THE TOTAL ENVIRONMENT OF THE FIRM (CHAPTER 2) from page 21 to 34

From BUSINESS POLICY IN AN ASIAN CONTEXT BOOK

(THIRD EDITION)

BY: EMANUEL V. SORIANO

LEE C. NEHRT

“According to the old saying, the only things which are certain are death and taxes. But that was an old
saying. Today we know that another thing is certain, namely change. “

Viewpoint of Top Management:

 the environment in which firm operates consists of a rich kaleidoscope of cultural, political, and
economic factors.
 Combination of constraints and opportunities within which the internal make up of the firm
impinges on it as their constraints or strengths, weaknesses, or capabilities.
 For purposes of establishing the company’s policies and goals, Top Management must fully
understand and consider all these external and internal environmental considerations, lest (to
fear that) the goals may turn out to be far from being realistic.

1. Top Management set the company’s Goals

2. Establish strategic plan toward achieving these goals (this plan is basically a strategy for “getting
from where we are now to where want to be”)
3. It is essential that during the planning process, top management should fully cognizant’ of the
firm’s capabilities, as well as weaknesses (“to know where we are now”) and to understand
where the firm stand at all times in relation to its environment.

“According to the old saying, the only things which are certain are death and taxes. But that was an old
saying. Today we know that another thing is certain, namely change. “

 Changes usually lie outside the firm’s sphere of influence

 The most effective and best -laid plan is that which anticipates and works toward such change.
 Yet, change also takes place within the firm itself ---- in those areas where top management, in
fact has control over: ITS FINANCIAL STRUCTURE, THE PHYSICAL PLANT OR FACTORY, THE
CAPABILITIES OF ITS MANAGEMENT AND ITS WORKERS, SO ON.
 These changes must thus be considered together with external environment in accordance with
goals and the overall targeted plan established by top management.

From the book “COMPARATIVE MANAGEMENT AND ECONOMIC PROGRESS” by Richard N. Farmer and
Barry M. Richman (Bloomington, Indiana: Cedarwood Publishing co., 1970).

Professor Farmer and Richman listed and categorized the many elements within the environment which
can affect the management of the firm. (these are shown in the annex at the end of this chapter)

Professor Farmer and Richman devoted 270 pages of text of detailed discussion about it, but we merely
shall review of some the key factors.
EDUCATIONAL FACTORS

 Clearly an integral part of the environment

 May be viewed from several perspectives
 The literacy level and the percentages of the population that belong to the different
educational strata for one, bear upon the marketing approach for the products which the firm
is to produce.
 The type-even qualities-of goods that will be in demand vary according to individual tastes,
which in turn are shaped by the educational backgrounds of the prospective consumers.
 Even the media and techniques used in advertising these products are also largely dictated upon
by these very same factors.
 Percentages and literacy and educational levels also affect the type of workers and managers
the firm will be able to hire in the course of working towards its goals. (internal)

Example:

 Foreman will necessarily spend more time supervising workers who are poorly educated (slow
to learn)
 Supervisors who are illiterate, managers will have to take pains in conveying instructions orally.
 When there is a shortage of high-talent manpower accompanying several barely literate workers
and foremen, it is usually inevitable that operations will have to revolve around the few
competent, literate people. Planning any significant growth becomes much more difficult for
top management.
 In terms of written communication (up and down and among departments) might not even be a
simple question of literacy but might be boil down to a problem of inadequate language skills
that inhibit any clear and effective communication. A written instruction of policy is useless
unless it fully conveys the intent of the writer to the reader.

Other considerations of more general character that a high level of illiteracy poses on the firm
efficiency and growth are:

 Illiterates tend to be sick more often

 Business operations incline more toward inefficiency
 A predominantly illiterate society is less capable of supporting a stable government

 There is little the individual firm can do to affect the external educational environment but there
is much the firm can do about the educational levels of its workers and managers: (LITERACY
AND TECHNICAL TRAINING, MANAGEMENT DEVELOPMENT COURSES)
 Personnel development must thus be an important part of any long-range plan if the firm wishes
to strengthen its ability to achieve its set goals.

SOCIO-CULTURAL FACTORS

 Those present in the country should be given critical consideration by top management because
these influences both the firm’s external environment as well as its internal system.
 Firms are constantly interacting with the cultural environment. They affect each other.

Example:

In United States, large corporations shape the attitudes and the value system of the communities.

Their attitudes and values turn upon the motivation, behavior and performance of both the people
dealing and working at the firms.
Americans secret in achievements in productivity is in the managers attitudes who seems to
engender an aggressive management which believes that methodological planning, energetic
training and enthusiastic work can solve any problem in business.

Four socio-cultural factors:

1. The legacy of the frontier: a spirit that has fostered a sense of opportunity pervading American
industrial and community life;

2. Faith in business and in the individual: a faith reflected in the high esteem the American national
community gives the businessman;

3. Belief in change: a belief whereby a successful experiment is not allowed to crystallize into mere
custom and that an unsuccessful experiment is accepted as an occupational risk, valued for the
experience that was gained in the process; and

4. The idea of competition: an ideal that leads “even those companies which are not operating in a
highly competitive market to run their enterprises as though they were…” (American managers)
know that their firms must maintain their competitive positions if they are to provide their people
with a continuing career.

Although, socio-cultural factors that work within the firm greatly affect management style, practices
and the contents of the operating policies, this should not preclude top management from drawing
up company policies and objectives, designing strategic plans, organizing, formulating operating
policies, controlling operations, etc.

Example of major effect which the cultural value system is like on the external environment, the
ability to attract the best talent to either join firms or to start new business.

“View Toward Change”. As a country develops, its culture changes accordingly. Development, by
definition, means change, and the most important aspect of change is neither economic nor
technological but the change in people. And, change in people ultimately means change in culture,
in the attitudes, in the value system.

Arbitrary political unit- few nations-states that are culturally unique. Very few nations have
homogeneous culture

An individual firm (an arbitrary economic unit) can develop its own culture.

Training program, creates an atmosphere for the exercise of authority, responsibility initiative, risk
etc. The culture(the value system) of the people working for a company undergoes a change. The
company becomes a cultural subsystem. It can be more efficient.

Example: International Business Machines Corporation (IBM) distinguished itself from other firms by
developing its own value system (thus affecting attitudes in dressing, drinking, living style and
security)

In developing countries, this is sometimes accomplished by physically isolating the factory and
offices from the rest of society and providing company housing, school, supermarket etc. for
workers and managers.

ECONOMIC FACTORS

The size of the market is inevitably a critical factor. This relates to present products, as well as to
other products and/or services into which the firm might diversify. Hence, corporate goal setting
and the strategic planning effort must depend closely on prospects for future growth in GNP, in per
capita income, and on income distribution. Every effort must be made to look as far into the future
as possible to anticipate this. A government’s five-year plan, for instance, can be of great assistance.
Competition is multi-faceted.

Existence and potential growth of competitors are economic factors ( primary importance in
developing a firm’s strategy.

ADMINISTRATIVE AND POLITICAL FACTORS

Government directly involve in many of the operational aspects of a business like:

Operational aspects of a business firm that need a permit from the government:

1. Start a company

2. Buy land for factories

3. Utilize foreign exchange import equipment or raw materials

4. Export goods and services

5. Enter into an agreement with a foreign firm

6. Increase prices

The government gets involved in labor negotiations. The government has a monopoly on the
importation of many critical items, etc. Government laws, policies, and the ways in which these are
administered in effect become crucial to the firm’s operations. On top of these, since permits and
other pertinent actions cannot usually be obtained by writing a letter, the chief executive officer (or
his assistant) must normally attend to these in person, instead of using his time as an effective
internal manager. This is, hence, a major cause of inefficiency in management. It is important for the
manager to remember that the political climate is only a part of the total environment acting upon
his firm. It should not prevent the utilization of scientific management. It merely means that the
goals and strategy of the firm must take this aspect of the environment into proper perspectives in
order or be realistic and as effective as possible.

INTERNATIONAL ENVIRONMENTAL FACTORS

International environmental factors are those which affect a firm’s ability to most efficiently import
equipment and goods, to export part or all of its production, and to enter into agreements with the
foreign companies so as to gain access to technology, patent rights, management know-how,
financing and markets.

ENVIRONMENTAL CONSTRAINTS

Educational Factors

 Specialized vocational and technical training and general secondary education – the
extent, types, and quality of education and training of this type not directly under the
control or direction of industrial enterprises. The type, quantity and quality of persons
obtaining such education or training and the proportion of those employed in industry with
such education and training are noted under this factor
 Higher education – the percentage of the total population and those employed in industry
with post-high school education, plus the types and quality of such education. The types of
persons of obtaining higher education are also considered here.
 Attitude toward education – the general or dominant cultural attitude toward education
and the acquisition of knowledge in terms of its presumed desirability. The general attitude
toward different types of education is noted under this factor.
 Special management programs – the extent and quality of management development
programs which are not run internally by productive enterprises, and which are aimed at
improving the skills and abilities of managers and potential managers. The quantity and
 quality of managers and potential managers of different types and levels attending or having
completed such programs are considered under this factor.
 Literacy level – the percentage of the total population and those presently employed in
industry who can read, write and do simple arithmetic calculations; the average years of
schooling of adults.
 Education match with requirements – the extent and degree to which the types of formal
education and training available in a given country fits the needs of productive enterprises
on all levels of skill and achievement. This is essentially a summary category, depending on
the type of job involved. However, different, educational constraints indicated above would
be more important.

Socio-Cultural Factors

 Inter-organizational cooperation – the extent and degree to which business enterprises,

government agencies, labor unions, educational institutions and other relevant
organizations cooperate with each other in ways conductive to industrial efficiency and
general economic progress.
 View toward achievement and work – the general or dominant cultural attitude toward
individual or collective achievement and productive work in industry.
 View toward Industrial managers and management – the general or dominant social
attitude toward industrial and business managers of all sorts, and the way that such
managers tend to view their managerial jobs.
 Class structure and individual mobility – the extent of opportunities for social class and
individual mobility, both vertical and horizontal, in a given country , and the means by which
it can be achieved.
 View toward wealth and material gain – whether or not the acquisition of wealth from
different sources is generally considered socially desirable and the way persons employed in
industry tend to view material gain.
 View toward specific method – the general social and dominant individual attitude toward
the use of rational, predictive techniques in solving various types of business, technical,
economic and social problems.
 View toward risk-taking – whether or not the taking of various types of personal, collective,
or national risk is generally considered acceptance, as well as that of the dominant view
toward specific types of risk-taking in business and industry. The degree and extent for
which risk- taking tends to be a rational process in a particular country is a consideration
under this factor.
 View of authority and subordinates – the general or dominant cultural attitude toward
authority and the persons in subordinate positions and the way industrial managers tend to
view their authority and their subordinates.
 View toward change – the general cultural attitude toward a social changes of any type
which bears directly on industrial performance in a given country, and the dominant attitude
among persons employed in industry toward all types of significant changes in enterprise
operations.

Economic Factors

 Market size – total effective purchasing power within the country, plus relevant export
market.
 Economic stability – the vulnerability of the company to economic fluctuations of
depression and boom, price, stability, and overall economic growth stability.
 Factor endowment – relative supply of capital and land (agricultural and raw materials) per
capita; size and general health of the work force.
 Organization of capital markets – the existence of such markets as stock and bond
exchanges, their integrity, effectiveness, and total impact; the size and role of commercial
banking, including loan policies and availability of credit to businessmen; the existence of
 other capital sources, such as savings and loan associations, government-sponsored credit
agencies, insurance company loan activities, etc.
 Competition – number of competitors; degree of competition vs. cooperation; government
attitude towards monopoly and oligopoly.
 Central banking system and monetary policy – the organization and operations of the
central banking system, including the controls of the commercial banks, the ability and the
willingness to control the money supply, the effectiveness od government policies regarding
price stability, commercial bank reserves, discounting, credit controls, and similar factors.
 Social ahead capital – availability and quality of power supplies, water, communication
systems, transportation, public warehousing, physical transfer facilities, housing, etc.
 Fiscal Policy – general policies concerning government expenditures, their timing, and their
impact; the general level of deficit, surplus, or balance; total share of government
expenditures in gross nation product.

Administration and Political Factors

 Relevant legal rules of the game – quality, efficiency, and effectiveness of the legal
structure in terms of general business law, labor law, tax law, and general law relevant to
business. Degree of enforcement, reliability, etc. are also considered here.
 Political organization – type of organization, in constitutional terms, degrees of
centralization or decentralization; degree and extent of red tape, delays, uncertainty and
confusion in industry-government dealings; pressure groups and their effectiveness.
 Foreign policy – impact of policy on industrial enterprise in terms of trading restrictions,
quotas, tariffs, customs unions, foreign exchange, etc.
 Defense policy – impact of defense policy on industrial enterprise in terms of trading and
purchasing policies vis-a-vis potential enemies; strategic industry development; labor and
resource competition, and similar factors.
 Political stability – influence on industrial enterprises of revolutions, changes in leadership,
stability or instability over protracted periods, etc.
 Government attitudes toward private enterprise – ideology vs. pragmatism; the mixed
economy; relative political strengths of business vs. labor unions vs. agricultural workers.

International Factors

 Nature and extent of nationalism – the manifestation of the collective nationalist feelings
within the country, as evidenced by actions, writings, and behavior.
 General balance of payments position – the general state of the balance of payments,
including deficits or surpluses on current account, the flows of capital, both long- and short-
term, new term international financial obligations, and tendencies for chronic deficits or
surpluses in the balance of payments.
 International trade patterns – the usual flow of exports and imports to and from the
country. Patterns of commodity and service trade, by countries and regions are also
considered here.
 View toward foreigners – the general attitude toward non-nationals as evidenced by overt
behavior.
 Memberships and obligations in international financial organizations – obligations and
responsibilities of the country toward international organizations such as World Bank and
the IMF rights of the country as a member of such organization.
 Import-export restrictions – formal legal rules controlling exports and imports, including
tariffs, quotas, export duties, exports restrictions governmental monopolies on importation
or exportation of certain goods.
 Relevant legal rules for foreign business – the special rules of the game applied only for
foreign-owned firms including special discriminatory labor and tax legislation.
 International organization and treaty obligations – formal obligations of the country in
terms of military responsibilities, political obligations, and similar matters.
 International investments restrictions – formal legal and administrative restrictions on
foreign investments by foreigners within the country.
 Exchange control restrictions – formal legal and administrative controls on the
conversation of the l9cal currency to any or all foreign currencies or gold.
 Power or economic bloc grouping – membership in formal and informal political, military,
and economic bloc, such as communist marxist, or neutralist groups, explicit and implicit
obligations of such bloc.
 Profit remission restrictions – formal legal and administrative controls on the conversion of
the local operations to foreign country.