January 29, 2015

Business Firm and Society - The External Environment, Social Responsibility and Ethics - Review Notes

Koontz and O'Donnell - Principles of Management Book Chapter

Managers of business firms or organizations in other walks of life are operating in pluralistic societies in which many groups represent various interests.

Enterprises do not live unto themselves alone. They are interlocking institutions that man has found it beneficial to organize to serve his needs. The family came into existence, then tribe, government, army, education, religion etc. slowly came into existence. The proliferation of institutions and enterprises has proceeded down to our day, where they often exist in bewildering confusion.

No ideal situation exists. People or individuals vary from stupid to the genius, from the passive to the  aggressive, from kind to the cruel, from the slothful to the energetic, from the cunning to the artless, from the humble to the proud. In an ideal society, the individuals would in concert determine when and which institutions and enterprises they would create to better serve themselves. But in practice many institutions and enterprises which have been created to serve them are the products of aggressive leaders-the few who care for many. They may not create always with care motive, they may do it for self-aggrandizement also.

The Historical Function of Business

Koontz and O'Donnell cite the explanation by economists. Economics conceives a business to be any activity that is concerned with the production (or purchase) for sale of scarce goods and services.The purpose of economic activity is always the same: it is to employ human and natural resources, and the man made capital equipment and components in the production of goods and services which the ultimate consumers want. Thus the purpose of business is to satisfy the economic wants of people, and since resources are scarce, their efficient use is a moral requirement.

Economic Organization of the Society or Country

The typical organizational patterns include free enterprise, socialism, communism, and the welfare state.

The Business of Business

There is no doubt whatever that the function of business is to make economic goods and services available for consumption. But it is not enough to produce economic goods; the first duty of business is to produce them efficiently.

Efficiency in resource employment is undoubtedly best achieved through free enterprise. It is the business of state to make sure through legislation and regulation that the private economy does not fail in its function to efficiently utilize resources to maximize the satisfaction of consumer wants for economic goods and services. The states are not able to do it by means of a monolithic bureaucracy as per the available experience.

External Environment and Stakeholders



Price Levels

Government policies

The term technology refers to the sum total of the knowledge we have of ways to do things.



Social attitudes, beliefs, and values

Business Ethics

The practice of ethics is one of the social responsibilities of business. Unethical conduct is highly publicized whenever it is found, but most of the "sharp practices" remain hidden within the organizations or their networks.

Morals are customs with a high degree of social acceptance.

Business and professional codes

Koontz and O'Donnell note that widespread tendency of business groups and professional people to adopt codes of conduct has scope to further ethical practices and development of science of ethics. Examples of codes of conduct include those of medical, legal and accounting professions.

Purpose of declaring codes of conduct

The usual reasons are two. In the first place, it is considered that the publication of a code of ethics will improve the confidence of the customer, client, patient, or voter in the quality of service he may expect. A second reason is to assure standard practices in the relationships between members themselves. McGuire pointed out two additional reasons. They can be used as a crutch by the weak to refuse to do unethical acts. They also help in detection of unethical behavior in competitors and employees.

Businessmen have an obligation to all others in society to use scarce resources efficiently and, in so doing, to make certain that every decision stands firmly upon the applicable moral customs and any generally accepted ethical principles.

Updated 29 Jan 2015, 12 December 2011 


  1. This is a nice write up. Very informative. I agree that businessmen do have an obligation to the society and it must reflect in their practices and decisions.
    *Shantala @ ShanayaTales*

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