Chapter-2 9 Business & its Environment

CHAPTER-2

BUSINESS & ITS ENVIRONMENT

EXTERNAL AND INTERNAL ENVIRONMENT OF BUSINESS

Study objectives:

After completing this chapter, a reader would be able to understand:

• Business and its environment

• How both internal and external environment influence a business
firm?
Chapter-2 10 Business & its Environment
A business operates in two forms of the environment (external and internal). The
external environment covers all those factors that are beyond the control of a firm while
the internal environment deals with factors that are within the control of the organization.
Figure-2 covers the description of both the environment. It is also evident that the
external environment covers industry-specific (micro) and external/general environment
(macro). The micro-environment is the one that can be controlled by the firm (though not
always) and has a direct influence on the performance of a business organization. It
covers factors like suppliers, customers, competitors, distributors, creditors and
shareholders etc. The macro-environment covers factors like political changes, economic
forces, social restructuring, and technological forces. The external environment can
influence an organization positively/favorably or negatively/unfavorably. When the
external environment has a positive influence on the organization it is called
opportunities and when the effects are negative it is denoted as the threats in the
environment.
Key concepts:
External environment: an environment that is beyond the control of an organization
Internal environment: an environment that is within the control of the organization
Micro-environment: the part of external environment that is specific and directly
influences the business
Macro environment: the part of external environment that is general and does not
directly, rather indirectly, influences business.

External
Social

Industry Specific

Tech
Econ

Internal
omic

Creditors Competitors
Structure
Culture
Resources
Trade
Communities Unions

Suppliers

Political/Regulatory

Figure 2.1: Business Environment

MACRO ENVIRONMENT OF BUSINESS
1. Political factors
Political conditions of the country (e.g. stability) directly influences the level of
business activities in a country. The stability is measured in terms of unchanging
governments that increase investors' interests. Moreover, the political government and its
interest in economic segments (e.g. Agriculture and Industry) may also set the direction
Chapter-2 11 Business & its Environment
of businesses. For instance, the political government of PML-N is considered industry
friendly while the PPP is believed to be a pro-agriculturist government; thus, the direction
of business activities follows the ruling party. The role of political factors can be
observed from the recent political turmoil in the first half of 2022 created political unrest
as the Pakistan Democratic Movement (PDM) move managed to topple the selected
government of that time. The local currency started devaluing speedily ultimately an
inflation upsurge started tumbling the overall economic structure. The move in fact
negatively influenced the weak economy facing the issues of balance of payment, current
account deficits and loan repayments of international monetary agencies. Both the
alliance government and previous government starting blaming each other’s. The
situation shows the values of good governance and political stability.
2. Economic factors
Economic factors are the most important factors influencing business
organizations, as they deal with resources and human wants. The economic condition of a
country either creates opportunities or threats for businesses. The economic activities
create a business cycle that affects overall business activities. For instance, in a growing
economy, the rates of unemployment are low, income is high, spending is more and the
demand for products is also high that ultimately leads to more business firms to produce
thus requiring more factors of production. Other macro-economic variables (e.g. inflation
and interest rates) are also the other areas that depend upon economic activities. The
fiscal and monetary policies also determine the direction of the business. Last but not
least the forces of demand and supply are the forces that determine the fate of a business
organization.
Similarly, the economic system/structure of a country may create opportunities or
threats for business activities. For instance, a free economy offers opportunities for
private investors, entrepreneurs, and businessmen, while the communist structure only
values the contribution of state and private owners are not valued. The global economic
structures are presented below:
a. Planned economic system
In a planned economic system government exerts its control over the allocation
and distribution of resources and goods/services. The system with the highest level of
state control is called communism. Theoretically, communism is a system where the
government owns all or most of the enterprises. The central planning of the
government decides what to produce, why to produce, and for whom to produce.
Communism in its real sense does not exist and very few countries (e.g. Cuba &
North Korea) operate under planned systems.
Yet another form of the planned system is socialism, where the essential services
(e.g. banking, health, education, and utility) are owned by the state while the rest are
owned privately. The state tries to allocate the goods and services produced by
government-run industries and try to ensure that the wealth is distributed equally. The
privately-owned businesses aim to earn profits. In such economies, the basic needs
Chapter-2 12 Business & its Environment
are fulfilled by the state, and citizens of such countries get more benefits like
education, health and child-welfare than the capitalist economies. Examples of such
countries include France and Sweden.
b. Free market system
A free-market system or capitalism is a form of economic system where most of
the businesses are owned by private owners. The competition in the market
determines the allocation of resources and a decision like how much to produce. In
such economies, businesses are conducted with minimum government involvement.
The economies like US and Japan are examples of a free-market economy.
c. Mixed market economy
Mixed market economies are a combination of both public and private
ownerships. As we have already discussed that in socialist countries the major
industries are held by the government (e.g. health, education and transportation) while
private owners work in other services. In a mixed economy, both government and
private sectors invest in all forms of industries. Thus, the economy is considered
mixed.
Activity # 2.1
Build a good understanding of the economic systems, and identify which type of
economic system is being followed in Pakistan?
3. Social forces
The demographical characteristics of the society, its composition based on age,
gender and education may influence the business activities in the country. Moreover, the
behavioral trends of the society also set the business and investment patterns. For
instance, the mass youngsters in our country attracted the mobile firms and thus billions
of dollars were invested in the country. Similarly, the psychographic characteristics of the
society (e.g. religious affiliation, social norms and family system) may also create an
opportunity for one form of business while not for another. The increasing focus on
fashion, trends, improving standards of living may also attract many investors while
throwing many out of the market.
4. Technological changes
Technological forces (e.g. advent of the internet, 4G or 5G) technologies have
changed the ways of doing business. The business models have been disrupted to
unconventional levels and the boundaries of the firms have changed. Now the world-leading
companies are information technology-based companies (e.g. Apple, Google, Amazon) while
working both physically and virtually with a global presence through trending tools. The
advent of smartphones has also changed the way businesses operate, produce, market, and
sell to their customers (e.g. online stores like Amazon, Alibaba, Daraz).
Case example: 3D technology and opportunities
3D technology is an emerging sector that is being embraced by the businesses of today.
Its uses include a 3D display, modeling, printing, and visualization. 3D printing is a
Chapter-2 13 Business & its Environment
revolutionary technology where a needle to a large-sized home can be constructed with
minimal effort, the highest level of precision, and no wastage. Now a house that
requires five masons and a week of work to construct can be constructed in two days
with the help of two workers, all thanks to the 3D printers. This is how technology is
changing the business dynamics.
Activity # 2.2: If 3D technology is brought to Pakistan, what would be the future of the
construction industry?
5. Ecological and environmental concerns
The focus on the environment is one of the most debated topics. The ways
weathers have changed the business organizations are the mostly blamed for that. The
high-tech innovations, large scale industrialization, and high consumption of oil and gas
have badly affected the environment. Now both business organizations and customers are
focusing on environmental issues and thus the firm practices are revolutionized.
Smog in various parts of Pakistan influenced the business differently. for instance,
it proved to be a threat for Brick making, thus influencing the business practices.
Similarly, the ecological considerations of the government banned plastic bags in
Pakistan in the last quarter of 2020. All the plastic bag manufacturing businesses closed
while new businesses erupted that produce paper or cloth bags.
Natural calamities and pandemics also influence business practices. For instance,
the spread of COVID-19 settled the new normal for the business world. The conventional
models faced enormous disruptions; for instance, retailing, food, health, education, and
many other sectors shifted to online platforms. This changes the supply chain system of
the world. The reduced physical interaction reduced the need for labour force but the
demand for workers with exceptional IT skills increased.
6. Legal forces
The legislative changes also influence overall business and set new directions. For
instance, the legislative change of giving 3G and 4G licenses in Pakistan attracted many
investors. It paved the way for Uber and Careem to enter in Pakistani market. Similarly,
many other applications-based businesses started operating in the country (e.g.
Zameen.com, OLX, Daraz, Pak Wheels). The restriction of bikers to wear helmets often
increases the demand for helmets and thus increases the number of sellers in the market.
The electric vehicle (EV) policy of the PTI government is also expected to create new
opportunities for both existing and new firms. Furthermore, in the last quarter of 2020,
the government allowed the large-scale cultivation of Hemp, which may attract many
farmers to put time and money into it. Similarly, legal changes related to Equal
Employment Opportunities (EEO), consumer protection, whistleblowing, safety
standards, health & safety, competitive legislations have significantly changed the
business dynamics.
Chapter-2 14 Business & its Environment
Case example: Legal changes in Pakistan
In September 2020 Pakistan’s government announced that it would allow industrial
production of hemp (a type of cannabis plant containing cannabidiol) used in the
production of medicine. Similarly, Government announced the electric vehicle (EV)
policy in December, 2020. The policy highlights that additional sales tax and customs
duty would be removed. While there will be only 1% tax levied on the import of EV. The
government also removed the vehicle registration and annual renewal fee for the EVs in
the Islamabad Capital Territory. The sales tax on locally manufactured EVs would also be
only 1% for vehicles upto 50 kWh and 150 kWh (for commercial vehicles).

Memorization tips: use the following keywords to memorize and remember external
and internal forces”
PESTEL for the external environment: political, economic, social, technological,
ecological/environmental, and legal factors
7. Global forces
Along with the aforementioned PESTEL forces, another important force is global
force which is often beyond the control of states. For instance, rise in oil prices influences
the global economies irrespective of the nature and status of growth. Though the
economies poor at the aforementioned forces (PESTEL) may not bear such shocks but
the effect is faced by all. Similarly, another global crisis e.g. global financial crisis, global
spread of pandemics (e.g. COVID-19) may influence all economies while many may
sustain the losses due to internal strengths the economies like Pakistan are often
influenced badly by such shocks.
Case example: Downfall of Airlift
Airlift was a tech-start up founded by Usman Gul, and quickly it reached to the eight major
cities of Pakistan including Islamabad, Karachi and Lahore. Users could order groceries,
fresh vegetables, fruits or medicines from the Airlift website or app and have it delivered
to them in 30 minutes. The startup managed to raise a huge fund of $85 million, in series
B funding in August, 2021 and was valued for worth $275 million, the highest for any
Pakistani startup. 20VC and Buckley Ventures (global VC firms) led that round, making
Airlift the most funded startup in Pakistan. Airlift was attempting to raise a new round
earlier this year via SAFE at a $500 million valuation in the first half of 2022, but failed to
do so and the firm announced its closure of Pakistan operations in July, 20227.
Activity 2.3: Visit various internet sources and try to find the major reasons of closure of
Air-lift. Also attribute those reasons to external (macro or micro) and internal factors.
Chapter-2 15 Business & its Environment
Case example: Mobile manufacturing business in Pakistan
Pakistan witnessed tremendous growth in the IT and telecom sectors over the past few
years. The inception of 3G/4G services, in 2014, opened new avenues of growth and
innovation. The teledensity reached to 86.71% with half a share of 3G/4G users.
According to the Pakistan Bureau of Statistics (PBS) we spend more than one billion
dollar a year for import of mobile phones, creating the negative balance of payment. In
order to overcome the challenge, the government approved Mobile Phone
Manufacturing Policy in 2020, and Mobile Device Manufacturing (MDM) regulations in
January, 2021. 30 companies were authorized to manufacture mobile devices locally,
which attracted $126 million as an investment. The policy covered the set a 49%
localization target for June, 2023 with 10% localization of motherboard and batteries
each. It turned around the local mobile industry creating thousands of jobs, saving
important spending and improving local market conditions. The local production
reached to 24.66 million units in 2021 including 10.06 million smartphones. The
production level kept on rising and only in January, 2022 1.53 million devices were
manufacturing. It reduced the burden on foreign reserves as it saved 21.45% more funds
in the following months when compared with January.
Numerous Chinese brands settled their assembly units locally, followed by launch of
Samsung (a global mobile giant). The entry of global firms along with the Device
Identification Registration and Blocking System (DIRBS) influenced the import spending
of the country. The later move helped in controlling the smuggling of phones and
encouraged the legitimate import. It influenced the overall foreign exchange reserves
and created almost 50000 jobs. Samsung further aimed to work on labor intensive
operations instead of capital-intensive plans, which could create thousands of more
jobs. The industry enabled Pakistan to export locally manufactured units to UAE,
creating inflow of foreign currency. The government plans further to export to
Afghanistan, Africa and Central Asian Republics.

Despit the increase in local manufacturing, the import bill of import of cell phones kept
on increasing as in only first eight months of fiscal year 2022-23 the government had to
spend $ 1.41 billion which showed increase of $0.1 billion when compared with same
period of the previous fiscal year. This could be attributed to the fact that most of the
mobile phones produced in the country were valued $200 and the mobile phones
valuing $1000 or above were still imported8. With this huge import bill the introduction
of the local policy was a success as the local assemblers were able to reach 92% of local
mobile demand9.
The industry is currently facing severe challenges. The sudden political shift due to
change in government in first quarter of 2022, the government changed the policy and
imposed the 17% sales tax on mobile and computer gadgets. Another important
Chapter-2 16 Business & its Environment
challenge is absence of support from local industry. Mobile manufacturing requires
various parts which can be produced locally to save import cost and improved
technological base of the country. But most of the units are imported in form of SKD
(semi-knocked down) units and further assembled in the country8. Yet another turmoil
faced by the mobile manufacturers is the restriction on import of raw materials. It
influenced the manufacturing processes badly and more than half a dozen
manufacturers closed their plants creating unemployment, reduction in earning and tax
revenues for the country. The change in policy is attributed to the government
restriction on import of material to safeguard the foreign exchange reserves 9.
Activity 2.4: Based on the case facts, answer the following questions:
• What are the major reasons of up rise of local mobile manufacturing industry?
• What are the causes of downfall of local mobile industry?
• How external environment influences the industry and business firms?

MICRO ENVIRONMENT OF BUSINESS

1. MICRO ENVIRONMENT
Micro-environment refers to all the actors that are part of the immediate
environment and have a direct influence on the performance of a business organization.
Micro-environment covers:
a. Suppliers
Suppliers are the important stakeholder of the value chain of a firm. Suppliers
may influence the product/services production, quality, and price by the provision of
timely, cheap, and quality raw material. Similarly, the concentration of suppliers may
influence the business firms negatively.
b. Distributors
Distributions are the ones that link manufacturers and customers and often display
the products of the manufacturers to attract customers. The distribution network is yet
another important segment of the business supply and value chain. Distributors may
help a firm reach its customers thus have a direct influence on the market
performance of a company.
c. Creditors
Creditors can influence business by delayed or timely payments. Though the
major portion of business transactions are credit-based the average collection period,
bad debts, need to create reserves for future bad debts exhaust lots of organizational
resources, thus creating a situation of dismay.
d. Competitors
Competitors are the firms that produce similar or substitute products, thus can
directly influence a firm. The product quality, prices, marketing strategy, selling
technique, goodwill, and customer base of a competitor may have direct bearings on
Chapter-2 17 Business & its Environment
the market position of other firms. The situation of perfect or high competition
reduces the chances of success of new ventures, thus the choice of business is
dependent upon the competitive positive of the market and industry. A market that
has saturated and has no attraction for newcomers is often difficult to survive with
(e.g. telecom and banking sectors in Pakistan).
e. Customers
Customers are the ones that are aimed at by the business firm. Customers are the
ones who ultimately buy company products and services for consumption.
Consumers, on the other hand, are those who ultimately consume products or
services. The company’s product/service, it is packing, quality, prices, and features
are often customer-driven and follow their requirements. The more customers are
satisfied with the products/services of a firm the more a firm is believed to be
successful. Just image the market position of apple if we compare its products with
competitors and how customers perceive it.
Case example: K&Ns – alignment of the external and internal environment
K&Ns is the acronym taken from the name of Khalil Sattar and his Wife Naushaba
Khalil. K&Ns started its business in 1964 when Khalil was a college student. At that time
malnutrition was one of the major issues in Pakistan when every fourth infant died after
birth. The lack of proteins and other nutrition affected the health of mothers and their
new born. To improve the health of the public the business started and now after 55
years it’s the market leader and sustained its position successfully. A detailed
investigation of the business practices
Highlights that the company values its external factors and believes in
continuous improvement of internal processes (e.g. hatchery, incubation, chicken feed,
slaughtering, packaging, and distribution). The product innovation is yet another unique
point of their business where the company offers chicken in various forms and a wide
range of half-baked products, offering the company a strong market position.
Activity # 2.5: Visit the nearest K&Ns outlet and evaluate its business practices. Come
up with a conclusion about the ways of managing the internal environment of business
and does that suit the external environment?
Note: The complete case of K&Ns is provided in chapter-22

Activities # 2.6:
Visit your nearest market and talk with five shopkeepers. Ask them how the macro and
micro level factors have influenced their businesses.
Tip: Do not use subject language rather use simple and easy words to make your
question understandable.
Chapter-2 18 Business & its Environment
INTERNAL ENVIRONMENT OF BUSINESS
Internal factors refer to the factors within the company which impact the
operations and overall performance. Unlike the external factors, these factors are well in
the control of a firm. The internal factors may be either favorable for the firm or
unfavorable. Favorable internal factors positively influence the company and are often
denoted as strength factors. On the other hand, internal factors that negatively influence
the company are denoted as weaknesses.
Considerations:
Strengths: are the positive and favorable internal factor
Weaknesses:
Weaknesses: are the negative or unfavorable internal factors
Opportunities: are the positive and favorable external factors
Weaknesses: are the negative or unfavorable external factors
SWOT: Both internal and external factors are collectively called SWOT and analysis of
such factors is called SWOT analysis
Internal factors may include:
a. Managing culture
Culture refers to beliefs, values, expectations, and practices that guide the actions
of organizational members. Organizational culture has a direct bearing on the actions
of its members and thus determining the operations and outcomes associated with
that.
b. Strategic Management
The strategic direction and management of the company determine the direction
and course of action to reach there. The direction (vision), company business, and
purpose of existence (mission), goals/objectives, and ways of achieving those
(strategies) determine the direction of the wind and its speed.
c. Organizational structure
The structure determines the ways through which various activities are performed.
It may cover the hierarchy, chain of command, the span of control, the delegation of
roles, coordination, and other aspects. The organizational structure may be
bureaucratic, matrix, divisional, functional, or hybrid.
d. Financial management
Financial management deals with the ways of managing finances in the
organization. It covers all the strategies used to create financial resources and their
utilization in the befitting manners so that the overall objectives of the firm are
achieved.
e. Managing humans at work
Human resource, like all other resources (physical and financial), is an important
resource for organizations. Its value is increasing with the advent of learning
organizations, knowledge workers, and knowledge-based firms. The advent of
Chapter-2 19 Business & its Environment
technology (e.g. industrial revolution 4.0, blockchain) has changed the need for
human resources. Even now the firms hire employees for skills/attitude rather than
mere degrees.
f. Operations and production management
Operations and production management deals with the operational processes of
the firms and the ways of producing goods and services that may meet the customer
requirements. It covers the basic activities for manufacturing, trading, and service
firms as its influence for all such nature of firms are same and obvious.
g. Marketing and selling
Marketing and selling are yet other important factors that may influence business
performance. In the competitive world of today, firms are required to work on
customized rather than standardized products. Even the technology firms are
producing customized products (e.g. cell phones, gadgets), services (door-to-door
services), and options suitable for customers (cash on delivery instead of advance
payments). This creates new horizons of business and transforms a stable business
environment into a dynamic one.
Note on the internal environment:
The factors mentioned in the internal environment are often called functions of a
business.

Chapter summary:
Business organizations do not operate in isolation and have to work with external and
internal environments. The internal environment is within organizational control while
the external environment is beyond organizational control. The external environment is
further divided into micro (that directly influences a business organization) or macro-
environment (that indirectly influences business organization). The micro-environment is
specific while the macro-environment is general. The micro and macro environments are
probed through SWOT analysis, which covers Strengths and Weaknesses as internal
factors and Opportunities and Threats as external factors. Both internal and external
factors have positive (S & O) as well as negative factors (W & T).
Discussion questions:
• How internal and external environment can influence the business organization?
• How SWOT analysis of a firm is carried out?
• Why micro external environment is called specific while the macro external
environment is called general in nature? Comment.
Chapter based field project/assignments:
• Interview one or two entrepreneurs in your surroundings and inquire them how
their external environment is influencing their business practices? Identify the
specific factors of the external environment that have been discussed by those
entrepreneurs.
Chapter-2 20 Business & its Environment
• Carry out a SWOT analysis of the business you have selected for the interview.
• Also highlight “is there any difference in an external environment when the nature
of business changes?”
Presentation and debate topics
• Listen to the business news and understand various internal and external factors
that have been discussed and how they may influence business. Create a debate on
these factors by looking at for whom these factors may prove to be positive and
for whom bring negative changes.
References
1. Needle, D., & Burns, J. (2004). Business in context: An introduction to business
and its environment. Sydney: Thomson.
2. Nickels, W. G., McHugh, J. M., & McHugh, S. M. (2008). Understanding
Business 9th ed. McGraw-Hill Irwin: New York, NY.
3. Brown, B. J., & Clow, J. E. (2008). Introduction to Business: Student's Book.
McGraw-Hill.
4. https://hapticmedia.fr/blog/en/3d-technology accessed on January 22, 2021.
5. www.amp.dw.com/en/pakistan-industrial-hemp-cannabis-production accessed on
January 22, 2021.
6. www.thenews.com.pk/amp/762680-govt-announced-new-electric-vehicle-policy-
for-pakistan accessed on January 22, 2021.
7. https://techcrunch.com/2022/07/12/airlift-shutdown/, accessed on July 23, 2022.
8. https://www.phoneworld.com.pk/from-global-to-local-what-mobile-
manufacturing-means-for-pakistan/ accessed on July 23, 2022.
9. https://mashriqtv.pk/en/2022/06/30/layoffs-phone-shortage-in-pakistan-as-
mobile-manufacturing-industry-shuts-down-plants/, accessed on July 23, 2022.