2.8: The Internal and External Business Environments

Internal Environment

The internal business environment refers to the elements within the organization that influence its operations and decision-making. It encompasses factors like the company’s culture, management practices, employees, and work processes. A manager should strive to create a well-managed or positive work environment within the organization. A well-managed internal environment has a significant role in influencing the organization’s operations and ensuring successful goal achievement. Some of the most important parts of the internal environment include communicating purpose to stakeholders through creating a mission statement (who we are, what we value), a vision statement (who we want to become), a strategy to achieve the company mission and vision and setting goals and objectives to gauge the company’s degree of success.

These are the areas management has control over and can make changes to in response to strategic goals or changes that occur, which impact the organization.

• Management
• Materials
• Machinery
• Money
• Employees

An internal business analysis is a business analysis conducted by management or by consultants to evaluate the company’s strengths and weaknesses. Such analyses are often closely associated with the SWOT analysis, which helps businesses identify the company’s strengths, weaknesses, opportunities, and threats. An internal business analysis is generally more concerned with the strengths and weaknesses of a business, while its opportunities and vulnerabilities fall more under the external business analysis.  When studying strengths and weaknesses, it is important to analyze them in light of their impact on customers, since the customer’s view of the company is ultimately the one that matters most. A SWOT analysis can be done on products, processes, companies, people, and just about anything you are trying to improve.

An internal analysis enables a firm to determine what it can do to improve its internal capability to support the overall success of the business. There are other internal analyses managers can do to gauge how the company is performing, some of these include process mapping (to identify issues in processes), and NOISE, SOAR, or SCORE analyses as alternatives to SWOT analysis; skills inventory tracking to determine what skills are missing or needed within the organization; succession planning to ensure employees are able to move into positions where someone else has retired; Gap Analysis, Core Competencies Analysis, OCAT, VRIO Analysis, Strategy Evaluation, McKinsey 7S Framework, etc.^[1] You will learn more about how managers analyze the business environment when you review the chapter on management.

Once complete, the organization should have a clear idea of where it’s excelling, where it’s doing okay, and where its current deficits and gaps are. The analysis gives management the knowledge to leverage the company’s strengths, expertise, and opportunities. It also enables management to develop strategies that mitigate threats and compensate for identified weaknesses and disadvantages.^[2]

External Environment

Micro-external environment

The micro-environment may be defined as including groups and organizations that have a direct relationship with the business. For example, suppliers, distributors, competitors, and external customers deal with the firm regularly and have a direct interest in the activities of the company because they are clearly affected by its actions (refer to Figure 2.4). It is important for any organization to monitor and analyze all elements of the micro-environment.  Porter’s Five Forces model is used for a thorough analysis of the competitive environment. A commonly used method for assessing suppliers is the Kraljic Matrix. A method often used when conducting consumer analysis is Ferrell’s 6W model. You will learn more about how managers analyze the business environment when you review the chapter on management.

Macro-external environment

The macro-environment refers to the broader condition of an economy as opposed to specific markets. The macro-environment can be affected by GDP, fiscal policy, monetary policy, inflation, employment rates, and consumer spending. The state of the macro environment affects business decisions on things such as spending, borrowing, and investing. To what degree is a business vulnerable to macroeconomic factors? It depends on the extent to which a company is dependent on the health of the economy and external factors for its success. If a company is relying more on the economic health of the country, then it will be more vulnerable to macroeconomic changes. Banks, financial institutions, and credit card companies are very good examples of such businesses that are heavily reliant on the macroeconomic factors.^[3]

The macro-environment analysis involves brainstorming and a lot of research to initiate the process. It starts by creating a list of trends that would have positive and negative impacts on the business. The macro-environment can be analyzed by using the PEST, PESTLE or PESTEL analysis method. This acronym represents external factors that affect the business, including political, economic, sociocultural, technological, environmental, and legal factors (PESTEL). The business has little influence over the macro-environment. For example, if the government enacts mandatory regulations on waste management, businesses must comply with these regulations to remain open. As consumers and employees, we see some of these laws and regulations in action when it comes to safety warnings on products, foods, buildings, etc. Consumer trends and technological innovations also impact company operations. For example, consumers put pressure on fast food restaurants to offer healthier choices. Another example of external factors affecting business is when one company adopts new technology to serve customers faster and more conveniently, other businesses must adapt in order to remain competitive. You will learn more about how managers analyze the business environment when you review the chapter on management.

A PESTEL analysis for Tim Hortons provides an overview of the external factors that can impact Tim Hortons’ business operations. Understanding these factors helps the company strategize and adapt to the changing business environment.

The Apple World of Business

Why is Apple so successful?

In 1976, Steve Jobs and Steve Wozniak created their first computer, the Apple I. They invested a mere $1,300 and set up business in Jobs’ garage. Three decades later, their business—Apple Inc.—has become one of the world’s most influential and successful companies. Jobs and Wozniak were successful entrepreneurs — people who take the risks and reap the rewards associated with starting a new business enterprise.

Have you ever wondered why Apple flourished while so many other young companies failed? How did it grow from a garage start-up to a company generating over $394 billion in sales in 2022? How was it able to transform itself from a nearly bankrupt firm to a multinational corporation with locations all around the world? You might conclude that it was the company’s products, such as the Apple I and II, the Macintosh, or its wildly popular iPod, iPhone, and iPad. Alternatively, you could decide that it was its dedicated employees, management’s willingness to take calculated risks, or just plain luck, that Apple simply was in the right place at the right time.

Before you draw any conclusions about what made Apple what it is today and what will propel it into a successful future, you might like to learn more about Steve Jobs, the company’s co-founder and former CEO. Jobs was instrumental in the original design of the Apple I and, after being ousted from his position with the company, returned to save the firm from destruction and lead it onto its current path. Growing up, Jobs had an interest in computers. He attended lectures at Hewlett-Packard after school and worked for the company during the summer months. He took a job at Atari after graduating from high school and saved his money to make a pilgrimage to India in search of spiritual enlightenment. Following his India trip, he attended Steve Wozniak’s “Homebrew Computer Club” meetings, where the idea for building a personal computer surfaced.^[4]

“Many colleagues describe Jobs as a brilliant man who could be a great motivator and positively charming. At the same time his drive for perfection was so strong that employees who did not meet his demands [were] faced with blistering verbal attacks.”^[5] Not everyone at Apple appreciated Jobs’ brilliance and ability to motivate. Nor did they all go along with his willingness to do whatever it took to produce an innovative, attractive, high-quality product. So, at age thirty, Jobs found himself ousted from Apple by John Sculley, whom Jobs himself had hired as president of the company several years earlier. It seems that Sculley wanted to cut costs and thought it would be easier to do so without Jobs around. Jobs sold $20 million of his stock and went on a two-month vacation to figure out what he would do for the rest of his life. His solution was to start a new personal computer company called NextStep. In 1993, he was invited back to Apple (a good thing, because neither his new company nor Apple was doing well).

Steve Jobs was definitely not known for humility, but he was a visionary and had a right to be proud of his accomplishments. Some have commented that “Apple’s most successful days occurred with Steve Jobs at the helm.”^[6]

Jobs did what many successful CEOs and managers do: he learned, adjusted, and improvised. Perhaps the most important statement that can be made about him is this: he never gave up on the company that once turned its back on him. So now you have the facts.  What do you think Apple’s success is due to?  (a) its products, (b) its customers, (c) luck, (d) its willingness to take risks, (e) Steve Jobs, or (f) some combination of these options. What impact has Apple had on technological advances with its over 500 devices?

Source: Adapted from the Saylor Foundation’s Exploring Business available under CC BY-NC-SA license, and based on Testa, D.M. (2007). Apple, Inc.: An analysis of the firm’s tumultuous History, in conjunction with the abounding future [Unpublished honours thesis]. Lehigh University.

Media Attributions

“Figure 2.4: Diagram showing the relationship of internal, micro, and macro business environments” is adapted from Chapter 2: Business Concepts and Teamwork in Business Fundamentals, 1st Edition, © Kerri Sheilds, licensed under CC BY-NC-SA.

“Steve Jobs 1955-2011” by Segagman on Flickr; CC BY 2.0 Generic.

Image Description

Figure 2.4

Small purple circle, which reads “The Company Internal Environment: Mission, Vision, Strategy, Resources, Processes, Products and Services” is contained within the medium blue circle.

Medium blue circle, which reads “Mico-Environment: Public, Marketing Intermediaries, Suppliers, Customers, Competitors, Employees” is contained within the large yellow circle.

Large yellow circle reads “Macro-Environment: Political Factors, Economic Factors, Sociocultural Factors, Technological Factors, Environmental Factors, and Legal Factors.

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