2 - The Firm and Its Environment

Chapter 2.
The Firm and its

Environment
DEPARTMENT OF AGRICULTURAL ECONOMICS AND AGRIBUSINESS
MANAGEMENT
Firm
 A business unit producing goods and services for profit.
 Any organization engaged in the production of goods
and services to generate revenue (with preference to
profit maximization).
Business
 All profit-seeking activities that provide goods and
services to generate revenue (with preference to profit
maximization).
 A generic term used to denote any economic activity
that is undertaken in order to make profit.
Environmental Scanning
 The activity of analyzing various areas affecting
a business enterprise
 The considering of events and trends that
present either threats or opportunities for the
organization.
 A necessity in generating business ideas or in
screening identified business ideas
 Information gathered are used in SWOT analysis
Elements of a Business Environment
1. Internal
2. External
Internal Environmental Factors
 Has a direct impact on the business.

 Generally
controllable because the
company has control over these factors.
a. Resources
 Tangible resources – e.g. financial resources
and physical assets
 Intangible resources – e.g. include
reputational assets (brands, image, etc.) and
technological assets (proprietary technology
and know-how).
 Human Resources or Human Capital – e.g.
skills, knowledge, reasoning, decision-making
abilities.
b. Capabilities
 Refer
to a firm’s capacity for undertaking
a particular productive activity.
 Theinterest is not in capabilities per se, but
in capabilities relative to other firms.
c. Culture
 Collectionof values and norms shared by
people and groups in an organization and
helps in achieving the organizational
goals.
External Environment Factors
 Has an indirect influence on the business.

 The factors are uncontrollable by the
business.
External Environment Factors
i. Macro-environment or PEST Analysis
 Consists of nonspecific aspects in the
organization's surroundings that have the
potential to affect the organization's
strategies.
 A part of firm’s environmental scanning to
better understand the threats and
opportunities.
Political Factors
 Include government regulations and legal
issues.
 Government regulations and legal factors
are assessed in terms of their ability to affect
the business environment and trade markets.
 The main issues addressed in this section
include political stability, tax guidelines, trade
regulations, safety regulations, and
employment laws.
Economic Factors
 Issues that are bound to have an impact on the
company. This would include factors like
inflation, interest rates, economic growth, the
unemployment rate and policies, and the
business cycle followed in the country.
 E.g.economic growth, interest rates, exchange
rates, inflation rate, unemployment rate, etc.
Social Factors
 Socio-economic environment of the firm’s market via
elements like customer demographics, cultural limitations,
lifestyle attitude, and education.
 Business can understand how consumer needs are
shaped and what brings them to the market for a
purchase.
 These factors affect customer needs and the size of
potential markets.
 E.g. health consciousness, population growth rate, age
distribution, career attitudes, emphasis on safety,
education levels, income levels etc.
Technological Factors
 Include technological advancements, lifecycle of
technologies, the role of the Internet, and the spending
on technology research by the government.
 E.g. R&D activity, automation, rate of technological
change, new or improved distribution channels, improved
communication and knowledge transfer etc.
 New technologies create new products and new
processes.
 Technology can reduce costs, improve quality and lead
to innovation.
International Business Environment
 The environment in different sovereign

countries, with factors exogenous to the
home environment of the organization,
influencing decision-making on resource use
and capabilities.
 Includes the social, political, economic,
regulatory, tax, cultural, legal, and
technological environments .
SWOT Analysis
 An assessment of the positive and
negative issues on the internal and
external environment of the firm
 Used to further screen project ideas or
search for previously unidentified ones
SWOT Analysis
Strengths
 Positive
characteristics that the
organization can exploit to achieve its
goals.
 Within the control of the entrepreneur.
SWOT Analysis
Weaknesses
 Negative internal characteristics that
might inhibit or restrict the organization’s
performance.
 Within the control of entrepreneur.
 Theyare “lack” or “missing” weak points
and should be eliminated.
SWOT Analysis
Opportunities
 Are positive characteristics of the external
environment that have the potential to
help the organization achieve or exceed
its goals.
 Beyond the control of the entrepreneur
SWOT Analysis
Threats
 Arenegative characteristics of the
external environment that may prevent
the organization from achieving its goals.
 Beyond the control of the entrepreneur.
4-QUADRANT SWOT FORMAT
Strengths Weaknesses
Positive factors in the firm’s Negative factors in a firm’s
internal environment that it could internal environment that would
capitalize on hamper its operations
Opportunities Threats
Factors in the firm’s external Factors in the firm’s external
environment that it could take environment that would
advantage of adversely affect its operations
Strengths of a product/service Weaknesses of a product/services
 Cheap and abundant raw materials  High price
 Sufficient funds  Poor quality/service
 Availability of technology  Weak management
 Presence of skilled workers  Lack of skilled workers
 Management and technical expertise of  Irregular supply
the entrepreneur  Unattractive design
 Good quality/service  High cost of production
 Ease of production
Opportunities of a product/service Threats

 Big demand for the product/service  Shortage of raw materials at a given time
 Favorable government policy/support  Entry of many competitors
 Scarcity of the product or service  Increasing costs of production
 Poor quality of existing product  Expectation of unfavorable government laws, such
 Absence of product/service as taxes
 Possibilities of good profits  Deteriorating peace and order
 Emergence of unfair demands of workers through
labor union activities
SWOT Matrix
 Developing a competitive advantage by

identifying a fit between the firm's
strengths and upcoming opportunities.
 In some cases, the firm can overcome a
weakness in order to prepare itself to
pursue a compelling opportunity.
SWOT Analysis
S-O strategies
 Pursue opportunities that are a good fit to
the company's strengths.
S-T strategies
 Identify ways that the firm can use its
strengths to reduce its vulnerability to
external threats.
SWOT Analysis
W-O strategies
 Overcome weaknesses to pursue
opportunities.
W-T strategies
 Establish a defensive plan to prevent the
firm's weaknesses from making it highly
susceptible to external threats.
Phases of
Agricultural Development
Economic
Development
Industrial Development
Electronic Development
Nuclear Development
FORMS OF
BUSINESS
ORGANIZATION
Forms of Business Organizations
 Sole Proprietorship
 Partnership
 Corporation
 Cooperatives
Source/References:
Boundless. “Overview of the International Business Environment.” Boundless Finance.
Boundless, 26 May. 2016. Retrieved 03 Jun. 2016
from https://www.boundless.com/finance/textbooks/boundless-finance
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Chapter 2.

The Firm and its

 Has a direct impact on the business.

 Has an indirect influence on the business.

 The environment in different sovereign

Opportunities of a product/service Threats

 Developing a competitive advantage by

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