The Firm and Its Environment – Quick Review

The Firm

• Economic entity providing goods/services for profit
• Exists within, and interacts continuously with, a surrounding environment

The Environment

• Sum of external & internal forces influencing firm’s operations/decisions

Internal Environment (Controllable)

• Exists inside the firm; effects are more predictable and manageable
• Key factors:
  • Employees
  • Skill level & motivation = potential strength or weakness
  • Board of Directors
  • Elected by stockholders; oversees top management & firm direction
  • Managers
  • Identify $\text{Strengths}$ & $\text{Weaknesses}$; drive strategy via SWOT

External Environment (Uncontrollable)

• Lies outside the firm; unpredictable
• Split into:
  • Micro/Operating Environment
  • Suppliers
  • Market Intermediaries
  • Competitors
  • Publics
  • Customers
  • Macro/General Environment (PEST factors)
  • Demographic
  • Economic
  • Technological
  • Cultural
  • Natural
  • Political
  • Legal

PEST Analysis

• Tool to scan macro-environment
  • $P$ Political: stability, policy, trade regulation
  • $E$ Economic: inflation, interest, trade flows, taxes
  • $S$ Social: demographics, education, lifestyles
  • $T$ Technological: innovations, competing tech, growth pace

SWOT Analysis

• Internal: $S$trengths & $W$eaknesses
• External: $O$pportunities & $T$hreats
• Guides formulation of strategies for competitiveness

Key Takeaways

• Firm success depends on aligning internal strengths with external opportunities
• Continuous scanning (PEST, SWOT) enables proactive decision-making