chapter 7: the micro environment 7.1 introduction 7 ......chapter 7: the micro environment 7.1...
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CHAPTER 7: THE MICRO ENVIRONMENT
7.1 Introduction
The micro environment is an environment with three sets of variables;
1. the mission and goals of the business
2. its functions
3. its resources
Each of these variables interact with the external environment (being the market and
macro environment) influencing it and being influenced by it. For example what the
competitors are doing will influence a manager’s business decisions.
7.2 Management, Leadership and Employee Empowerment
7.2.1 Management
The business scandals of the early 2000s put managers under analysis because of their
questionable competitive tactics. Responding to this criticism adds new challenges to
already pressure-filled jobs. Another current cause of pressure on managers is the
constant change occurring in most industries. The need to manage change has become
increasingly important in view of today’s emphasis on speed in the global market place
and intensified competition. Consequently management is becoming more progressive.
Many managers are being educated to guide, train, support, motivate and coach
employees rather than to tell them what to do (Nickles, McHugh & McHugh, 2005:212).
The management of any business is a critical part of its internal environment. Managers
are responsible for the efficient operation of any business. Managers allocate human and
material resources and direct operations either of a department or an entire organisation1.
Management Levels There are three managerial levels and these are usually classified as top, middle and first
line. A top manager is responsible for the overall direction and operations of a business.
A middle manager receives broad, overall strategies and policies from top managers and
translates them into specific objectives and plans for first-line mangers to implement
them into specific objectives and plans for first-line managers to implement.
A first line manager is directly responsible for the production of goods and services.
Top level management is largely concerned with conceptual and tactical issues, while
middle level management is only faced with some conceptual issues, as well as tactical
and supervisory issues. First line management is largely concerned with supervisory
issues as well as some tactical issues2.
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7.2.2 Tasks and Skills at different levels of Management
Few people are trained to be good managers. Usually a person learns how to be a skilled
accountant or engineer and then because of his skill is selected to be a manager. The
following are the three categories of skills a manager must have:-
Conceptual Skills
Thinking and planning abilities that depend upon the ability to view the organisation as a
whole and the relationship among its parts.
Human Relations Skills
The ability to lead, motivate, manage conflict, work with and through others and work
effectively as a group member
Technical Skills
These are skills that involve the ability to perform tasks in a specific discipline or
department3.
7.2.3 Leadership Styles
Nothing has challenged researchers in the area of management more than the search for
the “best” leadership traits, behaviours or styles. Just as there is no one set of traits that
describe a leader, there is also no one style of leadership that works best in all situations.
The following are some of the most commonly recognised leadership styles:-
Autocratic Leadership
This is a leadership style that involves making managerial decisions without consulting
others.
Participative (democratic) leadership
This is a leadership style that consists of managers and employees working together to
make decisions.
Free-rein leadership
This is a leadership style that involves managers setting objectives and employees being
relatively free to do whatever it takes to accomplish those objectives (Nickles et al
2005:227).
7.2.4 Communication
Successful managers spend much time and energy to communication, as they need to be
in touch with employees, suppliers, customers the competitive environment in order to
maintain a competitive advantage. About 75% of a manager’s time is spent every day
working in direct communication with others4.
There are both informal and formal communication channels in an organisation. In any
organisation the formal communication tends to follow the lines of the organisational
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structure. Downward communication is from top management to junior staff and upward
communication is from junior employees all the way up to senior/executive management.
Downward communication consists of:-
Objectives to be achieved
Job instructions
Policies and procedures to be followed
Action plan for implementing the strategy
Motivating employees
Feedback of performance that was achieved5
Upward communication consists of:
Problems
Financial and accounting information
Grievances and disputes
Performance reports Suggestions for improvements6
As communication is the transmission of information and understanding from one person
or group to another, the responsibilities of the sender are:
Be sure of the purpose of communicating
Know the receiver
Construct the message with the receiver in mind
Select the proper communication medium
To know, that the timing affects the transmission
To get feedback so as to ensure that the communication got through and that the
message was understood7.
7.2.5 Business ethics and social responsibility
Ethics is basically about the definition of what is right and wrong. As no two people have
the same opinions, the difficulty happens in trying to agree what is right and wrong
(Palmer & Hartley, 2005:160). Business ethics are principles of conduct within
organisations that guide decision making and behaviour. Business ethics involves making
legally and morally correct decisions or actions. Every business should develop a set of
principles, or codes, according to which the business decisions of the organisation are
made. Some important topics that involve these ethics are:
Product safety
Waste disposal
Affirmative action and empowerment of employees
Employee health
Sexual harassment
Gifts to influence business decisions
Conflicts of interest
Retrenchment practices
Quality of product
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Advertising
After-sales service8
The personal integrity and ethical views of the CEO/MD/GM and other top managers
have a huge impact on the business ethics of the organisation.
Social responsibility is the obligation of a business towards the community. It should
meet the legal requirements of society, as well as some additional voluntary actions that
will please society. Areas in which a business should exercise its responsibilities are:
Natural environment
Investors in the business
Employees and their immediate families
Stakeholders
Customers (4 basic rights)
1. Safe products and services
2. To be fully informed about the products and services
3. To choose what they purchase
4. To be heard if they complain9
7.3 Mission and Goals
The mission and goals is the first step of the planning process and are the reason for a
business’ existence. To define its business, managers must ask three questions, namely,
(1) who are our customers; (2) what customer needs are being satisfied; and (3) how are
we satisfying our customers’ needs.
Without definite goals to achieve, there would be no need for a business. Goals are
influenced by the external environment – for example a service provider that supplies
water to consumers would have to revisit its objectives should the community become
poorer as a result of social, political and economic developments.
Goals/objectives
The mission statement becomes the basis for setting goals and selecting and motivating
employees. Goals are the broad, long-term successes a business wishes to achieve. Goals
need to be jointly agreed by both workers and management, which makes the process of
setting goals a team effort (Nickles, McHugh & McHugh, 2005:215)
On the other hand, objectives are specific short-term statements detailing how to achieve
the business’ goals (Nickles et al 2005:215).
In a business objectives are required for:
Profitability
Innovation
Market position
Productivity
Social contribution10.
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Vision and Mission
“Businesses are usually started by an entrepreneur who has a vision (idea) as to what type
of business he would like to start. A vision includes an explanation of why the business
exists and where it is trying to head (Nickles et al 2005:215).
A mission statement is an outline of the fundamental purposes of an organisation. A
mission statement is decided upon by the chief executive, directors and top management.
The mission statement reflects the values of the chief executive, directors and top
management and gives the central function of the business, in product and market teams.
A clear Mission makes it possible for clear and realistic business goals/objectives. A
meaningful mission statement should address:-
The business’ self-concept
Company philosophy and goals
Long-term survival
Customer needs
Social responsibility
The nature of the company’s product/service (Nickles et al 2005:215).
The following is Starbuck’s Mission Statement. How well does Starbucks address all the
issues listed above?
Starbuck’s Mission Statement
To establish Starbucks as the premier purveyor of the finest coffee in the world while
maintaining our uncompromising principles as we grow. The following six guiding
principles will help us measure the appropriateness of our decisions:-
Provide a great work environment and treat each other with dignity and respect.
Embrace diversity as an essential component in the way we do business.
Apply the highest of standards in excellence to the purchasing, roasting and fresh
delivery of our coffee.
Develop enthusiastically satisfied customers all of the time.
Contribute positively to our community and our environment.
Recognise that profitability is essential to our future success.
(Nickles et al 2005:215)
A Mission statement is of value to outsiders, as they can learn from it as to what the
organisation stands for. At the same time it helps employees to identify with the
organisation and it gives them guidance as to what is expected of them by the
organisation. To be effective, a Mission statement needs to be regularly communicated to
both outsiders and insiders.
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7.4 The Functions of Management
Management can be divided into four functions, namely planning, organising, leading
and controlling. Managerial functions and roles are closely related as managers perform
the functions while playing one or a combination of roles. The management functions
(planning, organising, leading and controlling) will be briefly covered in this module.
Planning:
Planning is a management function that includes anticipating trends and determining the
best strategies and tactics to achieve organisational goals and objectives (Nickles et al,
2005:213). Planning is the process of establishing the organisation’s aims and deciding
how to achieve these aims. Planning is the first function of management and is a crucial
activity, for it designs the map that lays the groundwork for other functions. It includes
forecasting events and finding out the best course of action from a set of options or
choices. The plan itself stipulates what should be done, by whom, where, when and how.
All businesses - from the smallest store to the largest multinational corporation – need to
develop plans for achieving success. Before a course of action can be planned, business
must first determine what it wants to achieve, in terms of objectives and the mission
(Ferrel et al 2003:187).
Organising:
Organising is the management function that includes designing the structure of the
organisation and creating conditions and systems in which everyone and everything work
together to achieve the organisation’s goals and objectives (Nickles et al, 2005:213).
Organising is the structuring of resources and activities to accomplish objectives in an
efficient and effective manner. Managers organise by reviewing plans and determining
what activities are necessary to implement them, then, they break the work into small
units and assign it to specific staff members, groups or departments (Ferrel et al
2003:190).
Managers
Planning Organising Leading Controlling
Adapted from Ferrel & Hirt (2003:187)
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Organising is important for various reasons, it helps create synergy, establishes lines of
authority, improves communication, helps avoid duplication of resources and can
improve competitiveness by speeding up decision making (Ferrel et al 2003:191).
Once the managers have established what work is to be done and how it is to be
organised, these must make sure that there are enough employees with relevant skills to
carry out the work. Staffing is the employing of persons to carry out the work of the
organisation. Besides recruiting people for positions within the firm, managers must
determine the inherent requirements for specific jobs, how to motivate and train
employees to do their assigned jobs, how much to pay employees, what benefits to
provide, and how to prepare employees for higher-level jobs within the organisation
(Ferrel et al 2003:191).
Leading: Once the right people are employed, management must lead the employees. Leading is
creating a vision for the organisation and guiding, training, coaching and motivating
others to work effectively to achieve the organisation’s goals and objectives (Nickles et
al 2005:214). All managers are involved in leading, but it is more important for lower-
level managers who interact daily with employees operating the organisation. For
example, an assembly-line supervisor for automotive components must ensure that
his/her workers know how to use the equipment well and have the resources necessary to
perform the tasks at hand. Further the supervisor must be able to motivate his/her workers
in order to reach their expected output of finished components (Ferrel et al 2003:192).
Controlling:
Planning, organising, leading and controlling are all important to the success of an
organisation. However, controls have to be put in place to ensure that an organisation
reaches its goals. Controlling is a management function that involves establishing clear
standards to determine whether or not an organisation is progressing toward its goals and
objectives, rewarding people for doing a good job and taking corrective action if they are
not (Nickles et al 2005:214). The control process involves five steps as follows:-
1. Measuring performance
2. Comparing present performance
3. Identifying deviations from the standards
4. Investigating the causes of deviations
5. Taking corrective action when necessary
(Ferrel et al 2003:192)
7.5 Areas of management
Functional areas of a business include among others, human resources functions,
marketing management, financial management, operations management and information
technology. These will be discussed as follows:
7.5.1 Human Resources management
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The human resources function deals mainly with people, and as noted earlier in the
course, working with people is one of the most difficult aspects of running a business, as
people are unique and each individual has its own needs and reasons for working.
Human Resource Management is the process of determining human resource needs and
then recruiting, selecting, developing, motivating, evaluating, compensating, and
scheduling employees to achieve business goals (Nickles et al 2005:330).
As can be seen the human resources function of a business involves a number of
activities that must be carried out by human resources management. Some of the
activities are as follows:-
Providing the business with the human resources it needs to achieve its objectives.
This will include processes such as human resource planning, job analysis,
recruitment, selection, placement and orientation of staff.
The maintenance of human resources – service conditions and remuneration.
The development of human resources – training and development of staff and
workers in order to continuously improve their skills (Machado, 1999:86).
7.5.2 Marketing Management
Marketing is the activity or function of the business that links the business with the
consumer of products or services. Marketing management aspires at having all the right
products or services at the right place, convenient for the customer.
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Fig. 7.5.2.1: The Marketing Process
Source: Machado 1999:100
Once the customers/consumers’ needs have been identified, a business can produce and
market a product or service which must be better than those of your competitors in the
market. The whole marketing process is shown in the Figure 7.5.2.1. In this drawing, the
customer/consumer is clearly the point aimed at in the whole marketing process – all
arrows point to the consumer.
As noted in the earlier sections of this course, the customer/consumer is the most
important factor in a business as without customers/consumers to purchase our goods and
services, there will be no sales (Machado, 1999:99-116).
The best way to find out who our customers are or to put it in a better way who our
target market is and to get all the information we need about that target markets is to use
market research (Machado, 1999:99-116).
Once we have all the information we need about our target market, we can start
marketing our product or service to the people who make up that target market. In the
process of marketing our business will carry out certain marketing activities. These
activities are carried out so that we can sell our product or service at the right price,
through the right distribution channel to the target market. The four blocks in the left-
hand side of figure 7.5.2.1 make up the marketing mix (Machado, 1999:89-116).
Marketing Research
Marketing research is used to establish who our customers are, where they live, how
much money our customers have to purchase our products/services, whether they like the
products/services and whether they know about our products/services.
Locating the customer
The
product/service
provided
The
communication
message
The price charged
for the product
The distribution
of the product
Marketing
activities
Locating the
customer
Transporting
Storage
Sorting
Grading
Financing
Risk taking
Selling
The
consumer
The target
market of
the
enterprise
Marketing
aids
Market
Research
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Before we can sell to our customer, we need to establish who our customers are – we
must establish our target market. The target market is a group of persons who have
similar characteristics and will therefore have similar needs, which we hope to fulfil with
our product/service.
There are four factors which can be taken into account when establishing our target
market. These factors are as follows:-
Geographical Area: certain part of town, city, country. For example,
Pietermaritzburg, Durban, Cape Town and Johannesburg.
Demographic Factors: Age, income and education level of the target market. For
example, university students have a matric exemption and range from 17/18years
onwards.
Lifestyle: if you know what the consumers’ interests, activities and opinions are,
you are well on the road to delivering a product or service that the consumer will
purchase. Is the customer interested in sport, any hobbies, opinions about social
issues, interests, etc?
Customer Behaviour: when does the customer buy, why does he/she buy, how
often does he/she buy, is he/she a local buyer of the product or does the customer
prefer to go to big supermarkets some distance away. This information will help
us find the best place to sell our product/service (Machado, 1999:89-116).
7.5.3 Financial Management
The financial function of a business can be divided into finance and accounting tasks.
“Finance is concerned with a number of aspects as follows:-
Capital requirements and sources of finance for a business
At the start up phase of a business the capital requirements and the equity and
debt proportions of the capital needed must be determined. Who will purchase
shares and who will be prepared to give the loans to the new business must be
established.
Once the business is running, the acquisition of funds, which involves long term
and short term financial requirements, must be continually monitored. For
optimum results a business must have just enough funds available when they are
required.
Purchase of assets and production factors, labour, equipment and raw materials
The capital that the business has to spend to acquire assets and production factors
at the most favourable terms that can be negotiated.
Credit terms given to customers, and their control
In a strictly cash business all sales are for cash, but business is restricted to only
those people who actually have cash. By giving credit terms to customers more
will be sold, but administrative costs increase, payment is delayed and some
customers will never pay resulting in bad debts. The credit terms decided upon
and the management control of the customer’s accounts are an extremely
important financial function.
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Protection of the investment, capital or risk management
The business’ assets and human capital resources need to be protected through
physical means and different types of insurance.” (Buss 2003:31)
“Accounting is a legal requirement for businesses to keep adequate accounting records
for tax purposes and employment statistics. Also a well designed accounting system
provides valuable information for planning, controlling, and evaluating the performance
of the business. Annual financial statements (AFS) have to be produced for taxation
purposes and to keep the shareholders and stakeholders informed.
Budgeting for the business and assisting with budgeting in the other functional areas or
departments is one of the accounting functions. A budget plan that deals with the future
allocation and utilisation of various resources with regard to different organisational
activities over a given period (usually one year). A budget is usually in financial terms,
which in South Africa is a rand amount.
Budgets form the basis of financial control because:
They set the amount of resources that can be used by a department or unit
They establish standards of performance (assessment standards) against which
actual performance will be compared, to show variances.
These variances can then be analysed, in order to understand why they occurred.
Budgets are more likely to be achieved when managers are committed to trying to
achieve them. This is more likely to occur where managers have meaningful input in
helping to set realistic budgets and where the reward systems for their achievement are
seen to be appropriate and fair.
The accounting department uses three estimated statements in the budgeting process:
Cash budget, which is a statement of a business’ planned cash inflows and
outflows, and it is used to determine the short-term cash requirements.
Income statement, which is used to plan whether a business will be making a
profit or a loss, during a financial year.
Balance sheet, which is the financial position of the business with respect to its
capital employed at a specified future date, which is usually the end of a financial
year.” (Buss 2003:32).
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7.5.4 Operations Management
“Production and operations are those activities necessary for performing the work the
business was created to perform. The word production is normally used in a
manufacturing context, and the word operations for an administrative or service function.
Firstly, design and development of the product needs to take place. Once the decision has
been made as to what to produce and what production capacity is needed a production
plan follows, which consists of four aspects:
Location The location affects the factory’s operating costs, which can be divided into:
Skilled labour
Raw materials
Transport costs
Anti pollution regulations
Manufacturing process
What is being produced will assist in determining the most suitable layout:
1. Fixed position, where the product is so large it cannot be moved
2. Process, where all activities with similar characteristics are grouped together in
the same section of the factory and there are no fixed routes along which the work
flows, a high percentage of unfinished work is present, and workers must be able
to deal with a variety of orders and tasks.
3. Assembly line or product, in which machinery and equipment are arranged so that
the product moves through a sequence of activities. Although the output can be
high the variety of products that can be produced on the production line is limited.
Factory Layout
The factory layout is its physical, internal layout. The product to be produced has a
significant influence on the factory layout.
Principles of layout planning are:
Integration, where the machines are placed so that the factory forms an integrated
whole production system
Minimum distance. The shortest distance raw materials have to be moved or
unfinished work between work stations, the lower the costs
Flow must not be interrupted. There must be no back flow or cross movement of
parts.
Economic utilisation of space, takes into account machines, equipment and
people.
Flexibility and adaptability, particularly as a result of technological changes,
should be possible.
Satisfaction of workers with the layout assists productivity.
Safety reduces costs as there are fewer accidents therefore no production delays.
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Machinery and Equipment
Suitable machinery and equipment will need to be purchased and installed” (Buss
2003:32).
7.6 The Resources of the Organisation
These are the internal variables which are affected by and also affect the external
environment. For example, an important resource such as particular production methods
may be threatened by the external environment in terms of a new technology or some
new invention. On the other hand some special skill or knowledge that an employee has,
which forms part of the internal environment, can be used to exploit an opportunity in the
external environment, and will also affect that environment (Machado et al, 1999:32).
The resources will include the employees, production methods, special skills and
knowledge, and corporate culture. When managers and employees believe in the same
values and have the same goals, the business has a good chance of being successful. One
of the few variables that a manager can not control is the actions of individual employees,
who bring their personal values into the business. That is why when employing
employees, the selection process is imperative as employing the wrong employees can
sink your business (Machado et al, 1999:32).
Conclusion
It should be remembered, that the micro-environment varies from one business to
another, as does the kind of interaction between a business and its environment. As can
be seen from this brief look at the micro-environment, no business can exist in isolation
from the environment in which it operates. It is the responsibility of a manager or owner
of a business to be continually aware of the changes taking place in that environment and
how they will affect the business. The implications of ignoring changes in the
environment will result in the business probably not surviving.
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References
Most of this material is directly copied from the General Business Awareness course
notes (School of Business, University of KwaZulu Natal, Pietermaritzburg) written
by J. Buss. Kind permission was granted by J. Buss to use his material.
Other Sources Used
1. Ferrell, O.C. & Hirt, G. (2003) Business a Changing World. Fourth Edition.
Boston: McGraw-Hill.
2. Machado, R., Strydom, J.W. & Cant, M.C. (1999). The Foundations of Business.
Cape Town: Juta & Co. Ltd.
3. Nickles, W.G., McHugh, J.M, & McHugh, S.M. (2005). Understanding Business.
Seventh Edition. Boston: McGraw-Hill.
4. Palmer A. & Hartley, B. (2002). The Business Environment. 4th Edition. London:
McGraw-Hill.
Footnotes
1. Buss, J. (2003). General Business Awareness. Course notes. School of Business.
University of KwaZulu-Natal, Pietermaritzburg. P. 22
2. As above P. 22
3. As above P.23
4. As above P. 24
5. As above P. 25
6. As above P. 25
7. As above P. 25
8. As above P. 25-26
9. As above P. 25-26
10. As above P. 28
11. As above P. 27