Table of Contents:-
- Nature of business environment
- Business Environment Meaning
- What is Business Environment?
- Business Environment Meaning
- Define Business Environment
- scope of business environment
- Features of business environment
- Components of Business Environment
Nature of business environment
The nature of business environment can be understood from the following points:
1) Environment is Dynamic
Maintaining a consistent business environment over a long period can be challenging. Thus, the environment is considered dynamic. Environmental factors change based on customer preferences, technological advancements, government policy amendments, and other factors. The decision making process of business is affected by these factors. Hence, the ability to adapt to changes and implement them into action is essential for the success and growth of the company.
2) Environment is Inseparable from Business
The environment is the most essential element that impacts every aspect of a business. No business can function without its legal, political, social, cultural, and economic environment.
There is a mutual relationship between business and the environment. Therefore, a business’s success and failure are influenced by environmental changes. The enterprise comprises an interactive process that collects inputs like raw materials, capital, workforce, energy, etc., from the environment, converts them into finished goods, and returns them to the environment.
3) Internal and External Factors
Internal and external factors influence the business environment. Factors such as business policies, objectives, and staff members come together to form the internal environment of a company. At the same time, the external environment comprises both micro and macro factors. The micro factors involve competitors, consumers, suppliers, and society. Macro factors include legal, economic, cultural, political, technological, and other external factors.
4) Business Lacks Control Over the Environment
The business environment keeps changing continuously. Companies can influence the internal environment, not the external environment. Therefore, it can be concluded that the internal environment is within the control of a business (controllable), and the external environment is beyond the control of a company (uncontrollable).
5) Environment is Multifaceted
Environment changes constantly yield positive and negative outcomes. Different people perceive these changes differently. For example, the changes are an opportunity for some while a threat to others.
6) Environment is Complex
Several complex situations may arise in the dynamic business environment. To tackle these complexities easily, a business must be aware of them and use available resources best. Modern business is much more complex and unstable than the traditional form. The scope and size of contemporary business are vast and expansive, as is its operating environment. Increasing government interference and growing social awareness have had an unfavourable effect on business enterprises.
7) Regulates the Scope of Business
Business organizations function within an environmental framework. This framework can be political, social, economic, and legal structures within which all business activities operate. For the growth and survival of the business organization, the changing structure should be analyzed effectively and adapted efficiently.
8) Opportunities and Obstacles
The business environment is flexible. Therefore, depending on the situation, it can be an opportunity or an obstacle to the organisation. Opportunities provide scope for expansion, whereas obstacles curb the organisation’s growth.
9) Uncertainty
There is always a possibility of frequent changes in the business environment, and these changes are highly uncertain. Thus, it is challenging for businesses to forecast future events. Businesses must constantly monitor environmental changes to improve not just their present but also their future performance.
10) Long-Lasting Impact
The success of businesses can be influenced by the environment either positively or negatively. This can have a long-lasting impact on the method by which business activities are conducted. Therefore, thorough business analysis is essential to identify strengths and opportunities and to develop strategies and policies to avoid environmental risks and threats.
Business Environment Meaning
The business environment includes various factors that influence how a business operates and its level of success. Transacting and interacting with the environment are basic needs of every business. Thus, a symbiotic relationship exists between business and the environment.
Keith Davis states, “Business environment is the aggregate of all conditions, events and influence that surrounds and affect it”.
According to Andrews, “The environment of a company as the pattern of all external influences that affect its life and development”.
According to W.F. Glueck and Lawrence R. Jauch, “The environment includes factors outside the firms which can lead to opportunities or threats to the firm. Although there are many factors, the most important of these factors are socio-economic, technological, supplier, competitors and government”
The business environment is constantly changing and unpredictable. The success of any business enterprise depends on and is determined by the risks and opportunities present in the market. These risks and opportunities are external factors beyond the control of a company’s management system.
The business environment is comprised of various components, including competitors, customers, stakeholders, business trends, brokers, policies, government activities, social and economic factors, and technological advancements. All these components of an organisation collectively shape the business environment in which an organisation operates.
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What is business environment?
The business environment includes external and internal factors that impact a business’s operations and functioning. External factors of the business environment are beyond the control of the business, whereas the business can control internal factors.
Businesses operate within a complex environment that includes various factors, such as
- Economic conditions,
- Market dynamics,
- Societal trends,
- Shifts in market demand,
- Fluctuations in currency exchange rates,
- Geopolitical events,
- Environmental conditions,
- Technological advancements,
- Legal regulations, and more
All these factors are beyond the direct control of a business.
Business Environment Meaning
The term “business environment” comprises two distinct words: “business” and “environment.”
The term “environment” refers to the conditions surrounding us, where we live, work, and engage in various activities. When considering the environment for business, it encompasses all the factors that surround and impact the industry. The amalgamation of these multiple elements of the company within the environment is called the business environment.
Human beings are influenced by the environment, particularly the weather. People adapt themselves according to the weather and wear clothes accordingly, To survive in the environment people need to understand and adjust to their surroundings.
Similarly, businesses are influenced by their surrounding environment. It involves various factors such as customer preferences, government policies, and supplier relationships. Completely understanding and adapting to these external factors can lead a business to success.
Define Business Environment
According to William Gluck and Jock, “Business environment is the total of all those outside business firms and industries that affect their organization and operation.”
As per Arthur M. Weimer – “Business environment includes the climate or set of conditions such as, economical, social, political or institutional, in which business activities and operations take place.”
According to Davis, “The business environment is the total of all the circumstances, events, and factors that affect the business.”
As per Renki and Shawl – “Business environment includes the total of all those external factors to which the business exposes itself and is directly or indirectly affected”
According to Urwick and Hunt – “The environment includes external factors that create opportunities and threats to the business; This includes socio-economic status, technology, and political conditions. “
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Scope of Business Environment
The scope of business environment includes the following points:
- Identifies Business Opportunities And Threats
- Helps In Planning And Policy Formulation
- Provides Useful Resources
- Improves Performance
- Helps In Coping With Rapid Changes
- Enhances Business Image
- Assist In Facing the Competition
The scope of business environment is explained below:
1. Identifies Business Opportunities And Threats
The business environment enables companies to identify the various threats and opportunities in the business market. When businesses can identify market opportunities promptly, they can easily take advantage of them as soon as possible.
By establishing effective communication channels between an organization and its external environment, all threats can be easily detected. It will enable businesses to take corrective measures on time. Businesses can maximize their returns and profits by taking advantage of opportunities before the competitors.
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2. Helps In Planning And Policy Formulation
By properly understanding the trade environment businesses can prepare better policies and strategies for themselves. It provides them all detailed information related to the market conditions. All opportunities and threats of a business can be understood by scanning the business environment.
Businesses can make appropriate decisions and plan accordingly when they are well aware of the external environment. They can even efficiently change and formulate new policies through environmental awareness.
3. Provides Useful Resources
The success of a business depends on the environment in which it functions. The external environment supplies inputs such as capital, raw materials, and labour the business uses for its operations.
These inputs are converted into goods and services to meet the market’s demands. A business cannot continue its operations without a sufficient supply of inputs. It entirely depends on the surrounding environment to acquire inputs and deliver the required goods or services.
4. Improves Performance
The company environment has an effective role in accelerating the productivity, performance and efficiency of the business world. Managers can update their knowledge and skills through constant environmental awareness, The environmental study acts as a valuable tool for educating management on various environmental issues.
Environmental monitoring provides qualitative information which helps in the development of strategic thinking. It allows managers to implement effective management strategies to maintain and improve the performance of the business.
5. Helps In Coping With Rapid Changes
Factors which constitute the trade environment are constantly changing and evolving. These changes include changes in fashion, customers’ preferences, economic conditions, technology etc.
A proper understanding of the company environment helps businesses to detect all these and adapt to changes easily. It enables businesses to deal with the changes efficiently by taking suitable actions on time. Managers can continuously monitor the environment to stay attuned to any changes and respond promptly and effectively.
6. Enhances Business Image
A proper understanding of the external environment allows businesses to enhance their customer satisfaction and goodwill for long-term success. Businesses can become more responsive and sensitive to environmental needs through proper knowledge of the corporate environment. Analysis of the business world provides detailed information for resource allocation, strategic planning, risk management and performance monitoring. These all factors enable businesses to to implement plans effectively for long-term success.
7. Assist In Facing the Competition
The business environment provides all the details about the competitors prevailing in the market. Awareness of the actions and strategies of the competitors is essential for businesses to stay ahead in the tough competitive world. It helps companies to develop strategies, plans and policies for growth and success. Businesses can effectively stay ahead of their competitors through systematic planning.
The Features of business environment
The features of a business environment include various factors that affect the operations and functionality of a company. Businesses need to be well-informed about the features of business environment so they can perform well in the fast-changing business world.
The following are the salient features of business environment:
- The totality of External Forces
- Specific and General Forces
- Interrelated
- Dynamic Nature
- Relativity
- Complexity
- Uncertainty
Features of business environment are explained below:
1. The totality of External Forces
The entrepreneurial environment includes all external factors and forces beyond a business’s control. It is a combination of various factors such as economic, technological, social, environmental, cultural, political and legal factors that collectively shape the overall nature of the business.
2. Specific and General Forces
The forces outside the business can be divided into two parts; specific and general.
i) Specific – These forces affect different parts of an industry in different ways. This includes factors like customers, suppliers, other companies, and investors.
ii) General – These forces impact all companies in an industry, covering aspects like social, political, legal, and technical conditions.
3. Interrelated
Various elements in a business environment are closely interrelated to each other. Due to this, any change in one element can impact other elements of the business environment. Businesses that clearly understand these interrelations between the components can effectively reduce the risks, and grab opportunities present in the environment to achieve sustainable growth and competitiveness.
4. Dynamic Nature
The business environment is made up of many factors, many of which are constantly changing such as GDP growth, inflation rates, employment levels etc. The business environment is always evolving therefore it requires businesses to be agile, innovative, and adaptable.
5. Relativity
The business environment differs from one country to another because it’s closely linked to local conditions. Therefore, businesses must consider the characteristics and factors of each country when operating internationally.
6. Complexity
Many factors in the business world are closely connected which makes it difficult to predict and manage the risks. A complex environment makes it challenging for businesses to plan and strategize effectively. Complexities make it tough for businesses to manage international factors such as global supply chains, currency fluctuations, geopolitical risks, and trade policy factors effectively.
7. Uncertainty
Uncertainty is a key feature of the business environment, posing one of the most formidable challenges. The business environment is always changing, so predicting future outcomes with absolute certainty is impossible. Professionals who create business plans must carefully consider the ongoing changes in the business environment. Take technology, for example – it’s evolving so fast that we cannot accurately predict the timing or magnitude of changes that will occur. In this field, unexpected challenges can arise at any time.
Approaches of business environment
The business environment can be better understood by the following approaches:
- System Approach
- Social Responsibility Approach
- Creative approach
1. System Approach
Trade is a complex system that involves the production of goods and services to fulfil the needs of consumers. The process requires the use of various inputs from the environment, including raw materials, capital, and labour.
2. Social Responsibility Approach
In this approach, the business should fulfil its responsibility towards various segments of society like consumers, stockholders, employees, and government entities.
3. Creative approach
Businesses shape the environment by facing challenges and taking advantage of opportunities in time. They bring a change in society by paying attention to the needs of the people.
Components of Business Environment
The components of business environment include a wide range of elements that have a direct or indirect impact on a business’s operations, strategies, and overall success.
By understanding and analyzing the components of business environment organizations can aim to make informed decisions, identify opportunities, and mitigate potential risks.
An understanding of the environment and changes related to it is very essential for business enterprises. Those business enterprises which scan their environment and are always prepared to adapt to changes may achieve success. Contrary to this, enterprises which fail to adjust to their environment are unable to survive in the long term.
The components of business environment can be broadly classified into:
(i) Internal business environment, and
(ii) External business environment.
1. Internal Environment
An environment that has a direct influence on the business is termed an internal environment. The internal factors which influence the business environment are controllable i.e., they can be controlled by the business. Hence, factors like physical facilities, organisation and functional means can be revised and transformed as per the requirements of the environment.
Through understanding the internal components of business environment the strengths and weaknesses of the business are revealed.
The strategy and decisions of internal organisation are determined by the following internal components of business environment:
1) Value System
The selection of a business, its mission, vision, objectives, business policies and practices are all elements of the value system in an organisation. The founders and management team of a business play an important role in the decision making of the value system.
2) Mission and Vision and Objectives
Vision is a wider view to define the prospects of the business. Vision aids in meeting the purposes of the business organisation. The mission is the short-term action through which objectives are attained.
3) Management Structure and Nature
Generally, business decisions are influenced by the organisational structure. This structure comprises the board of directors, managers, executives, etc. The number of fellows in an organisational structure determines the duration of decision making.
4) Internal Power Relationships
Coordination between the levels of organisational structure is very important. The three levels, i.e., top, middle, and bottom levels, must have a mutual relationship among them. This helps the organisation to operate smoothly.
5) Human Resource
Human resource is a key part of any organisation. They define the strengths and weaknesses of an organisation. The essential requirements of human resources include skills, quality, commitment, sincerity, the right attitude, etc. The level of employee participation and initiative differs from organisation to organisation and is determined by the corporate culture.
6) Company Image and Brand Equity
The internal environment of the company is affected by the image that it carries in the market. The image of the organisation helps in raising capital, mergers, other alliances etc. Likewise, brand equity also affects the organisation.
7) Miscellaneous Factors
Various other factors that play an important role in determining the success or failure of a business are as follows:
i) Physical Assets and Facilities
The availability of assets and facilities is essential for the smooth functioning of the business. The facilities influencing the competitiveness of the company include production, technology, labour, etc.
ii) Research and Development
The ability to innovate and compete is determined by the R&D department of an organisation. However, it is one of the external factors; it also influences the internal environment of the business.
iii) Marketing Resources
The marketing effectiveness of an organisation is directly influenced by resources such as the marketing department of the organisation, marketing personnel, distribution channel, and brand equity.
iv) Financial Factors
Finance is the lifeblood of an organisation. The effective allocation of financial resources impacts the company’s overall performance, business policies and strategies. Some important factors influencing the internal environment are financial policies, capital, etc.
2. External Environment
The external environment is those factors which exist outside the business firm. External factors affecting a company are also known as uncontrollable factors like economic, socio-cultural, demographic, legal, technological factors, etc.
The external factors are beyond the control of the business enterprise. Therefore, a firm’s success is highly dependent on the capability to adjust and design the internal factors appropriately. This helps to make the most of the opportunities and overcome environmental threats. Usually, the business environment is considered the external environment of the business. But, every business enterprise comprises two types of environment i.e internal and external environment. The external environment consists of two vital elements:
- Micro environment and
- Macro environment.
Micro Environment
Micro environment refers to the factors that have a direct impact on the performance of the company. Micro environment refers to the factors which directly impact a company’s performance. In other words, these factors represent the immediate environment of the company. The micro factors include suppliers, competitors, marketing intermediaries, consumers and the public. These factors are affected by the macro elements present in the business environment.
The micro environmental factors are more closely related to the company in contrast to the macro factors. The micro factors have varying impacts on industries in different ways. Thus, a firm may apply the micro factors which apply to a particular business activity. For example, the microenvironment of a restaurant can be its customers, other restaurants, suppliers of raw materials, human resources, etc.
The success or failure of a firm depends on its ability to effectively deal with its micro elements such as:
1) Customers: The customer is the most important element of the business enterprise. The primary objective of any business is to attract and retain its customers. This helps the business achieve sustained growth, long-term survival, and market profitability. Therefore, to increase the level of loyal customers, business enterprises should carefully observe the needs and wants of the customers and fulfil them effectively.
Business enterprises must also analyse the changing tastes and preferences of the customers and make changes in their products and services accordingly. No business can neglect the customer’s interest, as this may have detrimental effects on the company. Hence, the customer is the central focus of the business environment.
2) Suppliers: Suppliers are individuals or companies that provide raw materials, components and machinery to the business enterprises. The suppliers are an important micro factor in the business environment as they provide essential inputs, contribute to innovation, and influence supply chain performance. They should be trustworthy and cordial with business enterprises. This will help the enterprise to attain customer expectations and companies will become free from the burden of keeping heavy stocks.
3) Marketing Intermediaries: Intermediaries are those who act as mediators between the manufacturer and the final consumer. The number of marketing intermediaries varies based on the size and nature of the distribution network. Marketing intermediaries are beneficial to the organisation only when there is proper coordination between channels without any hurdles.
4) Competitors: The organisations which manufacture similar products and try to conquer the market share are termed as competitors. To earn more profit and stay competitive, the company needs to the competitor’s activities and then prepare its plan. This helps the company to main beyond its competitors in the long run.
5) General Public: The general public is also an indispensable part of the business environment. The positive and negative responses of the public directly influence the company’s image. This can also have an impact on the sales and revenue of the company. Activities such as noise pollution, air pollution, no waste disposal, etc, may create adverse effects on the company’s image.
Macro Environment
The macro-environment prevails outside the business enterprise. These are the external factors that are beyond the control of a business (uncontrollable) and affect the business operations. Depending on macro factors, many changes need to be made in the areas like production, marketing, management, etc. The key macro environmental factors include the following points:
1) Political Environment: Factors such as state, government, political institutions, policies and legislations, and public and private stakeholders influence the business environment. The stability and success of the business depend on the prevailing political environment. Sometimes, the changes made in government policies (e.g., tax policies, government contracts, etc.) and regulations (eg, safety regulations) affect the smooth functioning of the business.
2) Economic Environment: The economic conditions of a country may affect the strategic plans and business decisions of companies operating within its borders. Factors such as economic growth rate, unemployment ratio, foreign exchange rates, and inflation and deflation conditions can help or create problems in the management of the business environment.
3) Social Environment: The social environment comprises the customs and values of the society from where the business originates. Business enterprises, at large are influenced by the factors such as the changing tastes and preferences of customers, the standard of living and educational level. For example, the advertisement slogan “Come Alive” was used by the Pepsi Cola Company to enhance the promotion of its product. This advertisement was misunderstood by people of a particular region. They perceived “Come Alive” as “Coming out of Graves”. As a result, the product did not sell in that particular region. Consequently, the company changed its slogan as it is impossible to survive in the market by overlooking societal values.
4) Technological Environment: It refers to the changes in the business operations such as the use of modern equipment, upgraded technologies, improved production techniques, etc. These changes must be monitored by the organisation to remain competitive in the market. The technological changes help the business enterprise to provide standardised and quality products to the customers.
5) Natural Environment: In the short and long term, concerns related to environmental changes are crucial for business. Environmental changes like natural disasters can affect the overall business operations like production and supply, damage to the company’s assets, etc. To handle such situations companies used environmental risk assessment techniques.
6) Legal Environment: All businesses must follow certain laws and legislations to ensure compliance with legal requirements. Legal factors are integral to the business environment and cannot be ignored by organizations, as this may change the way it operates. A proper legal environment is essential for all business organisations. Some of the major legislations which affect the business are the Essential Commodity Act, Weights and Measures Act, Trade Mark Act, etc.
7) Demographic Environment: Demographic changes have a huge impact on business decisions. The demographics differ from place to place. These changes can be in the size of the population, age, composers, ethnicity, income levels etc. Before formulating any strategy for the present and future, the business must consider these demographic factors.
FAQ
1. What do you understand by business environment?
The business environment is the sum or collection of all internal and external factors that impact a business and its operations. These factors include employees, customers’ needs and expectations, management, clients, supply and demand, owners, suppliers, activities by government, economic changes, social trends, innovation in technology, market trends, etc.
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