Business Studies Part I
Business Studies Part II

Business Environment: Meaning

The term ‘business environment’ means the sum total of all individuals, institutions and other forces that are outside the control of a business enterprise but that may affect its performance. As one writer has put it– “Just take the universe, subtract from it the subset that represents the organisation, and the remainder is environment”. Thus, the economic, social, political, technological and other forces which operate outside a business enterprise are part of its environment. So also, the individual consumers or competing enterprises as well as the governments, consumer groups, competitors, courts, media and other institutions working outside an enterprise constitute its environment. The important point is that these individuals, institutions and forces are likely to influence the performance of a business enterprise although they happen to exist outside its boundaries. For example, changes in government’s economic policies, rapid technological developments, political uncertainty, changes in fashions and tastes of consumers and increased competition in the market — all influence the working of a business enterprise in important ways. Increase in taxes by government can make things expensive to buy. Technological improvements may render existing products obsolete. Political uncertainty may create fear in the minds of investors. Changes in fashions and tastes of consumers may shift demand in the market from existing products to new ones. Increased competition in the market may reduce profit margins of firms.

Business environment, has the following features:

  1.  Totality of external forces: Business environment is the sum total of all things external to business firms and, as such, is aggregative in nature.
  2. Specific and general forces: Business environment includes both specific and general forces. Specific forces (such as investors, customers, competitors and suppliers) affect individual enterprises directly and immediately in their day-to-day working. General forces (such as social, political, legal and technological.
  3. Inter-relatedness: Different elements or parts of business environment are closely interrelated. For example, increased life expectancy of people and increased awareness for health care have increased the demand for many health products and services like diet Coke, fat-free cooking oil, and health resorts. New health products and services have, in turn, changed people’s life styles.
  4. Dynamic nature: Business environment is dynamic in that it keeps on changing whether in terms of technological improvement, shifts in consumer preferences or entry of new competition in the market.
  5.  Uncertainty: Business environment is largely uncertain as it is very difficult to predict future happenings, especially when environment changes are taking place too frequently as in the case of information technology or fashion industries.
  6. Complexity: Since business environment consists of numerous interrelated and dynamic conditions or forces which arise from different sources, it becomes difficult to comprehend at once what exactly constitutes a given environment. In other words, environment is a complex phenomenon that is relatively easier to understand in parts but difficult to grasp  in its totality. For example, it may be difficult to know the extent of the relative impact of the social, economic, political, technological or legal factors on change in demand of a product in the market.
  7. Relativity: Business environment is a relative concept since it differs from country to country and even region to region. Political conditions in the USA, for instance, differ from those in China or Pakistan. Similarly, demand for sarees may be fairly high in India whereas it may be almost non-existent in France.

The term ‘business environment’ means the sum total of all Individuals, institutions and other forces that are outside the control of a business enterprise but that may affect its performance. The economic. social political, technological and other forces which operate outside the business enterprise are part of its environment.

It is important for business organisations to understand their environment because of the following reasons

  1. It Enables the Firm to Identify Opportunities and Getting the First Mover Advantage: Environment provide numerous opportunities for business Early identification of opportunities helps an enterprise to use it before instead of losing them to competitors.
  2. It Helps the Firm to Identify Threats and Early Warning Signals: Environmental awareness can help managers to identify various threats on time and serve as an early warning signals.
  3. It Helps in Tapping Useful Resources: Environment is a source 01 various resources for running a business To engage In any type of activity, a business enterprise assembles various resources called inputs. This can be done better by understanding what the environment has to offer.
  4. It Helps in Coping with Rapid Changes: All types of enterprises facing increaSingly dynamic environment In order to effectively cope with these Significant changes, managers must understand and examine the environment and develop suitable courses of action
  5. It Helps in ASSisting in Planning and Policy Formulation: Since environment is the source of opportunities and threats, ItS understanding and analysis becomes the base for various policies to be framed and strategies to be made.
  6. It Helps in Improving Performance: The enterprises that continuously monitor their environment and adopt suitable business practices are the ones. which not only improve their present performance but also continue to succeed in the market for a longer period.