Unit 2 Understanding Firm-Specific Business Environment

The firm-specific business environment refers to the unique set of internal and external factors
that directly impact a specific company or industry. Since, these factors are firm or industry
specific, they can vary significantly from one firm or industry to another. Unlike general
environment, such as economic, social, or political conditions affecting all businesses within an
industry, a firm-specific business environment is unique to each organization and shapes its
competitive position.

Michael Porter: The firm-specific business environment encompasses the internal and external
factors that directly affect a company's competitive position within its industry including its
unique resources, capabilities, market positioning, and competitive dynamics.

From the above discussion and definitions, it may be concluded that the firm-specific business
environment is composed of the factors inside and outside the business that affect its competitive
position significantly.

Scope/factors of the firm specific business environment

1. Internal factors: They are the conditions and resources which are internal to an organization.
These factors are controllable to the firm in long run and determine the relative strengths and
weaknesses of the firm. Strengths are the positive internal characteristics that an organization can
exploit to achieve its strategic goals. Weaknesses are internal characteristics that might inhibit or
restrict the organization's capacity of achieving goals. The following are the major components
of internal environment:

a. Organizational goals and policies: Goals are the long-term desired Outcomes of an
organization. They are the end results. All the organizational activities are directed towards
achievement of goals. Profit, growth, market growth, and social responsibility are some of the
common goals of a business. Policies are broad guidelines for organizational activities. An
organization with precise and well communicated goals and policies is regarded stronger.

b. Organizational resources: Resources are the foundation for strategy. They are inputs into a
firm's production process, such as capital equipment, employee skills, patents, and finance. The
unique bundles resources generate competitive advantages. Resources may be tangible and
intangible. Tangible resources: They have physical existence. They include financial resources,
Organizational resources, Physical resources, Technological resources. Intangible resources:
They do not have physical presence. They include Human resources, Innovation resources
Reputational resources.
c. Organizational structure: Organizational structure specifies jobs and relationship. It defines the
job allocation, responsibility, and accountability. Clear and swift organizational structure is very
important for the implementation of a particular strategy.

d. Organizational culture: Organizational culture refers to the complex set of ideologies,

symbols, and core values that are shared throughout the firm. It influences how the firm conducts
business. It is a complex phenomenon and transfers over generations.

e. Leadership style: The leadership approach adopted by top management affects the company's
strategic direction and employee motivation. It may be autocratic, bureaucratic, transformational,
transactional, servant or laissez-faire.

2. External factors: They are the factors outside the firm that are immediately relevant for
achievement of business goals and related to the competitive position of a business. The major
external factors of the firm-specific environment are:

a. Industry dynamics: Industry dynamics refer to the forces and processes that shape the
behavior, evolution, and transformation of industries. These dynamics impact how businesses
operate, compete, and adapt within their specific sectors. Industry evolution and change,
competition and market structure, industry eco-system, and innovation and disruption are some
key aspects of industry dynamics.

b. Market position: The Company’s market share, brand reputation, and customer perception play
a crucial role. Market position shows its ability to influence consumer perception regarding a
brand or product relative to competitors.

c. Industry specific regulations: These are the laws, rules and regulations established by the
government or regulating bodies and apply to a particular industry or sector. They have direct
impact on the operations of firms within the industry. Hence, these are industry specific in
general.
d. Task environment: These are the external factors and forces that directly affect the operation
and performance of the firm. They affect the firm on a day to day basis. They includes the
following components:

i. Customer: Customer is the most important element of task environment. All business activities
are directed towards satisfying customer needs and retaining them effectively. Customers may be
an individual, family or business. Besides purchasing goods and services, they are also the
source of information and ideas for the business. An organization should always focus on
addressing the changing needs and demands of customers and build a long-term relationship with
them.
ii. Suppliers: Suppliers are the persons or firms who provide inputs to the business needed to
produce goods or services. The quality of product depends on the quality of input. Besides; price,
delivery time and other terms and conditions with suppliers are also very important for a
business. A good relationship with the suppliers always creates business opportunities.

iii. Competitors: Competitors are the firms that provide similar product in the similar market.
Businesses compete for customers. Hence, business needs to analyze the competitors through
competitive intelligence.

iv. Creditors/financial institutions: Creditors/Financial institutions are very important for a

business, since they provide fund for short a well as long-term financial requirements. Besides
fund, they also provide other services. They may be banks, insurance companies and other
institutions related to capital market. A sound relationship wits the creditors/financial institutions
always create opportunities to business.

v. Distributor: Distribution management is an important factor that determines the effectiveness

of a business. A sound distribution system enables a business to avail the product and services to
the consumer in the stipulated time. Distributors even provide strong manpower and cash support
to the supplier or manufacturer promotional efforts. Hence, it is essential for a business to have a
close relationship with the distributors.

vi. Media: A business is very closely related to media. Media always have a very close look on
the business activities. They largely influence the image of any business. A number of
opportunities may be created with a continuous interaction with the media. It is necessary to
address the media promptly.

vii. Government: Government regulates the business system. It further formulates different
policies for the development of the business sector. It attempts to protect the interest of the
consumer as well general public. Hence, the regulations and policies of the government exert
considerable impact on the operation of a business.

viii. Pressure groups: Environmentalists, consumer advocates, and women's group are some of
the pressure groups that influence business activities directly. They exert pressure to the business
on price, quality, employment, and environment protection. A business needs to address the
issues raised by the pressure groups as possible.
 Importance of understanding the internal dynamics of firms
1. Strategic decision-making: Internal dynamics of a firm provide insights into a company's
strengths, weaknesses, and core competencies that allow effective strategic decisions for
sustainability and growth.

2. Competitive advantage: Identifying and leveraging internal unique resources and capabilities
help to create a competitive edge to outperform competitors.

3. Optimization of operations: Internal dynamics shows the workflows, processes, and

procedures that enable leaders to identify inefficiencies and areas for improvement. It finally
leads to increased productivity and cost savings.

4. Resource allocation: Understanding internal dynamics allows leaders to allocate resources

effectively among teams or departments.

5. Communication and collaboration: Understanding of internal dynamics allows better

communication and collaboration among employees due to clarity in their roles, responsibilities,
and perspectives.

6. Employee engagement and retention: Understanding internal dynamics helps managers create
a congenial work environment where employees are valued and motivated.

7. Adaptation to change: Understanding the internal dynamics allows leaders to anticipate

external threats and proactively implement strategies to address them.

Organizational Structure: Organizational structure is the framework through which an

organization operates. It is required for smooth functioning or organizational activities. It
specifies jobs and relationship. It defines the job allocation, responsibility and accountability.
Clear and swift organizational structure is very important for the implementation of a particular
strategy.

Organizational structure is concerned with hierarchy within the organization, division of work,
delegation of authority and responsibility and creation of departments and units. The efficiency
and effectiveness of an organization largely depends on its structure.
 Types of Organizational Structure
Simple Structure: In simple structure, the owner-manager makes all major decisions. He/she
monitors all activities. The staff serves as the assistant of managers. This structure is
characterized by informal relationships, few rules, limited task specialization, and informal
information systems. The coordination is relatively high due to frequent and informal
communications between the owner-manager and employees. Firms implementing these
strategies commonly compete by offering a single product line in a single geographic market.
Hence, firms with focused strategy follow this structure. Local restaurants repair businesses, and
other specialized enterprises are examples of firms using the simple structure.

Functional Structure: The functional structure consists of a chief executive officer and with
functional line managers in functional areas such as production, accounting, marketing, R&D,
and human resources. It allows for functional specialization. It facilitates active sharing of
knowledge within each functional area. It enhances professional development of functional
specialists. However, it can negatively affect communication and coordination among the
functional units. Hence, the top management must ensure that the decisions and actions of
individual business functions promote the entire firm rather than a single function. This structure
is suitable for the organizations pursuing low level diversification strategy.

Multi Division Structure: The multidivisional structure consists of a corporate office and
operating divisions which represents a separate business or profit center. Under this, the
responsibilities for day-to-day operations and following business unit strategy are delegated to
division managers.

Strategic Business Unit (SBU) Structure: Strategic business unit structure is the modification
of the divisional structure. An organization may be involved in different businesses. They may be
operating different environment with different strategic positions. They are known as strategic
business units. They are divisions or groups of divisions composed of independent product
market segments that are given primary responsibility and authority for the management of their
own functional areas. They may be serving different markets with different products. In such a
situation, they demand different strategies. In multi divisional structure, there may be difficulty
in managing all the divisions due to extreme diversification and large size. In such a situation,
strategic business unit structure is suitable. Under this, the products or businesses with similar
strategic positions are grouped in a strategic business unit. They have different management,
competitors, and market segment.
Holding Company Structure: If a company acquires more than 50 per cent of other and for the
sake of control, the former is called the holding company and the latter subsidiary company.
Holding company allows the ownership of multiple companies. Its main objective is to increase
market power by enhancing the competitiveness by owning property such as patents, estates,
trademark and other assets. The subsidiary companies function under the control of the holding
company. The relationship between the holding and subsidiary company mainly rests on
financial issues. Holding companies are flexible. They have the ability to bring in outside
shareholders as partners and can buy and sell their subsidiaries conditions change. In this way,
the structure followed by the holding company is called the holding company structure.

Project Based Structure: Many businesses are naturally project-based, such as construction or
of drilling or entertainment. However, other companies also can organize their business structure
based on projects. A project has temporary nature. Its initial and termination time are
predetermined. The timing, cost, and standards are also pre-planned. In a project-based structure,
most of the business functions are organized in projects. The employees are assigned to projects
and report to the project manager. The project manager has direct control and authority over
project operations.

Network Structures A series of independe becausybusiness units linked together by computers

information system that designs, produces, markets a product or service

Matrix Structure: A matrix structure is the most complex of all structures. Functional and
divisional structures depend primarily on vertical flows of authority and communication.
However, a matrix structure depends upon both vertical and horizontal flows of authority and
communication. It includes dual lines of budget authority with dual sources of reward and
punishment, shared authority, dual reporting channels, and a need for extensive and effective
communication system. It is mostly used construction, health care, research, and defense. It
facilitates the specialized personnel, equipment, and facilities.

Team Based Structure: A team comprises a group of people linked in a common purpose.
Teams normally have members with complementary skills, knowledge, educational level, and
experience. A team generates synergy through a coordinated effort which allows each member to
maximize their strengths and minimize their weaknesses. A team attempts to achieve objective
through collective performance. It operates through collective leadership and decisions are also
taken collectively. A team is composed off the employees from different units or departments.
Under team structure, different cross functional teams are formed for the implementation of
strategy.
Network Structure: A network structure is also called virtual structure or non-structure. It is a
series of independent business units linked together by computers information system that
designs, produces, and markets a product or that service. It is most useful when the environment
of a firm is unstable. Innovation and quick response are the foundation of network structure.
Under this, manufacturing is subcontracted or out sources to other companies in low-cost
locations around the world. It provides flexibility to an organization to cope with rapid
technological change and environmental dynamism. It allows a company to concentrate on its
core competencies.

Multinational Company Structure: Multinational companies are internationalized companies.

International markets are complex and volatile, requiring management to find new ways of
efficiently meeting rapid changes. Hence, multinational companies adopt global approach in their
management and decision making. Organizational design and structure are determined by global
environment.

Organizational Culture
Organizational culture refers to the complex set of ideologies, symbols, and -core values that are
shared throughout the firm. It influences how the firm conducts business. It is a complex
phenomenon and transfers over generations. It may be taken as the personality of the
organization that shapes how employees interact, make decisions, and approach their work.

Culture reflects an organization's values, vision, working style, and belies. It influences
management, decisions and all other business functions such Production and marketing. It
influences how an organization Conducts business and helps regulate and control employees'
behavior. Culture may be a critical factor in promoting innovation. It is the most valuable factor
to differentiate an organization from others. Culture determines how employees and management
interact and handle outside business events. Organizational culture often is implied. It is
developed over times.

Role of Culture in Shaping Employee Behaviour and Organizational Performance

Organizational culture influences employee behavior by setting expectations, shaping attitudes
and values, and defining acceptable norms. It can encourage behaviors like collaboration,
innovation, and customer centricity. Organizational culture is crucial for performance
enhancement because it directly affects employee engagement, productivity, innovation and
customer satisfaction. A positive culture can lead to better financial performance and a
competitive advantage.

The following diagram shows how culture shapes employee behaviour ana organizational
performance.
Cultural Alignment and Strategic Fit
Cultural alignment refers to the degree of congruence between an organization's culture and its
strategic goals, mission, and values. It fosters a workplace environment where every employee
understands, engages, embraces, and actively supports the company's mission and strategic
direction. It is said that no matter how great a strategy is, if an organization's culture is not
aligned with and supportive of that strategy, the strategy will either halt or fail.

The alignment between the culture and strategy involves a three step process. First, defining the
strategy clearly. Second, identifying the key elements of the culture to support the strategies and
finally adopting a leadership style that actively shapes the required culture.

Operations Management
Operations management is concerned with the processes that transform inputs (raw materials,
labor, and energy) into outputs (finished goods and services). It involves planning, organizing,
coordinating, and controlling resources to ensure efficient production and delivery of goods and
services. Hence, it deals with a series of interrelated activities that transform inputs into outputs.

Operations management includes designing, optimizing, and improving processes to enhance

both efficiency and effectiveness. It uses tools such as performance metrics, benchmarking, and
feedback mechanisms to identify areas for improvement and implement changes to enhance
efficiency, quality, and customer satisfaction.

Operation Management Principles

1. Customer focus: Operations management should be aligned w customer needs and
expectations. It involves understanding custom requirements and delivering value-added
products and service accordingly.

2. Efficient production processes: Operations management involve determining the sequence of

activities, resource allocation and layout design to optimize productivity and quality.

3. Effective resource management: Operations management involves developing plans and

schedules to ensure that resources are utilized meet production targets and customer demand.

4. Capacity planning: Operations management is concerned with planning the capacity in terms
of resources, facilities, equipment to meet demand most efficiently. This involves forecasting
demand, allocating resource and managing capacity constraints.

5. Supply chain management: Supply chain management (SCM) is a major component of

operations management. It is the process of managing ti flow of goods and services to and from a
business. It encompasses ever step involved in turning raw materials and components into fin
products and delivering them to the ultimate customer. It should streamline company activities,
eliminates waste, maximizes customer value, and provides a competitive advantage in the
marketplace.
6. Logistics: It focuses on the movement and storage of items within t supply chain and has
internal focus. It primarily deals with inters processes related to efficient transportation,
warehousing, and distribution.

7. Quality management: Quality is the most critical aspect of operations management. Quality
management is essential to ensure that products and services meet customer expectations. The
commonly used principles of quality management are; total quality management (TQM),
statistical process control (SPC), and quality circles.

8. Continuous improvement: Continuous improvement is at the heart of operations management.

Organizations should constantly work to identify inefficiencies, eliminate waste, and improve
processes to enhance productivity, quality, and customer satisfaction. Kaizen, Lean Management,
and Six Sigma are the major principles of continuous improvement.

9. Flexibility and adaptability: Operations management should be flexible and adaptable to

changing market conditions, customer preferences, and other environmental issues.

10. Employee empowerment: Operations management emphasizes employee empowerment.

Participating employees in decision-making, problem-solving, and process improvement
initiatives fosters a culture of accountability, ownership, and continuous learning.

11. Strategic alignment: Operations management should be closely aligned with the overall
strategic objectives of the organization.

Production Process and Capacity planning

1. Design and planning: The first stage of production process involves conceptualizing the
product, designing its specifications, and planning the production process.

2. Sourcing of inputs: In the second stage, raw materials, components, and other necessary inputs
are sourced from suppliers.

3. Manufacturing and quality control: In this stage, the raw materials are converted into finished
products. Throughout the production process quality control measures are implemented to ensure
that products meet specified standards and requirements.

4. Packaging and assembly: After the products are manufactured, they are packaged and
assembled according to customer specifications.

5. Distribution and logistics: Finished products are transported distribution centers or directly to
customers.

6. Sales and marketing: Finally, products are marketed and sold customers through various
channels such as retail stores, online platforms, or direct sales.
7. Customer service and support: After-sales services such as customer support, warranties, and
product maintenance are offered to the customers as per the specified agreements or terms.

Capacity Planning
Capacity planning is a process of determining the production capacity needed to meet the
changing demands of its products and services.

The major components of capacity planning are:

1. Demand forecasting: The first step in capacity planning is to forecast the demand for products
or services over a specific period which is essential for determining the required production
capacity.

2. Assessment of current capacity: After demand forecasting, the current capacity of the
organization is assessed. Now, the required capacity and the current capacity are compared to
identify potential gaps of mismatches between supply and demand.

3. Capacity expansion or optimization: Based on the gaps, organizations can develop strategies to
address capacity constraints by expanding existing facilities, investing in new technology, or
outsourcing certain processes.

4. Risk assessment: Capacity planning also involves assessing various risks and uncertainties
emerging from changes in market demand, supply chain disruptions, regulatory changes, or
technological advancements. Organizations need to anticipate and mitigate these risks.

5. Financial analysis: Capacity planning affects capital investments, operating costs, and revenue.
Hence, it is necessary to evaluate the feasibility and profitability of capacity alteration.

6. Implementation and monitoring: Once capacity plans are formulated, they need to be
implemented effectively in way that capacity levels align with changing demand dynamics and
business objectives.

7. Continuous improvement: Capacity planning is an ongoing process that requires continuous

monitoring, evaluation, and refinement.

Supply Chain Management and Logistics

Supply chain management (SCM) is a major component of operations management. It is the
process of managing the flow of goods and services to and from a business. It encompasses
every step involved in turning raw materials and components into final products and delivering
them to the ultimate customer. It should streamline company activities, eliminates waste,
maximizes customer value, and provides a competitive advantage in the marketplace.

Logistics focuses on the movement and storage of items within the supply chain and has internal
focus. It primarily deals with internal processes related to efficient transportation, warehousing,
and distribution.

Quality Management and Continuous Improvement

Quality Management : Quality is the most critical aspect of operations management. Quality
management is essential to ensure that products and services meet customer expectations. The
commonly used principles of quality management are total quality management (TQM),
statistical process control (SPC), and quality circles.

1. Total Quality Management (TQM) is a management approach that focuses on continuous

quality improvement of products and services by using continuous feedback. The objective of
TQM is doing things righ the first time over and every time. It seeks to integrate all organization
functions to focus on meeting customer needs and organizational goals hence; TQM views an
organization as a collection of processes. It ensures that every single employee is working
towards the improvement of work culture, processes, services, and systems to ensure long term
organizational wellbeing.

2. Statistical Process Control (SPC) is a methodology used to monitor control, and improve
processes by analyzing data and statistical techniques. It aims to ensure that processes operate
efficiently consistently, and within specified quality standards.

3. Quality circles (QC) are small groups of employees who voluntarily come together to identify,
analyze, and solve work-related problems within their organization. These circles aim to improve
productivity quality and efficiency by harnessing the collective knowledge, skills, and creativity
of employees at the bottom level.

Continuous Improvement: Continuous improvement is a philosophy and methodology focused

on making incremental and ongoing improvements to processes, products, and services. It
involves: identifying opportunities for improvement implementing changes, monitoring and
measuring, standardizing best practices, and engaging employees.

Its major aspects are:

  Understanding and meeting customer needs and expectations.
 Active participation and involvement of all employees
 Data and evidence-based decision making.
 Process optimization for efficiency, consistency, and quality.
 Small and incremental improvements.
 Strong commitment and leadership from top management.
 Feedback and review mechanisms.

Human Resource Management: Human resources are the people who make-up the workforce
of an organization, business sector, or economy. It is also called the human capital or human
assets. It is the resource that resides in the knowledge, skills and motivation of people.
Management is the process of dealing with or controlling things or people. In other words,
management is the administration of an organization. The organizations can be business, not for
profit and even the government body. Human resource management (HRM) is the strategic
approach to the effective management of people in an organization, so that they help the
organization to gain the competitive advantage. In other words, it is the practice of recruitment to
retirement. HRM is concerned with people's dimension in organizations. To understand its
concepts a few definitions are given below:

DeCenzo & Robbins: Human Resources Management is a process consisting of the acquisition,
development, motivation, and maintenance of human resources.

The first objective of HRM is to attain maximum individual development. Second, get desirable
working relationship between employers and employees. Third, effective development of human
resources as contrasted with physical and other resources. In other words, staffing/HRM
includes:

 Policies and practices to manage people,

 Development and motivation of human resource,
 It incorporates recruitment to retirement (R2R) programs,
 The goal of staffing/HRM is to attain optimum level of efficiency and effectiveness in the
organization.

Human Competencies and Resources: Human competencies and resources refer to the
knowledge, skills, abilities, and personal attributes that individuals possess. They enable
employees to perform their roles effectively. Human competencies are developed over time,
often through experience and learning.

1. Technical skills: These encompass the specific competencies knowledge necessary to execute
job-related tasks efficiently.
2. Effective communication abilities: The skill of conveying ideas, seam collaboration with
peers, and successful engagement with customers’ clients all depend on effective
communication.

3. Aptitude in problem-solving: Effective problem-solving capability encompasses critical

thinking, swift decision-making, and the capacity analyzes and creates innovative solutions.

4. Adaptability: Adaptability entails embracing change, exhibiting resilience in challenging

circumstances, and thriving in dynamic environments.

5. Collaborative spirit: Successful teamwork rests on clear communication seamless cooperation,

and the ability to effectively collaborate with diverse array of team members.

6. Leadership and proactiveness: Regardless of hierarchical position individuals can exhibit

leadership qualities by proactively seizing opportunities, inspiring others, and setting a positive
example.

7. Time management and priority setting: Efficient time utilization and task prioritization are
indispensable for meeting deadlines and accomplishing objectives.

8. Emotional intelligence: Emotional intelligence encompasses the ability to understand and

regulate one's emotions as well as those of others Employees with high emotional intelligence
navigate social dynamics adeptly, foster positive relationships, and demonstrate empathy and
resilience in challenging scenarios.

9. Client-centric approach: A mindset geared towards meeting the needs of customers or clients
is indispensable for roles involving direct interaction with them.

10. Commitment to lifelong learning: In a swiftly evolving professional landscape, a dedication

to continuous learning and growth is crucial for remaining pertinent and adapting to evolving job
demands