of
the Group.

18) Impairment Loss on Fixed Assets

The Group owns substantial fixed assets, consisting of both tangible fixed assets such as plant and
equipment and intangible fixed assets such as goodwill obtained through the acquisition of the
former Intersil Corporation and IDT. When there are indications of impairment, the Group
examines the possibility of recovering the book value of assets based on the future cash flow to be
generated from the fixed assets. It may be necessary to recognize impairment of such assets if
insufficient cash flow is generated.

19) Information Systems

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Information systems are growing importance in the Group’s business activities. Although the
Group makes an effort to manage stable operation of information systems, there is a likelihood
that customer confidence and social trust would deteriorate, resulting in a negative effect on the
Group’s performance, if there is a significant problem with the Group’s information systems
caused by factors such as natural disasters, accidents, computer viruses and unauthorized
accesses.

20) Information Management

The Group has in its possession a great deal of confidential information and personal information
relating to its business activities. While such confidential information is managed according to
law and internal regulations specifically designed for that purpose, there is always the risk that
information may leak due to unforeseen circumstances. Should such an event occur, there is a
likelihood that leaks of confidential information may result in damages to our competitive
position and customer confidence and social trust would deteriorate, resulting in a negative effect
on the Group’s performance.

21) Legal Restrictions

The Group is subject to a variety of legal restrictions in the various countries and regions. These
include requirements for approval for businesses and investments, antitrust laws and regulations,
export restrictions, customs duties and tariffs, accounting standards and taxation, and
environment laws. Moving forward, it is possible that the Group’s businesses, performance, and
financial condition may be adversely affected by increased costs and restrictions on business
activities associated with the strengthening of local laws.

The Group makes use of an internal regulation system to ensure legal compliance and appropriate
financial reporting. However, since by its nature an internal regulation system is inherently
limited, there is no guarantee that it will accomplish its goals completely. Consequently, the
possibility is not nonexistent that legal violations, etc., may occur moving forward. Should a
violation of the law or other regulations occur, the Group could be subject to administrative
penalties such as fines, legal penalties, or claims for compensatory damages, or there could be a

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negative impact on the social standing of the Group. This could have an adverse effect on the
businesses, business performance, and financial condition of the Group.

22) Environmental Factors

The Group strives to decrease its environmental impact with respect to diversified and complex
environmental issues such as global warming, air pollution, industrial waste, tightening of
hazardous substance regulation, and soil pollution. There is the possibility that, regardless of
whether there is negligence in its pursuit of business activities, the Group could bear legal or
social responsibility for environmental problems. Should such an event occur, the burden of
expenses for resolution could potentially be high, and the Group could suffer erosion in social
trust.

23) Intellectual Property

While the Group seeks to protect its intellectual property, it may not be adequately protected in
certain countries and areas. In addition, there are cases that the Group’s products are developed,
manufactured and sold by using licenses received from third parties. In such cases, there is the
possibility that the Group could not receive necessary licenses from third parties, or the Group
could only receive licenses under terms and conditions less favorable than before.

With regard to the intellectual property rights related to the Group’s products, it is possible that a
third party might file a lawsuit against the Group or its customers claiming patent infringement,
or the like, and that as a result the manufacture and sale of the affected products might not be
possible in certain countries or regions. It is also possible that the Group could be liable for
damages to a third party or to a customer of the Group.

24) Legal Issues

As the Group conducts business worldwide, it is possible that the Group may become a party to
lawsuits, investigation by regulatory authorities and other legal proceedings in various countries.

Though it is difficult to predict the outcome of the legal proceedings to which the Group is
presently a party or to which it may become a party in future, the resolution of such proceedings

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may require considerable time and expense, and it is possible that the Group may be required to
pay compensation for damages, possibly resulting in significant adverse effects to the business,
performance, financial condition, cash flow, reputation and creditability of the Group.

a. (Civil lawsuit related to the alleged patent infringement and trade secret violation)

The Company’s subsidiary has been named as a defendant in a civil lawsuit in the United States
related to the alleged patent infringement and trade secret violation.

The Company’s subsidiary has been named as a defendant in a lawsuit filed in November 2008 in
the United States District Court for the Eastern District of Texas (hereafter “the Court of First
Instance”). The Court of First Instance entered a final judgment in June 2016 against us in the
amount of 77.3 million U.S. dollars, however the Company’s subsidiary immediately filed a
notice of appeal at the Court of Appeals for the Federal Circuit (hereafter “the Court of Second
Instance”). In July 2018, the Court of Second Instance rejected the judgement of the Court of
First Instance for payment of compensation and conducted the retrial order at the Court of First
Instance.

b. (Civil lawsuit related to the alleged violations of the competition law)

The Group has been named in Canada and the United Kingdom as a defendant in a civil lawsuit
related to possible violations of competition law involving smartcard chips brought by purchasers
of such products.

The civil lawsuit in Canada was brought in July 2013 in Supreme Court of British Columbia, but
the lawsuit was withdrawn by the plaintiff in December 2019 without any progress. There are two
civil lawsuits in the United Kingdom. One The one case was brought in December 2014 in the
Senior Courts of England and Wales and the proceedings were ordered stayed by the request of
the party after that. The other case was brought in July 2019 in Supreme Court of British
Columbia by the other purchasers of such products and has not reached settlement either.

c. (Indemnification claim related to environmental pollution)

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The Group’s subsidiary in Taiwan may be subject to requests for restitution for environmental
pollution associated with a factory in Taiwan owned by the subsidiary’s predecessor company.

Since June, 2004, the Group’s subsidiary has been notified that other company reserved its right
to seek indemnification from us for all costs associated with the remediation of the contamination
related to environmental pollution found at a factory in Taiwan owned by the subsidiary’s
predecessor company, and the costs associated with the lawsuit as well as the costs relating to
those retained environmental liabilities in a toxic tort class action lawsuit filed by ex-employees
worked at the factory. Though the Group’s subsidiary is not a defendant in the class action
lawsuit, the claimant initiated arbitration proceedings against us related to all claims arising out of
the contamination, including the remediation, the toxic tort claims, and attorneys’ fees in
December, 2017, but afterward, the arbitration was ordered stayed by the arbitrator on a unilateral
request by the claimant.

Ad hoc model: The term ad hoc implies that procurement is carried out without clear
considerations or planning. Organizations that employ this model, lack well defined procurement
policies, procedures or processes. Typically, with this model, variety of staff in different
departments undertake ‘buying’ activities for the agency. Coordination of these buying activities
is probably done through the accounting system.
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There are usually no procedures followed in the procurement processes thereby, suppliers
dictate their own terms and conditions. The language and philosophy of procurement does not
apply under this model and buying is perceived as a simple task and, at best, a basic clerical
activity.

An Ad hoc approach to procurement will provide an organisation with a level of agility, but will
not be operating according to principles of best practice. It will be very difficult to ensure
purchasing decisions have been made rationally, ethically and in the best interests of the
organization. It will be challenging to assess whether procurement has met the needs of the
agency without clear purchasing plans and whether or not the procurement was carried out in
the most efficient way, i.e., with the le e least possible wa e waste of resources.

Process model: Organizations operating within a Process model view procurement as a

number of actions which bring about a series of results. An agency managing procurement
within this model, will still not have clear policies, but will have a set of formal ‘buying’

processes. Procurement decisions will tend to be made in the absence of any formal
procurement structure. The language and phi e and phi e and philosophy of procurement still remains i
m ns immature with
procurement not being seen as n as a core competence rather than a minor element of finance.

‘Buyers’ will be accountable to the departmental managers who have created the specifications,
and will be constrained by requirements to purely follow the stated procurement process. No
clear or consistent policies will exist, causing difficulties in monitoring practices and measuring
success. It is unlikely that the organization benefits from any consolidation of buy or aggregation
savings. Supply chain risk is unlikely to be monitored which could lead to increased costs of
acquisition, missed deadlines and quality failures.

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Policy model: An organization operating within a policy model will view procurement as a
regulated activity. The agency will recognize the importance of procurement as an activity with
established procurement plans and policies. Although there will be clear evidence of a
procurement department managing procurement activities, there will be limited and/or
inconsistent co-ordination. The language and philosophy of procurement will be accepted as
formal procurement processes will exist. However, formal training of procurement staff is not
given priority.

Procurement decisions will be left to ‘buyers’ whose delegations are unclear and therefore
‘maverick’ spending will be high. Purchases will typically be made to solve short-term problems
with little considerations on the long-term impact on the agency or its stakeholders. This could
lead to increased supplier-related costs, through price changes, contract scope, creep and
limited understanding since supplier management and the ability to manage the procurement
process is limited.

Tactical model: An organization operating within the Tactical model will have recognized the
importance of procurement and it will be seen as a distinct function. Reliable procurement
processes will exist to ensure that procurement activity is carried out in accordance with
standard practices across the agency. There will be established methods of handling approved
procurement practices that reduce ‘maverick’ spending and other anomalous buy us buying behaviour.

Procurement policies are established across all major aspects of procurement. The language
and philosophy of procurement will now be maturing with procurement recognized as a value-
adding function and represented at senior level management.

A Tactical approach to procurement implies that procurement decisions are made according to
procedural rules rather than the strategic significance of buying decisions. Although well-defined
procurement processes will be in place covering main issues such as tendering, supplier
selection and contract management, there may still be significant amounts of ‘maverick’
spending. Typically, supplier evaluation will focus only on financial analysis where contracts are
awarded to the lowest-priced offers. This is because, product or supplier market intelligence is
unlikely to be undertaken thereby very little consideration of the overall benefits of the buying
decision.
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Strategic model: An organization operating at a Strategic level of maturity will have a well-
designed and established procurement function. The organization will see procurement as a
strategic activity that is aligned with the strategic goals and longer-term plans of the agency.
Supplier selection procedures, supplier relationship management and contract management
processes will have been developed to ensure that the outcomes of buying decisions match the
strategic intent of the original buying decision.

All positions within the procurement team will be filled with competent staff who possess the
required training and education in addition to relevant experience. Continuous professional
development is encouraged throughout the team and cross-disciplinary and cross-functional
interactions between staff and end–users is seen as the norm. The language and philosophy of

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procurement is mature within the agency with procurement decisions governed by an

overarching set of procurement policies.

Although it is likely that the procurement processes will take longer and be less agile, the
positive outcomes of aligning procurement decisions to agency strategy outweighs the
negatives. Uniform policies and processes adopted across the organization provide clear data
and information in order to make strategic procurement decisions. Focus is made on
maximization of end-user satisfaction, whilst managing costs and minimizing supply chain risk.
The procurement department is strongly led at executive level and has a clear understanding of
its impact on the success of the agency.

Professional model: An organization which has attained a professional level of procurement

maturity recognizes both the strategic contribution and the need to have a professionalized
approach to managing and conducting procurement across the agency. The organization
executive will intuitively recognize the contribution of procurement to commercial decisions by
the agency. This knowledge is supported by the appointment of competent staff at all levels of
procurement. These staff are expected to maintain professional currency through compulsory
continuous professional development (CPD). There will be strong evidence of consistent use of
supply market intelligence, spend analysis, supplier performance measurement and
management and continuous su us supply chain performance and ce and risk assessment.

The language and philosophy of procurement will be fully integrated into management practices
within the agency and will be consistently applied by staff in their dealings with end users and
suppliers. This means that senior procurement managers and organization executives act in
accordance with procurement policies, philosophies and practice. The organization will have a
senior procurement staff appointed at executive level, who along with the senior members of the
procurement team will have extensive links into the knowledge community of procurement, its
professional bodies and centres of learning. In an agency operating at this level, procurement
staff will engage in a constant search for improved methodologies for initiating and managing
procurement decisions and suppl d suppliers.

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The professional model of procurement is the highest maturity level, taking all the good aspects
of the strategic model and executing them in a highly developed and well-governed way. In this
model, decisions are made based on accurate analysis of the supply markets and the most
appropriate approach to market chosen by competent procurement team. This leads to
sustainable cost savings and risk mitigation. Ethical procurement practices are embedded into
governance rules at Board level, leading to elevation of the procurement team profile.
Additionally, suppliers perceive the organization as a ‘buyer of choice’ and its procurement
operations are valued as professional and c d competent.

Other Models

a) Local model: Under this model, all activity, decision

making, and control is autonomous and
done locally.

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b) Central model: With this model, procurement acti

and decision-making in the
organization is centralized. There may be local activitie
controls beyond the scope of
procurement, for instance, calling of g off Supply under
entrally negotiated contract.

c) Network model: With the network procurement model

vity is coordinated across local
units. Decision-making isn’t independent but remains c
olled in some shape or form by
various nodes on the network.

d) Hybrid Model: Is a hybrid model of the central and lo

models. Some activities are
controlled at the local level while others are centrally c
olled. The autonomy at the local
level can be determined either by mandate or mutual ag
ent usually from the centre.

e) Centrally-Led Network: With this approach, activity

ordinated across all local units
while control is exercised by nodes on the network.
centre operates as the primary
node.

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The Right Procurement Operating Model

Ultimately, the right procurement operating model has to start with an understanding of the
overall business strategy and al d alignment of the procurement practices into the desired outcomes.
For instance, if the organization is in growth mode, the procurement strategy needs to
emphasize on supplier innovation, development, and management. If on the other hand, the
organization is focusing its efforts on profitability, more attention should be directed to t o traditional
sourcing activities that reduce t e the cost of supply.

5.2. Organisational Structures for the Procurement Function

Organizational structure refers to the hierarchy of decision-making within a department. Built

like a pyramid, the employee at the top has the most decision-making responsibility. While
each job is considered vital to the department, everyone answers to the person above him.
Each business refines its organizational chart based upon particular needs. The structure of
one purchasing department does not necessarily look like another, although there are
positions that appear within most hierarchies.

The structure of the purchasing department is especially important in external and internal
networks. The organizational model must facilitate activities in different strategic levels as well
as cope with changes in the external environment. By adjusting formalization and centralization
levels, the organization can be positioned to best support the organization. Nevertheless, no
universal solution exists, as the right structure is highly company specific and dynamic over
time. Therefore, this is one of the major challenges that purchasing management confronts
within busi n business networks.

Structure of P of Procurement in a n an Organization

Types of procurement structures range from a single person being responsible for purchasing,
to a large, centralized department or decentralized organization with procurement

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professionals working in separate locations or business units. Getting the right structure is
essential, because procurement typically accounts for half of an organization’s expenditure. It
also plays an important part in a company’s competitive strategy.

Individual Procurement Responsibility

In a start-up or small business, one person, such as the Finance Officer, may take responsibility
for procurement. Alternatively, individual members of the management team, such as the
Production Manager, Office Manager or Marketing Manager, may p ay purchase products or services

to meet their own departmental requirements. In this scenario, the company would not have a
consistent purchasing procedure and would lack any purchasing power to negotiate better deals
from a fragmented group of suppliers.

Central Procurement Department

As it grows, the company may appoint a procurement manager with professional qualifications
to allow for a formal procurement organization structure. The company may also recruit one or
more purchasing assistants if the scale of procurement grows. The manager or team takes
responsibility for purchasing supplies for all departments, discussing their requirements,
identifying suppliers and processing orders. By coordinating procurement, the company can
place larger orders with preferred suppliers. It may be able to negotiate lower rates and
impose consistent quality standards on suppliers.

Centralized Procurement in Compa in Companies

Companies with a number of locations, operating divisions or business units have a choice of
operating centralized or decentralized procurement organization models. In the centralized
model, a single procurement department takes responsibility for purchasing on behalf of the
company. The department, which may consist of a purchasing director, managers and
assistants, impose standard policies and procedures across the organization with the aim of
reducing costs, increasing purchasing efficiency and achieving consistent quality.

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To improve the service to different locations, the department may appoint specialists
responsible f e for purchasing specific categories o es of supply.

Decentralized P d Procurement Structure

In the decentralized model, the company delegates purchasing authority to locations and
divisions. Procurement managers and assistants purchase supplies for local needs, although
they may receive support from a small central unit. While a decentralized structure enables
autonomy and reduces bottlenecks, it may lead to purchasing inefficiency, inconsistent
standards and increased overall procurement costs.

Strategic Sourcing M ing Model

Companies that need essential supplies such as critical engineering components, or want to
harmonize quality across a range of suppliers, have moved from traditional procurement

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practices to long-term relationships with strategic supply partners. Members of the

procurement team responsible for strategic sourcing focus on critical supplies, leaving the
purchase of commodity supplies to other team members.

The strategic sourcing team places long-term supply contracts and collaborates with supply
partners to drive down costs, harmonize quality and production levels, and undertake joint
product development projects.

5.3. Roles and Responsibilities of the Supply C ply Chain Function

Supply chain management is the practice of arranging and supervising supply chain operations
to achieve, or maintain, a competitive advantage. Supply chain management is at the core of a
business’s operations, including all processes from raw material, procurement to final product
delivery.

Role of Supply Chain Management in an O n Organization

i. The primary goal of supply chain management is t

o guarantee that items flow smoothly,
efficiently and flexibly across the supply chain. Whil
e supply chain management benefits
the whole suppl e supply chain, it also benefits certai
n a n areas of the primary company.

ii.

iv.

iii.

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 : 74 :

kly from the producer to the retail

outlet. Supply chain management minimizes buying
Supply chain management reduces manufacturing
expenses by reducing warehouses.
costs by ensuring that raw materials
are delivered on time to assembly plants. Businesses
Over time, a supply chain management plan will e
may prevent material shortages
nable organizations to forecast stock
and m d manufacturing del g delays in t n this manne
shortages in advance. They may avoid losing prosp
r.
ective sales by analyzing data such
as their reorder frequency, the quantity of goods pu
An effective supply chain management plan may
rchased, and the number of orders
assist reduce the need for a costly
received.
warehouse by ensuring that items are delivered quic

v. Supply chain management also ensures that clients

get the correct quantity of items at
the correct place and time. All of these things contr
ibute to enhanced customer service.

Functions of supply chain m in management

i) Acquisitions: Purchasing is the first role in supply

chain management. Raw materials
are necessary throughout the manufacturing proc
ess in order to create items and
products. It is critical to buy and supply these
materials on schedule to allow
manufacturing to commence. This will involve c
ollaboration with delivery firms and
suppliers to prevent any delays.

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 : 75 :

ii) Business operations: Demand forecasting is often a necessary activity which should
be conducted prior to material procurement. This is because the demand market dictates

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the number of units to be produced and the amount of material necessary for
manufacturing. This function is critical in supply chain management because firms must
estimate demand properly to avoid having too much or too little inventory, which results
in revenue losses. To prevent such errors, demand plan and projection must be
integrated with i h inventory management, manufacturing, and shipping.

iii) Transportation and logistics: Logistics is the component of supply chain management

that organizes all parts of planning, buying, manufacturing, storage, and transportation to
ensure that items reach the end customer without delay. Appropriate communication
across numerous departments is necessary to ensure that items are sent to consumers
swiftly and at the lowest possible cost e cost.

iv) Management of resources: Raw resources, technology, time, and labour are all used

during production. Resource management ensures that adequate resources are

distributed optimally to the appropriate activity. This will ensure that an efficient
production schedule is produced in order to increase operational efficiency. When
determining available capacity, it is Important to put into account the attributes of each
resource and assess if they are capable of doing the work placed on them. This ensures
that there are no chances of over-promising orders in additional to ensuring that the
manufacturing plan is viable and pr e and pr e and precise.

v) Workflow of Information: The exchange and di

ssemination of information is what
keeps all of the other supply chain management
operations on track. If the information
process and communication are inefficient, the wh
viii)
ole chain may break down. Numerous
supply chain interruptions may be avoided with
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greater visibility and communication. By everyone is operating with the same set of data, a
implementing a standardized system acrossvoiding miscommunications and time
ll departments, you can guarantee wasted alerting everyone on new developments.

vi) Acquiring goods at the best possible price: Purchasing departments must

continuously evaluate materials based on quality and, more importantly, on pricing! To

maximize profitability, organizations need to procure goods efficiently. For example,
buying small quantities from a large vendor is not economically practical. The
procurement team must achieve bulk discounts on these orders and negotiate with
alternate vendors for better pricing.

vii) Procuring raw materials for sustaining operations: While procuring goods at the

best price, the purchasing department must also maintain the purchases necessary for
sustaining daily operations. From raw materials such as iron and plastic to machinery,
production tools, and even office supplies, all these materials need to be procured to
keep the business running sm g smoothly.

Compliance with industry protocols: In addition to sustaining operations, all

goods and services procured by the purchasing department must also be compliant with

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industry standards and company policies. Vendors should ensure that the raw materials
are of good quality before delivering large orders. The procurement department should
also establish a purchasing policy that checks quality compliance at every level of the
purchase.

However, before establishing any purchasing policy or procedure, an organization m n must cr

eate a
strong team of professionals specializing in supply chain management (procuremen
t,
warehousing/storage, logistics, distribution, transportation, production).

5.4. Consortium Buying

A consortium consists of two or o or more in e independent organizations that come together t

o pu o purchase

materials, services and capital goods. Their goal is to leverage the purchasing power of the

group to op o optimize co ze cost reduction a n and external supplier relationships.

Generally, there are no membership dues for this type of purchasing group. Consortiums do
not

have to be owned by one parent organization. They can be groups within the same industry or

similar geographic region t n that band together.

Forms of c f consortium

i)

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A vertical consortium: It is one that is comprise

d of companies in the same in e industry.

ii) The horizontal structure: It is comprised of companies in es in diverse industries.

iii) Master buyer consortium: This involves large multinational company attempting to

extend its supply agreements to cu o customers and suppliers with a percentage added on its

baseline cost so as to act as a profit centre.

In conclusion, either structure has meris and also demerits. A vertical consortium, comprised
of
competitor companies, may have difficulty in getting all companies in the group to agree o
n
contract terms. On the other hand, companies in horizontal consortiums are generally not
competitive, but inequity among the members may arise in this arrangement. The smaller
companies may feel that the needs of the larger companies co es come be e before their own.

Advantages of consortiums

Consortiums are often considered as entities to use when responding to tenders. The question
that arises is whether to use a consortium or a Joint Venture wh e when responding to a o a t
ender.

Some of the advantages of consortiums include the f e following:

i) Economies of scale: As a part of a larger conso

rtium, member companies are better able

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 : 80 :

to ach o achieve lower prices and increase negotiating power.

ii) Economies of process: Member companies may share purchasing and administrative

information to streamline processes. The purchasing group may also assess areas for

improvement with the goal of decreasing workload and expenses. Areas of focus may

include any outside vendors or software p e programs.

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 : 81 :

iii) Economies of information: Within the consortiums, information sharing will occur among

the member companies. The purchasing group may also have a strong knowledge base

through its experience with the varied companies. Areas of focus may be technology,

improving good g goods and services and ces and reducing wasteful consumption.

iv) Easy t asy to establish as sh as there are no formal p

rocedures that must be followed.

v) Most consortiums are formed in writing by the exec

ution of a consortium agreement. In

addition, no capital is required to create the consortium.

vi) Members of the consortium can change their contrac

tual agreement at any time to suit

changed circumstances.

vii) The consortium can be set to expire on a given date or on the occurrence of certain

events without any formal requirements.

viii) The consor e consortium is not directly sub ectly subject to taxation. However, the individual m
embers are.

ix)
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 : 82 :

Some of the members of a consortium may choose

to be ‘undisclosed’ in dealings with

third pa d parties.

x) The cost e cost of running a c a consortium is usuall

y lower to that of a joint venture consortium.

Disadvantages / drawbacks of consortiums

i) It is difficult for consortium members to restrict or

limit its liability. Members may even
become liable to third parties for the non-
performance of other members of the consortium
or the debts of such members in unde n undertaking
a common project.

ii) Third parties will often find it difficult to enter into contract with a non-legal entity like a

consortium. This is because it is a non a non-legal entity whose funding is also difficult.

iii) Internal resistance: While purchasing groups attempt to broker deals that benefit the

majority of the member companies, their choices may be met by opposition by those

companies that feel their needs we ds were no e not addressed.

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 : 83 :

iv) Vendor resistance: Vendors may prefer not to work with consortiums due to the varied size

of their member companies and the need to work with both the individual member company

and the purchasing group. There have been instances of vendors dropping clients if they

join a consortium group.

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 : 84 :

v)

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 : 85 :

Monitoring program design: As many different organizations come together, so do many

different plan designs. During the vendor evaluation process, it is critical for the purchasing
group to clearly understand and articulate the benefits they are seeking. Communication
regarding potential changes or enhancements to current plan design is critical to the future
success and acceptance of the benefits plan.

Environmental Scanning & Monitoring- Techniques

a) SWOT-(Strength-Weakness-Opportunity-Threat)
Identification of threats and Opportunities in the environment (External) and strengths and

Weaknesses of the firm (Internal) is the cornerstone of business policy formulation; it is these
85
factors which determine the course of action to ensure the survival and growth of the firm. : 86 :

The SWOT analysis is an extremely useful tool for understanding and decision-making for all

sorts of situations in business and organizations. SWOT is an acronym for Strengths,

Weaknesses, Opportunities, and Threats.

SWOT analysis came from the research conducted at Stanford Research Institute from 1960-

1970. The background to SWOT stemmed from the need to find out why corporate planning

failed. The research was funded by the fortune 500 companies to find out what could be done

about this failure. The Research Team were Marion Dosher, Dr Otis Benepe, Albert

Humphrey, Robert Stewart, and Birger Lie

Strengths and Weaknesses

✔Resources: financial, intellectual, location

✔Cost advantages from proprietary know-how

✔Creativity / ability to develop new products

✔Valuable intangible assets: intellectual capital

✔Competitive capabilities

✔Big campus selection

Opportunities and Threats

✔Takeovers

✔Market Trends

✔Economic condition

✔Mergers
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 : 87 :
✔Joint ventures

✔Strategic alliances

✔Expectations of stakeholders

✔Technology

Page 17 of 94

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 : 88 :

STRATEGIC SUPPLY CHAIN MANAGEMENT-CPSP-K (4)-BY J.KINYUA 2017

✔Public expectations

✔Competitors and competitive actions

✔Poor Public Relations Development

✔Criticism (Editorial)

✔Global Markets

✔Environmental conditions

b) PESTAnalysis
A scan of the external macro-environment in which the firm operates can be expressed
in terms of the following factors:

✔Political

✔Economic

✔Social

✔Technologica
l

c) Industry Analysis
An industry is a group of firms producing a similar product or service

An examination of the important stakeholders’ group in a particular corporation’s task

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 : 89 :

environment is a part of industry analysis

Porter’s approach to Industry Analysis

A corporation is most concerned with the intensity of competition within its industry

The level of this intensity is determined by basic competitive forces

In scanning its industry, the corporation must assess the importance to its success of each of

the six forces.

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 : 90 :

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