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A business refers to a set of functions performed through a company's human resources, including procurement, manufacturing, distributing, marketing, and retailing, in order to earn a profit. A business environment, as the name suggests, refers to the factors that affect the functioning of a business. These factors may include the government regulations, import and export laws and duties, technological advancement, organization's capability and abilities, competitors, customers etc.
According to Richard F Stiegele (banker), "The business world is an extension of the kindergarten sand box - but with quick sand." Â It is rapidly and constantly changing and if the management cannot cope with the changes and deal with them the right way, it would be very difficult to make the business a success.
It is vital for an organization to constantly keep track of its environment. This includes the internal as well as external environment of the business. An organization needs to be aware of what is going on in each department at each branch/office of the business. If a matter needs special attention or a new technology needs to be introduced or a much needed innovation in the product/processes is being planned- the management of the business should be present as and when required. This can be achieved by performing regular business environment analyses.
A business environment analysis involves studying the factors that may influence a business; evaluating them on the basis of their impact on the business and then planning for possible ways to handle the situations that may arise in the future due to these environmental factors. The business environment for a specific industry or organization can be studied using two very popular means- namely, SWOT Analysis and PEST Analysis. SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis studies both - the internal (Strengths and Weaknesses) as well as the external (Opportunities and Threats) environment of a business/ industry. On the other hand, the PEST (Political, Economic, Social and Technological) analysis studies only the external environment of a business/ industry.
2.2 CHARACTERISTICS OF BUSINESS ENVIRONMENT
The business environment, consisting of both the internal as well as external factors, has some characteristic features. These maybe illustrated as:
The business environment is constantly changing. As has been rightly said- the only constant about a business is change! As a business grows and develops, it undergoes a number of changes. These changes may occur within the organization (internal environment of the organization) or in the external environment of the organization.
The different environmental factors are interrelated. For example, if a supplier fails to deliver the raw materials in time then not only will the manufacturer's business get adversely affected but the smooth functioning of the business will prove to be challenge for the wholesaler and the retailer as well. Moreover, development of new technology will affect the organization as well as the competitors equally. The fast adoption of the new technology would give the business a competitive edge.
The impact of the environment is very specific to the organization and hence differs from one organization to the other. A certain government regulation may have a major impact on one business while it may not even bother another business. For example, for a manufacturing unit that imports its raw materials, a change in the import duties and regulations would be crucial to the functioning of the business. On the other hand, it may have absolutely no affect on a business whose operations are limited to the domestic market completely- from procurement to manufacturing to selling.
The business environment may have long term as well as short term effects on a business. If a new technology is introduced in the processes, the processes will be altered for the long term. However, if a competitor lowers prices for a clearance sale, the organization would be required to lower prices but only for a short period of time.
2.3 TYPES OF BUSINESS ENVIRONMENT
The business environment can broadly be divided into two major categories. These are:
Internal or Micro-environment
External or Macro-environment
Source: The Marketing Teacher [Online]
Fig. 1: Components of Business Environment
The Micro-environment consists of those factors that are specific to the organization. It is often said that the micro-environment consists majorly of the five M's. These are men, materials, machinery, money and markets/minutes. Most often, they arise from within the organization- and hence, they can mostly be controlled by the business management. It is this level of the business environment that defines the strengths and weaknesses of the business. The Micro- environment/ internal environment is also known as Operating environment. The micro-environment factors include:
As can be seen, the members comprising the internal environment are specific to one organisation. The influence of these factors on one organization would be very different from that on another organization. The suppliers are the organizations providing raw materials and other parts to the organization. It may be noted here that the customers for different types of organizations would be different- and not the end consumer. In other words, the customer for a manufacturer would be a wholesaler but for a retailer the customer would be the end consumer. The market intermediaries consist of advertising agencies, financial consultants and other middlemen. Competitors play a major role in influencing the business as they need to be studied closely in order to secure an advantage over them. Public consists of both users as well as non-users of the product in question- this would include the media as well as the end consumer.
The Macro-environment consists of those factors that occur in the external environment. These factors cannot be controlled by the organization. Hence, the business must take due care to keep itself updated with the latest happenings in its surroundings in order to prepare itself for the same. This level of the business environment defines the strengths and opportunities of the business. The macro-environment/external environment is also known as the general environment. The macro-environment factors include:
Political/ Legal Conditions
This study concentrates on the Macro-environment of the business.
Most often when a business talks about analysing its business environment, the focus is more on the macro-environment of the business than the micro-environment.
According to G. Johnson & K. schools (2008) "Macro Environmental forces are the highest layer of business environment that impact to a greater or lesser extent on almost every organization". They also argued that "these forces may also be a source of threat".
B. Canzer (2006) defined environmental forces as "those factors affecting the business strategies and planning and are originated from outside the business and are unlikely to be controllable by the business decision makers".
M. Damen (2002) defined these forces as "all the relevant forces outside the company's control, and the company could be forced to change its strategies, and business model based solely on these forces".
By analysing all the above definition it could be suggested that "the external environmental forces are the uncontrollable factors that may have impact on every organization and hence, the companies must act and react accordingly"
As has been stated earlier, the Macro-environment can be analysed specifically through the PEST (Political, Economical, Social and Technological) Analysis. However, it can be analysed in combination with the microenvironment through the SWOT (Strengths, Weaknesses, Opportunities and Threats) Analysis.
2.5 COMPONENTS OF THE MACRO-ENVIRONMENT
Studying the macro-environment involves studying the various components of the macro-environment. These components are interrelated and trigger off new opportunities and threats, as explained through an example by Philip Kotler, "the explosive population growth (demographic) leads to more resource depletion and pollution (natural environment), which leads consumers to call for more laws (political/ legal).The imposed restrictions stimulate new technological solutions and products (technology), which if they are affordable (economic forces) may actually change people's attitudes and behaviours (social/ cultural)."
The various components of the macro-environment maybe explained as follows:
An organization's customers are the people in the market. Since customers are key to the success of a business, it is essential to study the population and the target market to serve them better. The demographic factors involve studying the population growth, the age mix, gender ratios, educational levels, occupations and regional characteristics.
Studying the population growth is necessary to know the future prospects of the business. A population growth could be a growth in the target market, which would lead to depletion of resources and hence increase in costs, which would further lead to an increase in prices. It would lead to an increase in the cost of living per family and hence may lower the quality/ standard of living for the consumers.
The age mix in the population would imply the percentage of the population that constitutes the target market. An organization can plan and develop to incorporate the age group with greater margin in the population. This can be explained further with the example of the baby boom period- there was a sudden increase in the infant population. In order to take advantage of the situation, the businesses needed to manufacture and sell products aimed at serving babies.
The varying educational levels in the market determine the kind of marketing and promotions to be carried out in order to catch the attention of the consumers. In other words, the advertising campaign would differ for people who are illiterate when compared to those who have completed their PhDs, which in turn would again differ from those who have studied only till high school. Hence, to attract the right group of consumers, studying the educational levels of the population is required. Similarly, a study of the gender ratios would help an organization decide on the focus of their marketing strategies.
Like the educational qualifications of people, the occupations of the target market need to be studied. Often, to decide on the target market, the occupations of the population, among other things, need to be studied. This helps determine interests of the target group, the income levels and the purchasing power of the prospective consumers.
Political/ Legal Factors
The political and legal factors influencing an industry/ organization include the government intervention in the business, the laws and regulations governing the industry, the control on unfair trade practices and the control of unfair competition, the formation of unions and communities and bodies to protect consumers, markets and businesses. These also include the subsidies that an industry gets; the import/ export duties that are required to be paid, the quotas and restrictions on the movement of goods across borders, government bodies protecting consumer rights, labour, employees, businesses and consumers.
The various laws include labour laws, health and safety law, consumer laws, competition laws and employment laws- concerning the minimum age requirements for the employees / workers, minimum wage requirements.
The economic factors influencing an industry/ organization include the income distribution, the business cycles, the exchange rates, taxes and duties; and of course unfortunate economic situations like inflation and depression.
The income distribution of the population gives an idea about the purchasing power of the people, which in turn helps an organization decide on their profit margins, the kind of merchandise to be introduced into a country, the quality of merchandise to be introduced. The level of taxation influences the prices of the merchandise. A high level of taxation increases cost for the organization, which in turn increases the price of the goods. In case of high import duties, the raw material cost may increase for an industry importing their raw materials, which again is passed on to the consumers through a rise in prices. In case of inflation, the costs of the major business inputs increase- wages, material costs, machinery costs- this in turn leads to an increase in the price of merchandise to the end consumer.
The social and cultural factors include majorly the values and beliefs of people, and the various subcultures existing in the population. People are concerned about their self image as well as their public image. In most societies, it is very important to the people that they are perceived well among others. Moreover, the various values and beliefs of the people are mostly taught from a young age and hence, these shape the individuals. The image of the individuals is judged on the basis of these values and beliefs. A business can take advantage of the prevailing beliefs and values by marketing their product accordingly to specific social groups. If a product in marketed well in a given social group, it is most likely to gain popularity within the group through word of mouth publicity. Similarly, if an organization creates the wrong or inappropriate image in a social group, which may be by going against what they society believes in, the group as a whole will avoid utilising the organization's offerings- products or services.
Within the major socio- cultural groups, there may be subcultures also. Subcultures consist of a group of individuals with similar interests. An example of a subculture within a social group or cultural group would be teenagers. An organization can recognise these groups and make their target market more specific.
The development in technology is an unending and increasingly fast growing process. Thus, this influences organizations and industries as a whole, in a big way. The industries and various competing organizations need to keep up with the accelerating pace of technological development. In order to reduce processing time and make work easier and quicker, organizations need to adopt the new ways of doing work. Companies need to innovate constantly to gain a competitive advantage. This innovation could be in terms of the final product or even the processes that go behind the procurement, manufacturing, distribution and selling of the final product. To innovate on a continuous basis, the organizations need to concentrate more on their research and development.
The technological factors, thus, influence an organization by determining its competitive position in the market. The organization can be the leader in the market by introducing innovations in its products/ processes or by being the first to adopt the new technologies. On the other hand, a company can be a follower also. It may be noted here that the leader would gain more popularity than the follower in the market.
The natural factors include climate and weather changes, shortage of raw materials, increased level of pollution, environment friendly regulations, and global warming. The increasing awareness about global warming and its impact on the environment is making the consumers as well as the businesses more concerned and careful about their surroundings. A number of organizations have started opting for eco- friendly materials and methods in business. A shortage of non-renewable raw materials poses a major threat to the concerned industries. These industries need to come up with alternative resources. The natural factors would also include unforeseen unfortunate circumstances such as earthquakes and floods. The organizations need to be prepared for such disasters by organising training drills for their employees. An abnormal rise/ fall in temperature would also affect some industries adversely- such as agriculture and tourism.
Therefore, as can be seen from the above listed components of the macro-environment, each and every aspect of the external environment of a business can have a major impact on its smooth functioning. An organization must study its environment closely and carefully before making major plans and decisions. It must be kept in mind here that the organization must do a self analysis and then decide on which factors would be critical to the organization. This can be done by studying changes in which factors actually affect the organization. Once these factors have been recognised, the business should focus on these critical factors. The chosen factors must then be studied with utter concentration. For example, for pharmaceutical companies, government regulations would be the most important feature.
According to Richard et al. (2009), "Organizational performance encompasses three specific areas of firm outcomes: (a) financial performance (profits, return on assets, return on investment, etc.); (b) product market performance (sales, market share, etc.); and (c) shareholder return (total shareholder return, economic value added, etc.)."
Organizational performance is a measure of the outputs as compared to the inputs. In other words, it is a measure of how well the resources have been utilised in an organization. It is measured in terms of the company's finances, its market share and sales, the customer base and feedback, the company's contribution to the society and environment- that is, corporate social responsibility, and employee performance and satisfaction.
As per the IUCN, there are three major forces that drive organizational performance. These are:
External environment of the organization
Internal motivation of the organization.
As can be seen in the figure below, an organization's performance can be measured in terms of its effectiveness, efficiency, relevance and financial viability. A firm's effectiveness refers to the ability of the firm to achieve its mission, vision and goals. An organization is said to be efficient if it optimally uses its resources. A firm is said to be financially viable and relevant if it gives its stakeholders enough reason for investment and remain in the market.
An organization's capacity is a measure of the different departments' capability to perform. The human resources, finances, technology, infrastructure, strategic marketing are some of the departments that are given due importance in analysing a firm's capacity. A organization may outsource some work- in this case the capacity of the firm to whom the work has been outsourced should also be analysed. As per the diagram, the major areas covered in an organization to determine its capacity are strategic leadership, structure, human resources, finances, program/ services, infrastructure, technology and inter-organizational linkages.
Source: Assessing Organizational Performance, IUCN Workshop Report
Fig: Driving forces of Organizational Performance
The External Environment of the organization, also known as the Macro- environment plays a crucial role in driving organizational performance. The various factors or components of the external environment influence the organization's functioning a different ways. These factors have different effects on different organizations. A new regulation on exports will have a major impact on an exporting firm but it will have no effect on a firm whose business is confined completely to the domestic market. The environmental factors affecting organizational performance, as per the above figure, include administrative functions, political scenario, social and cultural factors, technological developments, economic scenario and stakeholders.
The internal motivation of the organization talks about the driving forces within the organization that encourage the firm to improve its performance. These include a company's mission statement, vision statement, and statement of goals as well as the work culture within the organization. The mission, vision and goals provide the organization and its employees an objective to work. A healthy work culture along with incentives and bonuses to the work force encourage the employees to put in their best efforts. As per the given figure, the internal motivation of the organization includes history of the organization, the mission of the business, culture within the organization and the incentives and rewards given to the employees.
In order to improve organizational performance certain tools maybe adopted. Some of the tools to improve the effectiveness, efficiency, relevance and financial viability of an organization are as follows:
Benchmarking: This involves a company setting a standard image in terms of process or product quality, service level and quality, targets to be achieved or any other aspect of the business. The company then aims at achieving these set standards or benchmarks. The benchmarks set are higher than the company's normal performance standards but are set to an achievable level, keeping in mind the organization's capabilities.
Management by Objectives (MBO): In this, the company lays down a set of objectives that need to be followed throughout the organization. These objectives remain the same for all departments of the organization and they drive the organization. A small example of this could be sales targets- all departments of the company have to work towards achieving the common objective of achieving the set sales target.
Kaizen or Continuous improvement: Under this tool, the company has to work towards adopting improvements in all fields of work or all departments on a continuous basis. Small improvements need to be incorporated in the organization constantly. This ensures that the firm is updated with the latest processes and services.
Strategic Management: Strategic management is a planning tool, which lays down the mission, vision, goals, objectives and policies to be followed by a firm. This provides the organization with the encouragement and motivation to achieve the given mission/ vision.
Wa or Harmonization: Wa is a Japanese term, which means harmonization. This tool implies that all the departments of the organization must work in harmony with each other. This will not only improve the quality of work but also quicken the pace of work. Moreover, it will reduce the time required to achieve the organizational goals.
Total Quality Management: Total Quality Management or TQM refers to continuously checking and measuring processes to ensure a certain level of quality. It also talks about eliminating 'muda' or business waste from the processes; this could be in the form of excessive lead time, prolonged processes etc. TQM aims at exceeding or at least meeting customer expectations.
Business Process Reengineering: Business Process Reengineering or BPR refers to changing the processes and structure of an organization in a major way so as to improve organizational performance.
Quality Certification: This refers to an organization following the set of standards to be maintained to get a quality certificate. For example, for an organization to be ISO 9000 certified, it needs to follow the set of standards as prescribed under the ISO 9000 certification.
DETERMINANTS OF ORGANIZATIONAL PERFORMANCE
As has been mentioned earlier, organizational performance is given by the input- output performance of the firm. Hence, the determinants of organizational performance fall under two major heads- economic factors, which include mostly the external environment factors; and the organizational factors, which comprises of the conditions within the organization. These two determinants of organizational performance can be further divided into different components, which have been explained in the following paragraphs.
Economic factors comprise of three major components:
The condition of the industry that the organization belongs to.
The position of the organization in the industry as compared to its competitors.
The quality and quantity of resources with the organization.
Analysing the industry in economic terms is normally done by calculating the industry's average return on assets. The industry's performance says a lot about the organization's performance. If an organization belongs to a growing industry, then there are higher chances of it being successful than when it belongs to an industry that has reached its maturity or decline level.
The organization's position in the industry can be measured in economic terms by calculating its market share. The market share of the company indicates if the company is performing better than its competitors or not. This is crucial to a company's success as when analysed with the industry's growth rate, it determines the stage the company is in and its future prospects. If an organization with a high market share belongs to an industry with a high growth rate (a star in the BCG matrix), it is an indication to the organization's management to invest further in the firm. On the other hand if the organization with a low market share belongs to an industry with the low growth rate (a dog in the BCG matrix), it needs to be divested.
The quality of resources used by the organization determines the brand image of the company. This also gives an idea about the costs incurred by the firm.
The economic factors determine a part of the organizational performance. The majority analysis of performance is done through the organizational factors.
Organizational factors are those factors that influence the working climate of the firm. These talk mainly about the psychological, sociological and physical factors (Gary S. Hansen; Birger Wernerfelt). The psychological factors refer to the satisfaction of the employees and their attitudes towards the organization. A positive attitude towards the environment defines a positive work climate, which in turn promotes a high level of organizational performance. It is important that the employees are motivated and encouraged to give their best efforts to the organization. This may be done by offering incentives and bonuses, giving adequate holidays and leaves as and when required and maintaining a healthy work environment.
The sociological aspect of the organization refers to the relationship between the management and the employees. A healthy relationship between the two is absolutely essential for the smooth functioning of the organization. A positive relationship between the two translates into improved organizational performance. The management needs to constantly motivate the employees and provide them with honest feedback and advice in order to improve the processes and functions of the firm. The employees in turn need to understand, follow and respect the management's decisions. It must also be noted that the sociological aspect also covers the relationship between employees themselves and that amongst the management. A strong relationship amongst the management would lead to quicker decision making and lesser complications in the working of the firm. A healthy relationship amongst employees would ensure smooth functioning of the organization with team work being done fast and efficiently.
The physical factors include decent infrastructure facilities, hygienic amenities and availability of the basic requirements. A healthy physical environment is conducive to increased organizational performance. A clean and healthy work environment will keep the employees happy, avoid the spread of diseases and help retain employees in the organization for a longer period of time.
It may be pointed out here that the organizational factors have a much higher impact (almost two times) as compared to the economic variables. This can be explained as the organizational factors are controllable factors, while the economic variables are uncontrollable by the firm. Thus, the organizational variables can be changed and optimised to suit the needs of the organization. On the other hand, the economic variables cannot be altered. However, the organizational variables can be altered and worked on to suit the changes caused by the economic variables. For example, in case an organization's position in the industry in comparison to its competitors is poor. Here, the organization must first analyse where the firm is falling short, what are the company's weak points and what it needs to improve on to get a better market position. Then the management can formulate a strategy to improve the product being offered or develop on the processes being used or attempt to reduce prices or offer better service or introduce a new and more intensive marketing campaign- as the need maybe.
MACROENVIRONMENT OF PAKISTAN
Pakistan is a developing nation, which is influenced to a large extent, by the general conditions in the world. To analyse Pakistan's external environment, we may consider the individual factors separately as follows:
The population of Pakistan is increasing at a rapid pace. This leads to an increase in demand for goods. An increase in the population if not met with improvement in the income levels can lower the standard of living of the people. Moreover, when an unprepared enterprise faces an increase in demand for goods it can result in shortage of resources and facilities.
Political/ Legal Factors
Pakistan has a very unstable political scenario. The legal scenario also seems fairly dicey as the Chief Justice of the country has issues with the government of the country. There is abundant corruption; there are unresolved issues with the neighbouring countries, and terrorism among other things. This makes Pakistan an unattractive country for investment. The country is ruled by its government. Moreover, Pakistan has always been suspected to house terrorist organizations and hence is viewed with suspicion by some countries. The country needs to streamline its functions, organize its government and solve its internal as well as external issues in order to become a lucrative prospect for foreign direct investment.
Pakistan is highly dependent on the International Monetary Fund. It is an economically weak country. The prices and costs have been rising as the country develops; however, there is hardly any improvement in the purchasing power of the masses. The urban population is gradually improving economically, while the rural areas show very slow signs of economic development. Considering the recent floods, a large amount of economic resources have been invested in the rehabilitation of the affected areas. Investment in research and development in the developing sectors is a must for better development of the nation.
Socio- cultural Factors
Pakistan is a culturally rich nation. The people have strong values and beliefs. They are driven by religion- as the country is an Islamic country. In the urban areas however, the people are gradually becoming more practical and developing socially. The social and cultural scenario of the country is modernising.
Pakistan, in terms of technology, is in a developing stage. Like any other developing nation, it is adopting the new technologies available in the world today but at a fairly slow pace. It is in the technology adoption phase more than the innovation phase. Pakistan does not have the required funds to invest heavily in new technologies but it is growing a steady pace.
The recent floods in Pakistan caused innumerable deaths and injuries. The situation being uncontrolled and unforeseen, the degree of damage has been enormous. It has affected the country in all its major sectors. It requires investment in the rebuilding of the affected areas; it requires increased medical facilities to take care of the injured and to control the spread of diseases. To speed this up, new technology needs to be installed, which would also help serve the purpose better and faster.
PHARMACEUTICAL INDUSTRY OF PAKISTAN
The pharmaceutical industry in Pakistan has come a long way since the country's independence in 1947. After independence in 1947, the pharmaceutical industry in Pakistan, practically, did not exist. It was dominated by multinational firms. Today, however, the domestic industries are flourishing. There are about 400 pharmaceutical manufacturing units out of which about 25 are operated by multinational firms (PPMA).The Pharmaceutical industry in Pakistan, once dominated by multinational companies, is now almost evenly divided between the local companies and the multinational firms. A large portion of the market is served domestically and a small portion is imported. There are hospitals under public ownership, private ownership as well as those owned by NGOs (Non- Government Organizations). With some help from the World Bank, the government has initiated a number of health care programmes in the country. The family health care programme is one of them. Some private organizations have also started health care programmes, which include family planning programmes, HIV/ AIDs Awareness programmes, drug abuse etc.
Even though the industry is developing at a fast pace, the modern medical facilities and medicines have not reached more than half of the population of Pakistan. This indicates that the pharmaceutical industry needs to spread to each and every part of the country so that its benefits can be seen and utilized by all the regions of Pakistan. According to the Economist Intelligence Unit (EIU), 45% of the population lacks access even to primary health care. As per the EIU, "Government expenditure on healthcare in Pakistan is extremely low. The government estimates it at 0.84% of GNP in fiscal year 2003/04 (July-June) and the UN Development programme (UNDP) estimated it at 1% of GDP in 2002."
The focus of the pharmaceutical sector is to develop quality products. The industry in Pakistan is so dedicated to this objective that it has come a long way in manufacturing quality medication. It is almost at par with the international firms. Once its prices are controlled, the Pakistan pharmaceutical industry can become a global competitor in pharmaceuticals.
On the down side, the rapid growth in population in the country has lead to an increase in the demand for health care facilities. This in turn has lead to the development in the pharmaceutical sector. There has been an increase in the number of professional doctors and nurses, thus increasing the amount of investment to be made in the form of salaries to the professionals. This results in increasing costs and thus reducing the amount of money available for development of infrastructure facilities.
One of the major challenges facing the pharmaceutical industry in Pakistan today is that majority of its raw materials is imported. This poses numerous problems for the industry. Firstly, it increases the costs of manufacturing. The increase in costs makes the products unreachable for the consumers. The consumers then look for cheap substitutes which mostly come in the form of smuggled, low quality pharmaceutical products. Secondly, the cost of manufacturing/ procuring depends on the foreign exchange rate. If the value of the Pakistani rupee depreciates in comparison with the currency of the exporting country, the costs for Pakistan rise.
Another problem that was faced by the industry and which slowed down the growth of the industry was that its prices were governed and regulated by the Ministry of Health. The prices had been frozen by the Ministry. Even if there was a rise in costs, the industry was not allowed to increase its prices without the orders of the Ministry. However, fortunately, after 1991, the prices were deregulated and the domestic companies were allowed to fix prices matching up to those of the multinational firms.
A point to be noted here is that even though the prices are higher than what they could be, the Pakistan pharmaceutical industry produces the cheapest medicines with a high level of quality and packaging.
However, due to increased raw material costs, rise in prices and competition, hopeless intellectual property rights and the unstable political and economic situation in the country, the multinationals avoid entering the pharmaceutical industries in Pakistan today. This situation has been made worse by the level of corruption prevalent in the country, red tape, use of smuggled products, price controls and other restrictions imposed on trade and business in Pakistan.