SAN ISIDRO COLLEGE

City of Malaybalay
Tel No. 088-813-5541
Website: sic.edu.ph
Webmail: [email protected]

BA 103 Introduction to Business Operation Mr. Jiemarie D. Paderes

(Course Code) (Course Tittle) (Name of Instructor)

I. Learning Module 2 The Firm and Its Environment

(Topic)

II. Introduction
Greetings! Good morning, everyone! Praised be Jesus and Mary! Welcome to module. You
will find here our general instructional guidelines, then the components of our module. You
will be guided one step at a time through the specific instructions of the learning tasks given
below, which intend you to understand The Firm and Its Environment. Let joy and peace
abound in your mind and heart as you genuinely and responsibly respond to the learning
processes that this module offers

III. Intended Learning Outcomes (ILOs)

1. Identify the various forces/elements of the firm’s environment
2. Describe the local and international business environment.

IV. Stimulating Recall

a. What are the external and internal environment?

V. Presentation of the topic/learning material

The Firm and its Environment
 Internal Environment
 External Environment
 Micro/operating environment
 Macro/General environment
 Forms of Business Organization
 THE FIRM AND ITS ENVIRONMENT

BUSINESS ENVIRONMENT
Business refers to any economic activity being carried on by person or persons, natural
or juridical which involves buying, selling, transporting, financing or rendering of service
in pursuit of profit. Environment in the context of business refers to the surrounding
circumstances in which the business is operating. These circumstances can be
classified into two factors. First will be the internal or the institutional factors that are
controllable, both can affect the functioning of an organization. Second are the external
factors such as political, economic, social cultural, technological and legal conditions
that are uncontrollable in nature.

INTERNAL ENVIRONMENT
Internal Environment: It includes 5 Ms, i.e. man, management, machinery, material, and
money, usually within the control of business. Business can make changes in these
factors according to the change in the philosophy, operating style and functioning of
enterprise.
EXTERNAL ENVIRONMENT
Those factors which are beyond the control of business enterprise are included in
external environment. These factors are: Political Factors, Economic Factors, Socio-
Cultural Factors, and Technological Factors. It is of two types-the micro environment
and the macro environment:

Micro/Operating Environment: The environment which is close to business and affects

its capacity to work is known as Micro or Operating Environment. It consists of
Suppliers, Customers, Market Intermediaries, Competitors and Public.
A. Suppliers. They are the persons who supply raw materials and required
components to the company. They must be reliable and a business must have
multiple suppliers, i.e. they should not depend upon only one supplier.
B. Customers. Customers are regarded as the king of the market. Success of
every business depends upon the level of their customer's satisfaction.
Types of Customers:
 Foreigners
 Government and Other Institutions
 C Industries
 Retailers
 Wholesalers

C. Market Intermediaries. They work as a link between business and final

consumers,
 Financial Intermediaries
 Marketing Agencies
  Middleman
 Physical Intermediaries

D. Competitors. Every move of the competitors affects the business. Business

has to adjust itself according to the moves and strategies of the competitors.
E. Public. Any group who has actual interest in business enterprise is termed as
public, e.g., media and the general public; they can be both users or non-users of
the product and services that the business is offering.

Macro/General Environment. It includes factors that create opportunities threats to

business units.
Following are the elements of macro environment of the firm:
A. Political Environment. It affects different business units extensively.
 Defense and military policies
 Political belief of government
 Political party orientation with business community
 Political stability of the country
 Relation with other countries

B. Socio-Cultural Environment. Influence exercised by social and cultural

factors, not within the control of business, is known as socio-cultural
environment. These factors include: attitude of people to work, family system,
caste system, religion, education, marriage, etc.
C. Technological Environment. A systematic application of scientific knowledge
to practical task is known as technology. Everyday there has been vast changes
in products, services, lifestyles and living conditions, these changes must be
analyzed by every business unit and should adapt these changes.

FORMS OF BUSINESS ORGANIZATION

Sole proprietorship
Also referred to as "single proprietorship," a sole proprietorship is the simplest form of
business and the easiest to register, through the Department of Trade and Industry
(DTI). It is owned by an individual who has full control/authority of his own and owns all
the assets, as well as personally answers for all liabilities or losses.

Advantages of Sole Proprietor Form of Business

1. Easy formation. The formation of sole proprietorship business is very easy and
simple. No complex legal formalities are involved for setting up the business
except a license or permission in certain cases (from DTI to Local Government
Unit, to BIR, HDMF and finally to SSS) which normally takes fifteen (15) to twenty
(20) simple steps depending on the scale of your business.
 2. Direct motivation. The entrepreneur owns all and risks all. The entire profit
goes to his pocket. This motivates the proprietor to put his heart and soul in the
business to earn more profit. Thus, the direct relationship between effort and
reward motivates the entrepreneur to manage the business more efficiently and
effectively.

3. Promptness in decision-making. When the decision is to be taken by one

person, it is sure to be quick. Thus, the entrepreneur as sole proprietor can arrive
at quick decisions concerning the business by which he can take the advantage
of any better opportunities.

4- Secrecy. Each and every aspect of the business is looked after by the
proprietor and the business secrets are known to him only. He has no legal
obligation to publish his accounts. Thus, the maintenance of adequate secrecy
leaves no scope to his competitors to be aware of the business secrets.

5. Socially desirable. New and small entrepreneurs can take up business on

small-scale basis. There will be no scope for concentration of wealth in few
hands. Sole proprietorship continues its operation. almost each and every area of
business activity and caters to the needs of the society.

Disadvantages of Sole Proprietor Form of Business:

1. Limited resources. The financial resource of any small entrepreneur as an

individual is limited. He mainly finances from his own savings or borrows from
financial institutions, friends and relatives as per his capacity. Thus, limited
resource is the major drawback of this form of business.

2. Limited managerial capability. Modern business requires updated managerial

skills in each and every sphere of activity. We cannot hope a single individual to
possess all the managerial talents necessary to carry on a business efficiently.
The limited financial resource of the sole proprietorship is a hindrance to hire the
services of managers with expertise in different areas, thereby the growth of the
business.

3. Unlimited liability. Since the liability of the sole proprietor is unlimited, the
private properties of the proprietor is also at risk. When the business fails, the
private properties of the owner are utilized to pay off the business debts.

4. Less scope for economies of large-scale. The economies of large-scale

operation is enjoyed only by a large-scale enterprise, which the sole
proprietorship business normally lacks. Therefore, there is less scope for availing
the economies of large-scale.

5. Not suitable for large-scale business. The limited financial resources, limited
managerial capability of the proprietor, risk to the private property, etc., makes
the sole proprietorship business unsuitable for large-scale business. This system
of business cannot afford large-scale operation.

Partnership

A partnership consists of two (who are not husband and wife) or more persons who bind
themselves to contribute money or industry to a common fund, with the intention of
dividing the profits among themselves. Under the Civil Code of the Philippines, a
partnership just like a corporation, is considered as a juridical person, (which means
that it has a personality distinct and separate from that of its members) having a
separate legal personality from that of its owners (partners). A partnership with more
than three thousand pesos (P3,000.00) capital must register with Securities and
Exchange Commission (SEC). Partnerships are generally treated

Advantages of Partnership Business

1) Ease of formation. Partnerships are relatively easy to establish.

2) More skills. A partnership may benefit from the combination of complementary

skills of two or more people. There is a wider pool of knowledge, skills and
contacts.

3) Specialized business approach. Partnerships can be cost-effective as each

partner specializes in certain aspects of their business.

4) Induces partners' creative thinking. Partnerships provide moral support and

will allow for more creative brainstorming.

5) The partnership pays its own tax. As a separate legal entity, a partnership is
also a separate taxpayer from it owners. It its own Taxpayer Identification
Number, and it pays its own taxes, such as income tax, business taxes and
withholding taxes. The owners or partners pay their own taxes on the
compensation and or distributive share of income they receive from the
partnership.

Disadvantages of Partnership

1) Friction during distribution of profits. Profits must be shared with others, You
have to decide on how you value each other's time and skills. What happens if
one partner can put in less time due to personal circumstances?

2) Possible divisiveness in decision. Since decisions are shared, disagreements

can occur. A partnership is for the long term, and expectations and situations can
change, which can lead to dramatic and traumatic split-ups.

3) Limited Life. The partnership may have a limited life; it may end upon the
withdrawal or death of a partner. 4) Managerial Flexibility. You have to consult
your partner and negotiate more as you cannot make decisions by yourself. You
therefore need to be more flexible.

5) Unlimited Liability. A major disadvantage of a partnership is unlimited liability.

General partners are liable without limit for all debts contracted and errors made
by the partnership.
Corporation

A corporation is a juridical entity established under the Corporation Code and regulated
by the SEC with a personality separate and distinct from that of its stockholders. It is a
business that is owned by its shareholders (natural or juridical persons). The liability of
the shareholders of a corporation is limited only to the amount of their share capital. It
consists of at least five to 15 incorporators, each of whom must hold at least one share
and must be registered with the SEC. Minimum paid up capital is P5,000. A corporation
in the Philippines can either be stock or nor stock company.

Advantages of forming a corporation.

1. Owners have limited Liability. A corporation is considered by law as a separate

and distinct legal entity. Thus, owners of corporation or shareholders are only
indebted to the extent of their interest in the corporation. Corporations have
limited liability.

2. It can exist with continuity. The power of succession gives a corporation

continuous existence. Unlike a sole proprietorship, where the death of the owner
proprietor ceases its existence, the death of a shareholder will not terminate the
corporation.

3. Shares of ownership are transferable. The shares of stock or interest of a

publicly traded corporation can be traded easily though a stockbroker. Shares of
corporations are freely transferable except when shareholders have "buy-sell"
agreements restricting when and to whom share may be sold or transferred.
4. It attracts more investors. Corporations attract investors because of its stock
structure, perpetual existence, ownership transferability, and limited liability.
Attracting more investors allows a corporation to raise more capital or equity to
manage and expand their operations.

5. You can be an employee of your own corporation. Since the corporation is a

distinct entity from its owners or shareholders, they can become the corporation's
employees or officers. Thus, they can receive salaries or compensation income
aside from the dividends they may receive from the corporation.

6. The corporation pays its own tax. As a separate legal entity, a corporation is
also a separate taxpayer from it owners. It has its own Taxpayer Identification
Number, and it pays its own taxes, such as corporate income tax, business taxes
and withholding taxes. The owners or stockholders pay their own taxes on the
compensation and or dividend income they receive from the corporation.

Disadvantages of forming a corporation

1. Incorporation is costly. Incorporating a business entails filing with the

Securities and Exchange Commission (SEC) and may involve a lot of formal and
legal papers, such as by laws, articles of incorporation, affidavit or resolutions.
This is sometimes done by getting the service of a corporate attorney or firms
which specialize in incorporating businesses.
2. Corporations are highly regulated. Ordinary corporations are regulated by the
SEC. Special corporations with different licensing requirement are further
regulated by other government agencies, such as Bangko Sentral ng Pilipinas
(BSP) and SEC special division for finance and lending companies, Commission
on Higher Education (CHED) for tertiary schools, (DepEd) for companies
 operating secondary schools and Insurance Commission (IC) for insurance
companies.
3. Limited liability may discourage creditors. The limited liability feature of the
corporation can be an advantage for stockholders. However, it can als be a
disadvantage when a corporation doesn't have a good financia condition and
performance. Because of the limited liability, a corporation with a low credit score
may discourage creditors to lend their money to th corporation.

4. It may result to double taxation. Since the corporation is already taxed on its
income, distributing this income to shareholders in the form of dividend may
result to double taxation. This is because the dividend income received by the
shareholders (natural persons) is also taxed on their distribution. 5. It is not easy
to dissolve. Corporations are difficult to dissolve as it is also difficult to form.
Cooperative

Often referred to as a "co-op", a cooperative is a limited liability business that can be

organized for-profit or not-for-profit. A cooperative differs from a for-profit corporation in
that it has members, as opposed to shareholders, who share decision making authority.
Cooperatives are typically classified as either consumer or worker cooperatives.
Cooperatives are fundamental to the ideology of economic democracy.

Advantages of Cooperative Society

1. Easy to form. The formation of a cooperative society is very simple as

compared to the formation of any other form of business organizations. The
procedure involved in the registration of a cooperative society is very simple and
easy. No legal formalities are required for the formation of cooperative society
except complying with the usual business requirement after it is registered with
the Cooperative Development Authority (CDA).

2. Service motive. In a cooperative society, members are provided with better

good and services at reasonable prices. The society also provides financial help
to its members at concessional rates. It assists in setting up production units and
marketing of products.

3. Democratic management. The cooperative society is managed by the elected

members from and among themselves. Every member has equal rights through
its single vote but can take active part in the formulation of the policies of the
society. Thus, all members are equally important for the society.

4. Surplus shared by the members. The society sells goods to its members at a
nominal profit. In some cases, the society sells goods to outsiders. This profit is
utilized for meeting the day-to-day administration cost of the society.

Disadvantages of Cooperative Society

1. Inefficient management. A cooperative society is managed by the members
only. They do not possess any managerial and special skills. This is considered
as major wbac this sector. Inefficiency of management may not bring success to
the societies.
2. Lack of secrecy. The cooperative society does not maintain any secrecy in
business because the affairs of the society are openly discussed in the meetings.
But secrecy is very important for the success of a business organization.
3. Cash trading. The cooperative societies sell their products to outsiders
generally in cash. But, they are usually from the poor sectors. These persons
require availing credit facilities which are not possible in the case of cooperatives.
Hence, marketing is a shortcoming for the cooperatives.

4. Absence of motivation. The members may not feel enthusiastic because the
law governing the cooperatives put some restriction on the rate of return.
Absence of relationship between work and reward discourage the members to
put their maximum effort in the society.

5. Disputes and differences. The management of the society constitutes the

various types of personnel from different social, economic and academic
background. Many times, they strongly differ from each other on many important
issues. This becomes detrimental to the interest of the society. The different
opinions and disputes may paralyze the effectiveness of the management.
VI. Assessment Tasks

Essay:

1. Fully discuss the internal and external environment of a business.

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2. What are the forms of organization? Explain.

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Rubric for essay: /10

Identification of main issues or topics /1
Analysis /5
Solutions/ Answer to questions /2
Readings and Research /1
Spelling and grammar /1

VII. Other reading materials or sources

Messenger
Google Classroom
Google Meet
PowerPoint Presentation