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© M. Naude 1 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 organisation 1 . 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 issues 2 .

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Page 1: CHAPTER 7: THE MICRO ENVIRONMENT 7.1 Introduction 7 ......CHAPTER 7: THE MICRO ENVIRONMENT 7.1 Introduction The micro environment is an environment with three sets of variables; 1

© M. Naude 1

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