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Chapter Two: Business Functions and Its Environment

Primary Functions in the business functions are Operations, finance and marketing. They are
interdependent. That means they don’t exist independently. Operation deals with conversion of
inputs to desired outputs. Finance comprises all activities related to securing and monitoring
financial resources. The interface between Finance and operations are information on budgetary
issues, economics analysis of investment, provision of funds, rate of return on the investment,
payback periods, interest rates, etc, Marketing is concerned with all activities related with selling
organization goods and services. Other functions include procurement, Personnel and
engineering The success of organization depends on how well each of these functions perform
and how well they interact with each other. This all functions are undertaken in the business
environment.
Organization does not occur in a vacuum. It performs its activities in the environment. Every
business organization is a part of the business environment, within which it operates. No entity
can function in isolation because there are many factors that closely or distantly surround the
business, which is known as a business environment. Every business, no matter how big or
small, operates within the environment. Its present and future existence, profits, image, and
positioning depend on its environment. The business environment is one of the most dynamic
aspects of the business. In order to operate and stay in the market for long, one has to understand
and analyze the environment and its components properly.
Business environment refers to any actors and forces from distance or immediate, internal or
external, direct or indirect that will have positive or negative influence on business operations
affecting company’s ability to develop and maintain successful transactions and relationships
with its target customers as well as stakeholders.

Changes in the environment create opportunities and threats for the organizations. To track these
external forces it uses environmental scanning, continual monitoring of what is going on.
Environmental scanning collects information about environmental forces. Environmental
analysis determines environmental changes and predicts future changes in the environment the
manager should be able to determine possible threats and opportunities from the changing
environment. Businesses’ environment is classified into two broad categories: internal
environment and external environment.
Internal environmental factors have impingement on business operation but Management can
control them by changing management philosophies. External environmental factors include not
only those factors that have colossal effect and shape Business operations but also can dictate
farms’/ industry’s’ destiny. Their influences are uncontrollable and companies are expected to
adopt by adjusting themselves.
Internal Environment
The internal environment of the business includes all the forces and factors inside the
organization which affect its marketing operations. These components can be grouped under the
Five Ms of the business, which are:
 Men
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 Money
 Machinery
 Materials
 Management

Internal environment is under the control of the marketer and can be changed by changing
management philosophies. Nevertheless, the internal environment is as important for the
business as the external marketing environment. This environment includes the interaction of the
sales department, marketing department, the manufacturing unit, the human resource department,
etc. The will help to effectively manage marketing mix elements (4ps).
External environmental
External environmental factors include those factors that have colossal effect and shape Business
operations. Their influences are uncontrollable and companies are expected to adopt by
adjusting themselves. As these factors are stem from the external forces, they provide the
organization with immense opportunities that may pave way for better success or threats that
may endanger and hinder organization’s existence. External environment factor even dictate the
destiny/survival of the firm. Hence, organization should constantly scan the different
opportunities or threats being shaped by external environment and in this regard the marketers
are the most responsible for scanning the tendency of such factors as they are responsible for
dealing with the organization’s market. This eventually enables them to revise and adapt
marketing strategies to meet new challenges and opportunities in the market place. This
environmental scanning involves three basic steps:
 gathering information about a company’s external environment,
 analyzing it and
 Forecasting the impact of whatever trends the analysis suggests.
The external environment is further divided into two components: micro/ task environment &
macro/general/Broad.
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The micro or the task environment is also specific to the business but external. It consists of
factors engaged in producing, distributing, and promoting the offering. The macro or the broad
environment includes larger societal forces which affect society and organization as a whole. The
broad environment is made up of six components: demographic, economic, physical,
technological, political-legal, and social-cultural environment. What firms do is adopting by
adjusting themselves.

Micro environmental forces

Task/micro environment factors are those factors that are immediate to the firm and whose
effects or influences are specific to the firm or industry and their influence is uncontrollable.
These factors are Competitors, Suppliers, customers, stakeholders, etc. They refers to the
environment which is in direct contact with the business organization and can affect the routine
activities of business straight away. It is associated with a small area in which the firm functions.
Microenvironment is a collection of all the forces that are close to the firm. These forces are very
particular or specific to particular firm or industry only. They can influence the performance and
day to day operations of the company, but for a short term only. Its elements include suppliers,
competitors, marketing intermediaries, customers and the firm itself.

Micro environmental forces are factors that are specific only for the company and/or specific to
industry under consideration. They are not the same for all companies operating in a given
market (economy). For example the competitors of a company may be different from another
company engaged in some other unrelated business. As well, a company’s suppliers might be
different from one company to the other. In the same way, customers (markets) the firm serves
might be different in accordance with the company’s business. Generally, all the aspects
mentioned above are things that can change from one company to the other. They are not the
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same for all companies like macro factors. As they are external to the company, still these forces
are uncontrollable by company but are not that much difficult to influence like macro factors.
For example a company may not control the activity of its competitors but can systematically
affect its activity. Likewise, a company may not exert control over its suppliers but still may
have the bargaining power to influence their activity. Now let’s have a look at the main factors
one by one;
Suppliers: Suppliers are specific to the company. i.e. suppliers of a company in one industry
are/may be different from the other company engaged in other industry and even for companies
engaged in the same industry. Suppliers might be different from one company to the other. They
can affect an organization’s activity in so many ways. If the supplier cannot deliver the materials
on timely basis, it will be difficult for the company to deliver the product for customers in areas
where they are in need of on timely basis. In the same way, if suppliers fail to meet quality
requirements, it will be difficult for the company to come up with superior quality products.
Likewise, if suppliers increase the price of the materials they are delivering, it may enforce the
company to raise prices of its final products etc. In return a company may have some bargaining
power to affect suppliers’ activity. E.g. a company may enforce suppliers to meet some quality
requirement, may enforce them to decrease price etc. Hence, it is of paramount importance to
continuously monitor the activities of suppliers in terms of their materials quality, dependability,
etc. This is so because if a supplier stops delivering abruptly, it may threat the company’s
business. In the same way, if the numbers of suppliers go on rising, it can be considered as
opportunity for the company as it will make getting in puts less difficult.

Competitors: A company’s competitive environment is a major influence on its business

activities. A company is rarely stands alone in its effort to serve a given customer market. There
will always be host of competitors. Hence, company should identify, monitor and
outmaneuvered to capture and maintain customer loyalty. The company generally faces three
types of competition; Brand competition: come from marketers of directly similar products e.g.
coca and Pepsi. Substitute products: products from other categories but can substitute the
company’s products and serve same need. In the third, more general type of competition, every
company is a rival as all strive to get the limited buying power of buyers.

Customers: Customers’ companies’ targeting might be different from one company to the other
even in one industry and if the industry with in which the companies are operating is different,
obviously their direct customers will also be different. And, as we said it in market oriented
approach, the justification for organizations existence is the decision of customers to purchase.
Hence, every activity of the organization should revolve around the needs and specification of
customers in today’s competitive environment. As we all know, in today’s world it sometimes
seems that change is the only constant thing. Hence, what customers are interested today may be
outdated by tomorrow. Thus, companies should keep on improving themselves with the
changing environment of their customers. That means if the interest of customers starts to shift,
in the same way the company should adjust itself in accordance with that change. To this end, it
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is compulsory for companies to continuously scan their customers and adjust themselves
accordingly.

Marketing intermediaries: these are all those parties that are involved in delivering the
company’s products to the market from where they are produced and that are involved in the
exchange process with the company’s target market in one way or another These include,
physical distribution companies (transportation and warehousing companies), marketing service
companies such as advertising companies, marketing research companies etc and financial
intermediaries such as banks and insurances. Obviously, in one way or another, these may have
positive and/or negative impact on a company. So, it’s so important to follow up any changes in
such atmosphere so that the company can prepare the things it may encounter in advance

Macro level environmental forces

These are factors springing from political-legal, Socio-cultural, Economic and Technological
forces. They are said macro because they affect all the companies operating in a given
environment. As they are overall factors and external, they are largely uncontrollable by a given
company. Company’s success depends on their adopting by adjusting and therefore, companies
should systematically asses these forces and shape their activities in light with the environment’s
trend. Apart from this, all these forces are interred related to each other. Hence, a change in one
of these factors is likely to cause change in one or more of the others. Additionally, all they are
dynamic in nature, that is, they are subject to change at overtime. Sometimes they are termed as
PESTE Factors. Now, let’s have a look at of them one by one in detail.

Political-Legal Environment: this consists of laws, governmental agencies and pressure groups.
In the first place, countries will have their own legislation aimed at protecting companies from
unfair competition, protecting consumers from unfair business practices and/or to protect the
society’s interest from unbridled business behavior. Hence, marketers must have good
knowledge of the major laws protecting competition, consumers and society. Additionally, new
framework of laws might be introduced as it becomes necessary and this newly created law may
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affect the organization’s activity positively or negatively in addition to the existing ones. Apart
from all this, the government may have its own regulations, priorities and initiation that
regarding pollution, product, production process etc that may change over time for different kind
of businesses. In addition to this, there might be some influential groups that are capable enough
to influence the legislation body and the government to introduce new laws or take actions.
Hence, business firms need to look into all this aspects and practices on continuous basis to
identify the possible threats being posed on the company and opportunities coming along with
the changes of these factors that would be exploited via strength they have.
Economic environment: people alone do not represent markets. All production is meant to be
sold. So, people must have the ability and willingness to buy, purchasing power. Individuals’
purchasing power is a function of different interacting forces in the so called economic
environment. When we say economic environment, we are referring to factors that directly affect
customers purchasing and spending pattern. Among the factors affecting customers purchasing
and spending pattern, level of the economy and income distribution are the most important. As
far as the level of economy concerns, some countries have subsistent economy; they consume
most of their own agricultural and industrial outputs. Hence, such economies represent less
attractive opportunity. At the other extreme are industrial economies, which constitute rich
markets for many goods and services. Apart from this, the income distribution in a country may
have lot with customers’ purchasing power and spending pattern. Suppose that in a given
country, much of the income goes to a very small part of the population leaving the mass with a
very insignificant portion of the income, this obviously tells that much of the purchasing power
is confined in the hands of few and hence, giving the higher bargaining power, implying major
part of the society does not represent attractive market as it has limited purchasing power.
The other force, in this regard, is the overall situation of the economy: booming and depression.
An economy is said to be booming if the economic situation of given country goes on improving
due to the additional employment opportunity in an economy, additional income, more
investment etc. Contrary to this, an economy is said to be on depression if the economical
situation in a country keeps on aggravating from time to time such as increased unemployment,
decrease in investment, decrease in income etc. Both these two kinds of situations have their
own impact on the purchasing power and psychology of individuals. In a booming economy,
individuals’ income is improving. This eventually results in higher purchasing power. Apart
from this, in such economies, individuals will have the confidence to spend what they have now
thinking that they will have no problem in terms of secured income in the future. Hence,
booming economy represents additional opportunity. Unlike this, depression has negative impact
on customers. In the first place, due to the many negative factors such as unemployment,
decrease in investment etc, individuals’ income will go on declining and this in turn result in the
shrink of purchasing power. Additionally, individuals will have no confidence to sacrifice their
current resource for their current need thinking that the future is more aggravated than it is now.
Hence, this represents a threat. Apart from all these, the so called inflation and deflation are the
other important forces. Inflation is persistent rise in the prices of goods and services. Hence the
purchasing power of a currency declines. (When prices rise at a faster rate than personal income,
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consumers buying power declines). This as well affect consumers psychology and purchasing
power and there by marketing program of a company. High inflation obviously results in
decrease consumption as it makes purchasing power decline. Likewise, it may psychologically
force consumers to overspend today for fear that prices will be higher tomorrow. Apart from
this, sever inflation is a real challenge for a company as it makes managing prices of final
products and inputs difficult. In the same way, extreme deflation (when the purchasing power of
currency rises at opposite of inflation) may have implication to organizations in different ways.
In particular, it is very difficult for firms to raise prices because of consumer resistance. Hence,
their only option will be to concentrate on as to how cost of products can be decreased,
otherwise, profit will evaporate. In addition to all these factors, consumers’ expenditures are
highly affected by savings, debt and credit availability and interest rate. Hence, business men
must pay careful attention to major changes in all these factors.
Socio-cultural environment: it is made up of institutions and other forces that affect a society’s
basic values, perceptions, preferences and behaviors. The society, in which people live, shapes
their basic beliefs, values and norms. They absorb a world view that defines their relationship to
themselves, to others, to nature etc. People in every society hold many core beliefs and values
that tend to exist for a long. For example, many Ethiopians believe in patriotism, in getting
married, in giving to the poor, not eating pork etc. These are cultures that passed down from
parents to children and of course are being reinforced by different institutions such as churches,
business, government etc. Obviously if there are cultures that work against company’s marketing
activities, the company will be at the odd but if the culture commensurate with the company’s
marketing activities, it will be very conducive. Hence, companies need to assess if there are any
culture operating against or with the company’s business activities and thereby should devise
ways as to how they can copy up with the challenges being pose by that culture or as to how
they can make the best use of the opportunity. In addition to this, marketers should continuously
look if there are any cultural shifts and if there, whether they are adaptive (conducive) to the
organization or not. As we all know, culture is not something that standstill always as it is.
Rather it is subject to change overtime owing to various reasons. In Ethiopian culture, it was
housewife who is responsible for dealing with the many things involved in a family such as
taking care of child, homemaking etc. But as time passed, it came to be evident that this culture
is changing and hence today especially in urban areas the role of a husband and wife is deviating
from its traditional position. This eventually may have implication on traditional buying pattern
of households. Additional, children are being given more attention in terms of their interest
today than that of what traditionally accustomed before. Likewise, in urban areas increasing
number of females are becoming office workers and such women are seeking for better balance
between work and family. This is essentially changing their attitude towards shopping etc. In
such way, we can think of the different kind of changes happening to our culture beginning from
changing the existing up to the creation of new cultures. Generally, in such constantly changing
cultures, companies should respond on timely basis as the culture changes otherwise their
activities will be outdated with the culture or the cultural changes may endanger their success in
one way or another or they may over look the new opportunities coming along with cultural
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changes. In addition, human population interms of size, density, location, age, gender, race,
occupation etc affect business activities. This is of major concern to marketers because it
essentially involves people and people constitute markets. In the first place, the explosive growth
of population has great implication for companies. Primarily population growth results in the
increase in human needs that must be fulfilled, hence we can think of it in terms of the
opportunity it may have, but it does not mean growing market unless, otherwise the growth of
population is backed up by sufficient purchasing power. On the other hand, if the population
growth presses too hard against the available food supply and resources, costs will shoot up and
hence profit margins will be depressed. In addition to this, national demographic factors which
vary from country to country also have significant impact on marketing. In one country the
number of youngsters may be far greater than that of seniors; this may tell to the marketers what
possible behaviors are dominant in the market, which group represents the most influence etc.
Likewise, in a country, where the proportion of literate is so small, advertising through
magazines may not be fruitful as it does not make the message reach to the maximum number of
customers. Similarly, the household pattern composition may also have implication.
For example, traditionally household consists of husband, wives and children. No matter how,
we can have a lot other kind of households such as only mother and children, father and children
and only wife and husband (which is being accustomed recently), each of these groups may
represent different kind of market segments as each group may have different buying behavior
based on the selected characteristic. Generally, marketers should look into all these aspects on
continuous basis to learn if any of these demographic factors are changing in such a way that
they are capable enough to pose threats or create opportunities to the organization.
Technological environment: it is one of the most dramatic force shaping people’s lives. It has a
tremendous impact on life-styles, consumption patterns and economic well being. You can think
of the many technological breakthroughs that are expanding our horizon as we progress into the
future. It is really hard to grasp each and every aspect in this regard. Technology can affect
companies in different ways:
 By starting new industries such as computer, robot etc
 By radically altering or virtually destroying existing industries as it paves the way for
improved products, innovative products etc. E.g. emergence of television over radios,
computers on type writer machine industries etc.
Apart from this, technology has affected marketing activities extensively. The breakthrough in
communication now permits people and organizations to transact from almost any location at
any time of the day.
We should also keep in mind that technology is a mixed blessing in some ways. A new
technology may improve our life in one way while creates environmental and societal challenges
and problems on the other. E.g. automobile industry has made life great but blamed for polluting
the environment. And, in fact, technology is expected to solve some of the problems for which it
is being criticized. E.g. air pollution through environmentally adaptive products.
Ecology and physical/Natural Environment: it refers to the physical environment with in
which the company operates. It involves natural resources that are needed as an input by
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companies or that are affected by activities of companies. The change in this environment may
have greater implication on the activity of marketers.
In the first place, this environment is the source of different kind of resources the company may
need. In this regard, the first kind of resources are what we call infinite resources such as water
and air but today pollution of such resources has become a major issue and challenge for
companies. Likewise, the so called finite but renewable (recoverable) such as food, forest etc
should also be exploited in economical and reasonable manner that they can be recovered
otherwise if they are used extremely, it will be difficult to recover them back and this as we
know will have impact on companies in different ways beginning from degradation of
environment up to shortage of resources. In the same way, the so called finite but non renewable
such as petroleum, coal and various minerals pose a very great challenge for companies. Firms
making products that require such materials as an input will face large cost increase, even if the
materials remain available.
Apart from all these, the activities of companies may cause problems to the environment such as
pollution. Hence, the government and the society at large may make movements against such
companies for the dangers they are causing to the environment. This in turn may compell
companies to put their large sum of money to take care the physical environment and further it
may compel them to look for improved products that are friendly to the environment for e.g. car
producing companies are doing their best to create cars that minimizes the pollution of
environment. Generally, marketer should look into all these aspects if there are any tendencies
posing a challenge or creating a chance for the company.
Comparison Chart
Basisfor
Micro Environment Macro Environment
Comparison
Micro environment is defined as the Macro environment refers to the general
Meaning nearby environment, under which the environment that can affect the working
firm operates. of all business enterprises.
COSMIC, i.e. Competitors,
PESTLE, i.e. Political- Legal, Economic,
Organization itself, Suppliers,
Elements Socio-Cultural, Technological, Eco-
Market Intermediaries and
Physical environmental.
Customers.
Nature of
Specific General
elements
Influence Directly and Regularly Indirectly and Distantly

Environmental scanning and SWOT analysis

Environmental scanning is one of the essential components of the global environmental analysis.
Environmental scanning can be defined as 'the study and interpretation of the political,
economic, social and technological events and trends which influence a business, an industry or
even a total market' The factors which need to be considered for environmental scanning are
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events, trends, issues and expectations of the different interest groups. Issues are often
forerunners of trend breaks. A trend break could be a value shift in society, a technological
innovation that might be permanent or a paradigm change
Environmental scanning is an ongoing process and organizations are always refining the way
their particular company or business goes through the process. Environmental scanning
reinforces productive strategic plans and policies that can be implemented to make the
organization get the maximum use of the business environment they are in. Environmental
scanning not only helps the business find its strengths in its current environment but it also finds
the weakness of competitors, identifies new markets, potential customers and up and coming
technological platforms and devices that can be best used to sell/market the product or service. It
helps a business improve their decision-making process in times of risk to the external and
internal environments the business is in.
When scanning the environment, the organization needs to look at all the influences of the
company. The scanning process makes the organization aware of what the business environment
is about. It allows the organization to adapt and learn from that environment. When the company
responds to an environmental scanning process it allows them to easily respond and react to any
changes to both the internal and external business environment. Environmental scanning is a
useful tool for strategic management as it helps them to create and develop the aims and
objectives of the company which assists with the production of the company or organization.
A common formal environmental scanning process has five steps. The five steps are fundamental
in the achievement of each step and may develop each other in some form:
 The first step of the environmental scanning process requires the identification of the
needs and the issues that have occurred that caused the organization to decide an
environmental scanning is required. Before starting the process there are several factors
that need to be considered which include the purpose of the scanning, who will be
participating in the processes and the amount of time and the resources that will be
allocated for the duration of the scanning process.
 The second step of the scanning process is gathering the information. All the needs of
the organization are translated into required pieces of information that will be useful in
the process.
 The third steps analyzing all the information that the business has collected. When
analyzing the information organizations are made aware of the trends or issues that the
organizations may be influenced by.
 The fourth of the environmental scanning process is all about the communication of the
results obtained in step three. The appropriate decision makers analyze the translated
information of the potential effects of the organization. All the information is presented
in a simple and concise format
With all the information obtained from steps three and four, step five is all about making
informed decisions. Management creates appropriate steps that will position the organization in
the current business environment.
SWOT or situation analysis is used when without to look at both the internal and external
environment scanning. SWOT stands for Strength, Weakness, Opportunity and Threat. The
internal factors considered are the strengths and weaknesses where the opportunities and threats
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are external factors that are all used and considered to help improve the overall decision making
process in dynamic strategic situations the business is facing.
The strengths are positive characteristics in the internal business environment which can be
capitalized on to increase the overall organizations performance
The weakness is factors of the internal environment which may restrict and interfere with the
positive organizational performance. The internal environment factors will include finance,
production, research, development and marketing which are regarded as 5Ms.
The opportunities include factors of the external environment that act like stepping stones for the
organization in order to achieve their current strategic goals. They are fertile and favorable
elements for firm if it exploits it by maximizing its strength.
The threats include the factors that have hampering effect and may interrupt the organization
from achieving the goals. Threats are unfavorable elements in external environment by exposing
us to hindrances because of internal weaknesses. Often threats will come out of the external
business environment.
Environmental scanning isn't always as effective or useful in an organizational setting for several
reasons. The volume of the information received through the scanning process can be
disadvantageous when attempting to translate and make sense of the information as some
information may get overlooked or just missed entirely. Because of the volume of information it
is hard to decipher what is important or not as vital information can be missed is if the
information is unordered and unorganized. Due to ever changing environment all information
runs under a time limit of validity. Another barrier to environment scanning is the interpretation
of information that has been collected. Undetermined sources can cause confusion and
irrelevance to the process.
By proper scanning of environment and analysis of SWOT, organizations develop suitable
strategy that will fit the situation.