ENVIRONMENT FACTORS AFFECTING THE ORGANIZATION – INTERNAL AND EXTERNAL APPRAISAL
Environment Factors Affecting The Organization
The importance of business environment and the need to consider forces external to the organization were first incorporated in management thought during the late 1950s. it was during the 60s that management came to recognize that organization must actively consider their environment, the environment of an organization affects every aspects of its success and consequently every decision managers a make According to Gerald Bell, an organization such as customers, competitors, government regulations, supplier, financial firms and labour pools that are relevant to an organization’s operation.
CHARACTERISTICS OF ORGANIZATION (BUSINESS) ENVIRONMENT:
In the past, managers concentrate attention on their economic and technical environment; in recent years, however, changes in human attitudes, social values, political forces, and legal liabilities have forces managers to broaden the scope of the environmental forces they consider. These characteristics of the environment can be categorized as follows:
1. Interrelatedness of factors
3. Rate of change or volatility
INTERRELATEDNESS OF FACTORS:
The environmental factors are interrelated. A change in one of the environmental factor can cause tremendous change in others. For example, decrease in supplies of oil, primarily due to change n the political structure of some OPEC countries, notably IRAN, had a strong effect on the general economic conditions in the world. Higher prices for petroleum product caused a general increase in prices of almost all products. The environment of many organizations was also affected because unions demanded more pay to compensate for inflated prices. Some firms suffered a loss of consumers.
These refer to the number of external environmental factors which the organization must respond and also to the degree of variety within each factor. With respect to the number of environmental factors to which an organization must respond, an organization that is subject to much government regulation, frequent negotiations with unions, many competitors, and than an organization only concern primarily with a few supplies, a few competitors, no unions and allow technological development. And organization that uses many different technologies that are undergoing rapid development would also be considered more complex than one that does not.
RATE OF CHANGE:
Volatility refers to the rate at which an organization’s environment is changing. Environment volatility is often greater for some organizations than for others. For example, the rate of change in the technological and competitive environment is greater in the drug, chemicals, and electronic industries than in the machinery, auto parts and confectionary industries.
Furthermore, environment volatility can be greater for some departments/subunits of an organization than others. For example, the research and development department because it must keep track of newly developed technological application, faces high volatility.
Environmental uncertainty is a function of the amount of information one has about a given factor and one’s confidence in that information. If very little information is available or one has life confidence in its accuracy, the environmental factor is more uncertain than in a situation where adequate information is available and there is good reason to consider it highly accurate. The more uncertain the environment, the more difficult it is to make effective decision.
DIRECT AND INDIRECT ENVIRONMENT (EXTERNAL APPRAISAL)
One way of appraising the external environment and making its influences on the organization easier to comprehend is to divide environmental forces into major categories. Direct and indirect environmental factors.
a. The direct-action environment consists of those factors that directly affect and are affected by the organization’s operations. These factors would include suppliers, labour unions, laws and government regulatory agencies, customers and competitors.
b. The indirect-action environment is those factors that may not have an immediate direct effect on operation s but nevertheless influence them. These would include such factors as general economic conditions, technology,socio-cultural, psychological, political development, demographic, and interest groups, and the influence of events in foreign countries, the Nigerian Breweries PLC, for example is directly affected by suppliers of materials (malt etc) used in brewing beer, laws regulating the importation of wheat, customer’s preferences and the action of its major competitor like Guinness Nig PLC must direct directly respond to these factors such as new business. However, factors such as new technological developments in the Brewering industry, inflation, recession, etc while not immediately affecting the daily operations of Nigerian Breweries PLC, also must be considered for the company to be successful in the long run.
THE DIRECT- ACTION ENVIRONMENT:
i. Suppliers: from a system perspective, an organization is a vehicle for transferring input into outputs. The relationship between the organization and the network of suppliers from which these inputs are obtained in one of the clearest example of forces in the environment directly, influencing the operation and success of an organization. Clearly, if the organization is unable to obtain essential inputs of the quality, quantity and price that are required to attain its objectives, it cannot possibly succeed in doing so.
ii. Low and Government (legal): in any economy, the interaction between buyers and sellers of every input is subject to many legal restrictions. Every organization has a specific legal status, such as they sole proprietorship, partnership, corporation or non-profit corporation that establishes how it can conduct business and how it will be taxed whatever management thinks of these laws, it must heed them or face the consequences, which may range form a fine to being force to go out of business. The legal environment is not that often characterized not only by complexity but by rapid change and even uncertainly.
iv. Customers: An organization’s survival and reason for existence are directly dependent on its ability to identify customer for its output and meet its needs. An organization’s customers determine virtually everything related to its output by deciding which goods and services are desirable and at hat price. The need to meet customer requirements thereby affects interactions with supplier of both materials and labour.
v. Competition: the management of every business is acutely aware that unless it meets the need of customers as effectively as its competitors, the firm cannot long survive. In many cases it is important to realize that customers are not the only area of competition among organizations. Organizations also often compete for labour, material, capital and the right to use certain technical innovations.
Factor in the indirect environment usually do not have as marked an effect on the organization’s operations as those in the direct-action environment. However, management must also take them into account. The indirect environment is usually more complex uncertain than the direct environment. Management is often compelled to make assumption about it, based on incomplete information in order to predict what the impact on organization will be. The major factors of the indirect environment are as follows:
b. New technological development affect the efficiency with which products can be manufactured and solid; some major technological development that has profoundly affected organizations and society are the computer, laser, xerography, integrated circuits, semiconductors, television, nuclear power synthetic and fuel, and birth control pills.
c. ECONOMIC CONDITIONS:
d. Economic conditions affect the cost of all inputs and the ability of customers to buy certain goods inflation is predicted, for example, management may find it desirable to increase inventories of supplies. Similarly, if a recession is predicted, the organization may find it necessary to reduces its inventory of products because they may not be saleable, or it may be forced to reduced the size of its labour force.
e. SOCIO-CULTURAL FACTORS:
f. All organizations operate within at least one culture. Therefore socio-cultural factors including the prevailing attitudes, values and customers of that culture, influence the organization. For example, American public has certain expectations and values about what constitutes ethical business practice, such practice as paying bribe to obtain contracts or political favour, promotion on the basis of favouritism instead of competence, are considered unethical and immoral in American. In other nations like ours (Nigeria) however, such practices are seen as normal and acceptable business practice. Socio-cultural factors also affect the products or services an organization provides. A good example of this s the beer business in Nigeria, people are often willing to pay more for beer that has been in the market for a long time and for the one bearing the name w e have been hearing before- like star, Gulder, Harp Guinness.
g. POLITICAL ENVIRONMENT: this factor has an indirect environmental effect on most firms. The political stability and policies of a country strongly affects multination firm would like to invest in the country. Political instability in a foreign country may make business difficult or impossible.
h. DEMOGRAPHIC FACTOR: the demand of product at a particular time will be partly determined by the number of people with a need for the product, their income, the existing price level, and their expectations about future income and price. Factors influencing these variables include; total population of various segments (age, groups, race, religion, nationality and so well as relevant to the particular organization. Note the above discussed environmental factors can equally become a threat external environment is made up of OPPORTUNITY AND THREATS we need to ask the following questions to determined what actually constitute an opportunity or threat;
a. Does the company serve additional customers groups?
b. Enter new market or segment?
c. Diversified into related product?
d. Have vertical integrations?
e. Having ability to move better?
f. Have strategic growth
g. Have faster market growth
a. Is the firm likely to enter into a new market competition?
b. Have operational threat?
c. Have slow market growth
d. Adverse government policy
e. Growing bargaining power of customer and supplies
f. Changing buyers need and taste
g. Adverse demographic change
h. Vulnerability of recession in business circle
INTERNAL ENVIRONMENT APPRAISAL:
The internal environment of an organization can favorably be comprehended when one has absolute knowledge of what the STRENGTH AND WEAKNESSES OF THE ORGANIZATION ARE:
To know these, you need to ask some specific questions, on the strength and weakness.
The following questions, if properly answered will give one the inside of what should constitute the strength of an organization.
a. Does the company have a distinctive strategy?
b. Have adequate finance?
c. Have good competitive skill?
d. Have an acknowledge market?
e. Have access of economic of scale
f. Have cost advantages?
g. Have product innovative ability
h. Have problem management
a. No clear strategy direction?
b. Obsolete facilities?
c. Lack of managerial talent and debts?
d. Have internal operational problems?
e. Vulnerable to competitive pressure?
f. Is the company falling behind R & D
g. Toor narrow product lines
h. Weak marketing image?
i. Is the company in comparative advantages?
j. Unable to finance immediate changes in strategy.
ORGANISATIONAL ENVIRONMENT INTERNAL APPRAISAL:
The internal environment appraisal of an organization is a basic requirement in the study of business management. To be effective in evaluating, formulating and implementing strategy. Therefore, both managers and students must understand the analytical process and be able to analyze corporate or other organizations.
For the active manager, internal environment appraisal is an assessment of live functioning company and its operations; for the students, it is an appraisal of a simulated situation such as in a case study/analysis.
The internal environmental factors are those factors that can be controlled by the organization’s management. Such factors include: Finance: Finance – Accounting, cash balances, depreciations, returns on investments, dividends etc; manufacturing – purchasing inventory, quality control, production, scheduling products etc;
Marketing – Advertising, product sales date, warehousing, distribution, pricing etc;
Personnel – Training, industrial relations, staff turnover and benefits, wages etc.
In performing the internal appraisal the analyst assembles and analyses available information such as facts, opinions, statements, and observations and also note that is not known. Such analysis facilitates the preparation of a profile of resources, strengths and weaknesses about the organizations as a whole and also its various parts. From this profile, judgments are made about the organizations as a whole and also its various parts. From this profile, judgment is made about the organizations and its subunits, about the people in the organization, and about the way in which the organization has been managed.
The Internal appraisal by itself reveals what the company has been doing or what it is now doing and also reveals the ways in which the future is being approached. Combing an internal and external appraisal will provide the complete assessment which will allow the analysts to be able to see what the business is, what it does and what it cannot.
APPRAISAL MANAGEMENT, DEPARTMENTS AND FUNCTIONS
Within strategic frameworks the internal appraisal of an organization, with the objectives of developing a profile of strength and weakness, begins and ends with the management of the organization. The profile of strengths and has achieved within the perspective of the job that if faced, its present job, and the jobs to be done in the future.
To evaluate the management of an organization, it is necessary to appraise how well and management functions were performed and with what results. This distinction is made because results alone do not always tell the entire story. Sometimes firm show short-run success in their financial reports during the time mismanagement is setting in.
FINANCE AND ACCOUNTING:
The security and utilization of fund, together with planning for both controlling expenditure and reporting sell important transactions and results to appropriate parties is of crucial importance to both profit-oriented and non-profit oriented institutions. Thus, this area is a likely place to being an appraisal of any organizations. Gaining insight into the financial situations may place the entity’s conditions into perspective relatively quickly. Many hard factors can be gathered in the initial seasoning of operations and tentative conclusions can be readily drawn.
Financial statements offer an abundance of information about the present position of an organization as well as showing the results of operations over time. The current portions of the balance sheet tell of cash receivables and inventors, and corresponding liabilities. The job of the analysts is to make the figure take. Ratios may be calculated by various formulae may be employed to learn more.
NOTE: The first responses to information from the financial statements should be drawn later. Caution should be noted by analysts in concluding that the company has too many debts and is also heavily beverage. It could be certain that a company’s (ROI) Return on Investment and nature of its business might indicate that excellent financial management was employed.
Balance sheet and income statements then provide factual information within the limitation of accounting principles a justification of inferences and conclusions.
The appraisals of the marketing area from the overall perspective are so necessary to students of business management. This requires inclusion of the product-market strategy and such that is external to the firm. Marketing is the area which brings together the organization and many external parties and environments so crucial to its very existence. It is a vital requirement that organizations look outside to customer. Competitors and various changes in the technology, social and other environments, in market research, market analysis, market forecasting, sales forecasting, advertising application, engineering and direct selling, the marketing organization carries out the mission of bringing information back to the organization and forward to the customers.
PRODUCTION MANUFACTURING AND ENGINEERING:
In analyzing the area of production, manufacturing, engineering and related functions, the student should be familiar with the relationship of these areas. Marketing promotion relies heavily upon information from sales and marketing. Production schedule usually are based upon sales order and forecasts. If the firm is making “what it can sell”. The manufacturing and engineering group in a firm has communication and interaction with areas other than marketing. They must work effectively with research and development in order that items developed may be manufactured and engineered in a manner which considers the cost involved and the effectiveness of the finished product.
RESEARCH AND DEVELOPMENT:
The importance of the R&D function varies with the nature of the organization in question. It is of minor importance in retailing operations in some cases and other, which does not directly produce a product. The R&B of concern to the analyst is normally a product oriented toward production. Although many firms develop new product oriented effort. But, the ultimate consumers, those with technically oriented products are most involved in R&B.
Remarkable advantages in solid state electronics and miniaturization, electrical – mechanical technology and other fields have received much attention.
(FINANCIAL) RATOS ANALYSIS:
The logic of financial analysis- Ratios analysis like the other tools of financial analysis, is based on a logical relationship between underlying business operation and the accounting or financial representation of these activities. The analysis of each floe cycle determined how various business activities such as the purchasing of raw materials. Product on and manufacturing activity, the sales of good noncredit and the collection of account receivable, all were reflected in corresponding changes in the financial statements. In a like manner, the operation of a business firm generally flow the same logic in that the underlying production, sales personnel and other operations of the firm are reflected in their financial consequences. five types of ratios are discussed in this lecture and these are:
1. activity ratio
2. cost structure ratio
3. leverage ratio
4. liquidity ratio, and
5. profitability ratio
Profitability ratio leads the rest four ratios since it represents the goal/objectives in planning and control. The term profitability is used in a broad, long-run sense. This is a result of two broad set of forces. The first represent
STANDARD OF PERFORMANCE RATIOS:
It includes the activity ratios which measure how effectively the firm is managing its investments and assets. The cost structure ratios measure how effectively the firm is managing the control of it costs.
RELATIONS BETWEEN FINANCIAL RATIOS:
The second set represented by policy formulation ratios. Leverage ratios- measure the extent to which the firm finances its investment and operations by the use of debt. Liquidity ratios- measure the balance in the firm’s cash flow. The liquidity and leverage ratios reflect management policies. Up to a point decreasing liquidity and increasing leverage will increase the profitability of the firm. But if carried too fear, leverage and liquidity ratios can lead to losses and insolvency of the firm.
Measure the overall effectiveness of firm operations and policies.
FINANCIAL RATIOS AND COMPUTATION PROCEDURES:
For each financial radical first, the method of measurement or calculation will be the described; secondly, the nature of the information conveyed by the financial ratios will be explained. It should be noted that the financial statements of a firm are strongly influenced by its industry classification and by its size. The ratio to be calculated shall be based on Jones company balance sheet and income statement data for the year ending December 31, 1984.
1. ACTIVITY RATIOS: The ratios measure how effectively the firm is managing the investment of its ASSETS. The amount of sales represents the basic forecasting or casual variables in the financial ratio analysis, budgeting and financial forecasting
1.2 INVENTORY TURNOVER RATIO:
If inventory turnover is low it may have dual undesirable consequences. One is that inventories are excessive, indicating that the firm is inefficient in inventory control. This will have a depressing effect on profitability. If inventory turnover is low, the risk is higher that some absolute or otherwise unstable inventory continues to be carried. If some inventories are obsolete, the current asset figure which includes inventories and which is an overall indicator of liquidity could be overstated. If the sales to inventory ratios are usually high in relationship to the are rage for the industry, the firm might be losing sales because of lack of adequate reduced sales, and under utilization of fixed asset
INVENTORY TURNOVER RATIO = Sales
Inventory ? Times.
1.2 Average collection period ratio = Receivables x 365 days
= ? Days
1.3 fixed Asset TURNOVER RATIO = ? Times
Average collection period ratio: this should be within a month’s period or comparably with company industrial average. Anything credit above the industry average period suggests the possibility that unsound credit policy exist or that the firm is experiencing serious collection problems with at least some of its accounts. Again, excess of the industry average will be associate with a low receivable turnover. An indication of two particular unfavorable developments.
i. Bad debt write – off may occur
ii. If some of receivable are infact unperceivable the balance sheet value of the account receivable is over- stated. Therefore, the firm may not be as liquid as the total current asset figure would ostensibly indicate
1.4 TOTAL ASSET: Sales = ? Times
TURNOVER RATIO: Total Asset
2. COST – STRUCTURE RATIO:
The cost structure ratios are the most critical of all financial ratios. Cost represents a continuous flow which if out of control can quickly lead to an erosion of profitability and results in bankruptcy of the firm. However costs are also attenable to corrective actions by the firm’s managers.
2.1 Gross Profit Margin: this ratio indicate margin available for
Covering all of the other functions that have to be performed to achieve the final sales of the goods. Although gross profit margin vary among industries. For forms that are too small to have own selling operation, and pay 15 % to 25% for the use of sales representative or sales agents, the gross profit margin necessarily must be somewhat higher than 30% if any profit are to be retained. But big firms with modern facilities like research and development and considerate selling effort the GPM is always as high as fifty (5%) percent.
2.1 Gross profit margin = sales – cost sales (exclude depreciation and
rentals to sales
Or = sales – cost of sales (exclude depreciation and rental x 100
2.2 selling Expense ratio = selling expense x 100
2.3 General Admin ratio = G.A Expense x 100 = ?%
2.4 Depreciation plus lease rental ratio :
= Depreciation + lease rental x 100
The result of all the calculation on cost structure is prefixed with percentage (%).
3. LEVERAGE RATIO:
This ratio measures the extent to which the firm finances its own investments and operations by the use of debt. These ratios have number of implications. If the owners of the firm provided only a small proportion of total creditors and when funds are raised through debt, mainly by the gain the benefit of maintaining control of the firm with limited investment.
3.1 Leverage ratio Total debt x 1000 = ? Times
Total asset 1
3.2 fixed charge coverage ratio
EBIT +rental = ? Times.
Fixed charge = int. payment, lease payments and before
Tax sinking fund payment which could be given as N15, 000 per year (BTSF)
A sinking fund is a requirement of a bond issue that an annual amount be set aside in connection with the repayment of the bond.
Tax rate in Nigeria is 40 to 45% always given if not given its 455 to be at safe side
Before tax income required for sinking fund payment
= sinking fund payment (BTSF)
1.0 – tax rate
4 LIQUIDITY RATIOS OR WORKING CAPITAL:
These ratios measure the firm’s ability to meet it maturing obligations. A large number of liquidity ratios could be employed, but most aspects of liquidity are conveyed by two ratios.
4.1 CURRENT RATIO:
Is a division of current asset by current liability. It I concerned with the assessment of an organization’s ability to meet it short term obligation. Its must be sufficient to meet obligations, so the ratio must be high enough for safety. Note: high current asset do not normally lead to high profits in themselves and so they usually trade-off between Risk and return exist.
Current ratio = current assets = ? Times
6.2 QUICK RATIO OR ACID TEST RATIO:
Is calculated as current asset less inventories/stock to current liabilities.
= current Assets – stock / inventories = ? Times
The ratio is also concerned with short term liquidity. In a sense, it is a more appropriate measure than the current ratio since liquid assets represent the sources of funds from which current liabilities will be met. A ratio of 1.1 minimum.
5. PROFITABILITY RATIOS:
These ratios measure the firm Overall effectiveness of operations and policies. It is basically the results of the proceeding four sets of ratios. They measure the joint effects of the extent to which the fund has met its standards with regard to activity and cost structure performance, balance against the policies the firm selects with regard to liquidity and margin on sales ratio
5.1 Profit margin on sales ratio.
= Net profit x 100 = ? %
Total sales 1
It measures the percentage by which the selling price of the firm’s product could decline before the firm suffers losses.
5.2 return on total Asset ratio
= net income + interest (after tax) x 100 = ? %
Total sales 1
It measure of after-tax profitability with which the firm’s total resources have been employed or call it, return on investment (ROI)
5.3 return on Net worth ratio
= Net income x 100 = ? %
Net worth 1
This ratio is stockholder’s equity; measure the oval results of operations from the owners stand point. It reflects both the profitability with which total investment or total assets have been deployed and how effectively the firm has utilized leverage.
Environment Factors Affecting The Organization – Internal And External Appraisal