Organization & Management

Lesson 3

Lesson 3: ENVIRONMENTAL FORCES, ENVIRONMENTAL SCANNING, AND

BUSINESS ENVIRONMENT

Definition of Terms
Environmental scanning – seeking for and sorting through data about the environment
Inflation – a period of above normal general price increases, as reflected in the consumer
and wholesale price indexes
Inflation rate – rate reflected during a period of above normal general price increases
Interest rates – the total amount that a borrower must pay annually to the lender and
above the total amount borrowed
Changing options – the consumers change in preference of goods and services offered
Gross National Product (GNP) – total domestic and foreign output claimed by the
residents of a country
Gross Domestic Product (GDP) – total final output of goods and services produced by
the country’s economy, within the country’s territory

Environmental Forces and Environmental Scanning

Business environment refers to the factors or elements affecting a business organization.
It may be divided into External and Internal Business Environments.

Components of the External Business Environment: General and

Specific
The general business environment includes the economic, sociocultural, politico-
legal, demographic, technological, and world and ecological situations. All these
must be considered as managers plan, organize, staff, lead, and control their respective
organizations.

Inflation, rates of interest, changing options in stock markets, and people’s spending
habits are some examples of factors/elements of economic situations. Economic
situations may affect management practices in organizations.

Sociocultural situations include the customers’ changing values and preferences;

customs could also affect management practices in companies.

Politico-legal situations refer to national or local laws, international laws, and rules and
regulations that influence organizational management.

Demographic situations such as gender, age, education level, income, number of family
members, geographic origin, etc., may also influence some managerial decisions in
organizations.
The technological situations of companies involve the use of varied types of electronic
gadgets and advanced technology such as computers, robotics, microprocessors, and
others that have revolutionized business management; e-commerce, teleconferencing,
and sophisticated information systems have rapidly changed the ways that business is
conducted in the 21st century.

World and ecological situations are related to the increasing number of global
competitors and markets, as well as the nature and conditions of the changing natural
environment. Products produced by companies, of course, must cater to the changing
needs of people in the global community, while, at the same time, considering their impact
on the natural environment.

Meanwhile, the specific business environment focuses on stakeholders, customers,

pressure groups, and investors or owners and their employees.

Stakeholders are parties likely to be affected by the activities of the organization, while
customers are those who patronize the organization’s products and services. Increasing
customer sophistication makes it necessary for managers of organizations make crucial
decisions regarding the development of products with higher value and the improvement
of their services to meet their patrons’ increasing demands.

Suppliers are those who ensure the organization’s continuous flow of needed and
reasonably priced inputs or materials required for producing their goods and rendering
their services. Inputs mentioned also include financial and labor supply.

Pressure groups are special-interest groups that try to exert influence on the
organization’s decisions or actions. For instance, pressure from the Food and Drug
Administration on some department stores and drug stores led them to stop selling beauty
products containing lead and to stop ordering or importing such products from
their suppliers.

The organization’s investors or owners provide the company with the financial support
it needs. The company, of course, cannot exist without them; thus, they greatly influence
organizational management.

Top-level, middle-level, and lower-level managerial decisions are all influenced, in one
way or another, by the investors or owners of organizations. Branching out, offering new
products and services, and applying for needed loans are all affected by the investors’ or
owners’ way of thinking.

Employees are comprised of those who work for another or for an employer in exchange
of salaries/wages or other considerations. Employees execute the company’s stability.
Components of the Internal Business Environment
An organization’s internal business environment is composed of its resources, research
and development, production, procurement of supplies, and the products and the
products and services it offers.
The organization’s internal environment must also be subjected to internal analyses.
Internal strengths and weaknesses, opportunities, and threats (SWOT) with regards to its
resources (financial, physical, mechanical, technological, and human resources),
research and development endeavors, production of goods, procurement of supplies
(materials, inputs, and finance), and products and services must all be considered prior
to organizational planning.

Components of Environmental Scanning: Developing a Competitive

Mindset, Considering Future Business Scenarios, Business Prediction,
SWOT Analysis, and Benchmarking
Adapting to environmental uncertainties must start with developing a competitive mindset.
Ignorance of present-day realities may cause individuals or organizations to do certain
things that may regret in the future; hence, environmental scanning is necessary. By
seeking for and sorting through data about the environment, you may be able to
understand and predict the various changes, opportunities, and threats that may affect
organizations in the future.

The Local and International Business Environment of the Firm

Understanding the local and international business environment of the firm requires
managers of organizations to sharpen their cultural intelligence. Cultural intelligence is an
individual’s ability to favorably receive and adjust to an unfamiliar way of doing things.

Anthropologist Edward T. Hall, as cited by Schermerhorn (2008), noted that the way
people approach and deal with time varies across cultures. Monochromic cultures refer
to cultures wherein people tend to do one thing at a time; also, these cultures emphasize
punctuality and sticking to set rules. Polychromic cultures, on the other hand, are more
flexible as regards time; accomplishing many different things at once is also common for
these cultures.
Geert Hofstede, also cited by Schermerhon (2008), showed how selected countries
ranked on the five cultural dimensions he studied:
Power Distance – the degree to which a society accepts or rejects the unequal
distribution of power among people in organizations and the institutions of society.

Uncertainty Avoidance – the degree to which society is uncomfortable with risk, change,
and situational uncertainty. Managers in the US are risk takers. Filipinos are seguristas
that are afraid of taking risks within business endeavors in the market.
Individualism-Collectivism – the degree to which a society emphasizes individual
accomplishments versus collective accomplishments. Individualistic cultures like those of
the US and Australia are characterized as “I” and “me” cultures where employees prefer
to work alone without help from others. Mexico, Thailand, and the Philippines exhibit
collectivism or preference for group or team work.
Masculinity-Femininity – the degree to which a society values assertiveness and
feelings of material success versus concern for relationships.
Time Orientation – the degree to which a society emphasizes short-term thinking versus
greater concern for the future or long-term thinking.

What is PEST Analysis?

PEST Analysis is a strategic framework used to evaluate the external environment for a
business by breaking down opportunities and threats into Political, Economic, Social,
and Technological factors. PEST analysis can be an effective framework to use in
Corporate Strategy Planning, useful in identifying the pros and cons of a Business
Strategy.
Below we break down each of the 4 Factors of PEST (Political, Economic, Social,
Technological).

Political Factors
When looking at political factors, you are looking at how government policy and actions
may affect the economy, as well as the specific industry the business operates in. These
include the following:
➢ Tax Policy
➢ Labor Law
➢ Environmental law
➢ Trade Restrictions
➢ Tariffs

One of the reasons that elections tend to be a period of uncertainty for a country is that
different political parties have diverging views on economic policy. The P in PEST
analysis stands for Political.

Economic Factors
Economic Factors take into account the various aspects of the economy, and how the
outlook on each area could impact your business. These economic indicators are usually
measured and reported by Central Banks and other Government Agencies.
➢ Economic Growth rates
➢ Interest Rates
➢ Exchange Rates
➢ Inflation

Often these are the focus of external environment analysis. The Economic outlook is of
extreme importance for a business, but the importance of the other PEST factors should
not be overlooked.

Social Factors
PEST analysis also takes into consideration social factors, which are related to the
cultural and demographic trends of society. Social norms and pressures are key to
determining a society’s consumerist behavior. Factors to be considered include the
following:
➢ Cultural Aspects
➢ Health Consciousness
➢ Population Growth rates
➢ Age Distribution
➢ Career Attitudes

Technological Factors
Technological Factors are linked to innovation in the industry, as well as innovation within
the overall economy. Not being up to date on the latest trends of a particular industry can
be extremely harmful to operations.
Technological Factors include the following:
➢ Research & Development Activity
➢ Automation
➢ Technological Incentives
➢ The rate of change in technology