Forces and Elements Influencing Local and International Business Environments

Overview and Objectives of Business Environment Analysis

• Goal of Analysis: The fundamental objective is to analyze various forces and elements influencing the local and international business environment utilizing specific strategies such as PEST (Political, Economic, Social, and Technological) and SWOT (Strengths, Weaknesses, Opportunities, and Threats).
• Specific Learning Objectives:
  • Identify the diverse forces and elements constituting a firm’s environment.
  • Describe the characteristics and dynamics of both local and international business environments.
  • Understand how major corporations (e.g., Mitsubishi, Kodak, Starbucks, Jollibee) interact with and adapt to environmental shifts.

Core Definitions and Dynamics

• Definition of Business Environment: This term refers to the totality of external and internal factors that influence a business’s operations, decision-making, and overall performance. These influences can be either positive or negative.
• Sum of Factors: It is the aggregate of all elements outside the business firm that significantly influence its functioning.
• Dynamic Nature: The business environment is inherently dynamic, meaning it is in a state of continuous change rather than being static.
• Adaptation for Success: The success of every business is contingent upon its ability to adapt to the specific environment in which it functions. Key drivers of needed adaptation include:
  • Changes in government policies.
  • Advancements or shifts in technology.
  • Changes in consumer lifestyle.
  • Shifts in consumer spending habits.

Analytical Tools: Benchmarking, Scanning, and Prediction

• Benchmarking:
  • Definition: The process of measuring or comparing an organization’s own products, services, and practices against those of recognized industry leaders.
  • Purpose: To identify specific areas for improvement.
  • Common Metrics: Typically used to evaluate customer satisfaction, operational costs, and quality standards.
• Environmental Scanning:
  • Definition: The process of gathering information regarding events and their subsequent relationships within both the internal and external environments of an organization.
  • Function: It involves continuous analysis of market changes and surrounding conditions to identify trends that may generate opportunities or threats.
  • Strategic Utility: By searching and sorting through environmental data, organizations can predict changes and develop a competitive mindset. This includes understanding competitors, barriers to entry, existence of product substitutes, and dependence on powerful suppliers or customers.
• Business Prediction (Business Forecasting):
  • Definition: A method utilized to predict how various environmental variables will alter the future of a business.
  • Applications: Influences decisions regarding offshoring, local branching, company expansion, or downsizing.
  • Limitation: The accuracy of business predictions is not always guaranteed.

Environmental Forces: Internal vs. External

Internal Business Environment

• Definition: Factors residing within the establishment that influence the organization's performance. These factors are generally considered controllable.
• Key Components:
  • Resources (financial, physical, etc.).
  • Research and Development (R&D).
  • Production processes.
  • Procurement of supplies.
  • Products and Services offered.
  • Human Resources (employees and management).
  • Organizational Structure and Company Policies.
  • Office norms, values, and the prevailing reward system.
  • Machinery and technology used internally.
  • Board of Directors and company owners.

External Business Environment

• Definition: Factors existing outside or beyond the organization that influence performance. These factors represent opportunities and threats and are typically beyond the firm's direct control.
• Classification: Divided into Micro (Specific) and Macro (General) environments.

The Micro-Environment (Specific Components)

This environment includes "players" whose decisions and actions have a direct impact on the company:

• Suppliers: Individuals or entities providing reasonably priced inputs and materials (including financial and labor supply) required for manufacturing and service delivery.
• Customers: Individuals who patronize products and services. Organizations must solicit feedback to meet increasing demands and avoid customer discontent.
• Pressure Groups: Special-interest groups that attempt to influence business or government decision-making. An example is the Department of Trade and Industry (DTI) exerting pressure on the pricing of face masks and face shields during a pandemic to prevent overpricing.
• Employees: Individuals working for a salary or wage. Knowledge workers specifically influence managerial decisions.
• Investors/Owners: Individuals providing capital. They influence management regarding new product introductions, loan applications, and expansion plans.
• Media: External communication channels that can influence public perception and business reputation.
• Competitors: Other firms in the same industry targeting the same customer base.

The Macro-Environment (General Components)

These represent conditions existing in the economy and society as a whole:

• Economic Situations: Includes factors such as inflation rates, interest rates, stock market options, and general spending habits. For instance, high interest rates on bank loans may cause a company to postpone expansion.
• Politico-Legal Situations: National, local, and international laws and regulations. Example: Labor laws set by the Department of Labor ensure employees cannot be terminated without due process.
• Socio-Cultural Situations: Includes changing customer values, preferences, and customs. Example: A rise in health consciousness leads companies to market cholesterol-free products.
• Technological Situations: Advancements that allow businesses to reach new markets or outsource functions. This involves electronic gadgets and specialized advanced technology.
• Demographic Situations: Characteristics of the population including size, growth, life expectancy, educational/skill levels, income, and geographic origin. Example: Management policies regarding the hiring of married females may be influenced by the desire to minimize maternity benefit payments.
• World and Ecological Situations: Factors related to protecting the natural environment and maintaining corporate efficiency. This includes waste disposal, recycling, pollution control, and climatic conditions (e.g., Climate Change).

Scenario and Case Study Analysis

Scenario: Milk Tea Shop

In a hypothetical scenario of a shop operating for $3$ months near a school facing a new competitor with lower prices, a SWOT analysis reveals:

• Strengths: Good location, loyal customer base, quality ingredients, friendly staff.
• Weaknesses: Higher prices, limited menu, small shop space, low brand recognition.
• Opportunities: Launching student promos, partnering with delivery apps, loyalty cards, collaborating with influencers.
• Threats: Competitors with cheaper prices, price wars, decreased foot traffic, competitor marketing strategies.

Case Study: Starbucks SWOT Analysis

• Strengths: Ranked as the No. $1$ brand in the coffeehouse segment; strong brand image; largest coffeehouse chain globally.
• Weaknesses: Product pricing strategies; exposure to negative publicity.
• Opportunities: Extending the supplier network; increasing product offerings; expanding retail operations.
• Threats: Competitor pricing influencing profit; rising costs of coffee beans and dairy products; increased competition from local cafes; supply disruptions; product boycotts.

Case Study: Jollibee Foods Corporation

• Market Position: Largest fast food chain in the Philippines with over $1,150$ stores nationwide. It holds a dominant market share exceeding all other multinationals combined.
• International Presence: Expanded into Vietnam, Brunei, Hongkong, Singapore, Macau, Malaysia, US, Canada, Saudi Arabia, UAE, Qatar, Kuwait, Bahrain, Oman, Italy, and the United Kingdom.
• Core Values: Founded by Tony Tan Caktiong, the company utilizes a family-oriented approach to personnel management and marketing.
• Recognition: Recipient of the Employer of the Year Award (Personnel Management Association of the Philippines), Best Employer in the Philippines (Hewitt Associated), and cited as a Top $20$ Employer in Asia by the Asian Wall Street Journal.

Questions and Discussion

• Why is it necessary for firms to understand their environment?
  • Understanding the environment allows firms to identify threats and early warning signals. Recognizing external changes that hinder performance early enables managers to prepare and respond effectively.
  • It helps identify opportunities to gain a "first-mover advantage," allowing an organization to become a market leader by acting before competitors.
• Can a company become successful without considering the environment?
  • No. An organization cannot survive without the support of its environment, which serves as the primary source of both opportunities (trends that improve performance) and threats.
• Why is it important for managers to study the current business environment?
  • It facilitates continuous learning and helps identify the firm’s specific strengths and weaknesses.
  • It assists in analyzing competitor strategies to remain competitive in the market.

Environmental Sorting Exercise Results

• Internal Environment Factors:
  • $1$. Reward system
  • $2$. Office norms
  • $5$. Organizational Structure
  • $6$. Company Policies
  • $8$. Resources
  • $14$. Machinery
• External Environment Factors:
  • $3$. Technology
  • $4$. Inflation rate
  • $7$. Customer Preference
  • $9$. Taxes
  • $10$. Climate Change
  • $11$. Global Competition
  • $12$. Competitors
  • $13$. Media
  • $15$. Politics