Meaning of Business Environment
The term Business Environment’ means the total of all individuals or institutions and other forces that are outside the control of a business enterprise but that may affect its performance Thus, the economic social, political, legal, and technological forces which operate outside a business enterprise are part of its environment. The individual consumers or competing enterprises as well as the governments, consumer groups, courts, media, and other institutions working outside an enterprise also constitute its environment.
Features of Business Environment
- The totality of external forces:
The business environment is the total of all the things external to business firms. Therefore, it is aggressive in nature.
- Specific and general forces:
The business environment includes both specific forces (investors, customers, competitors, and Suppliers) and general forces (economic, social, political, legal, and technological conditions). Specific forces affect an individual firm directly and immediately in its day-to-day working while general forces have an impact on all business firms and thus may affect an individual firm only indirectly.
Different elements or parts of the business environment are closely interrelated. For example, people can purchase better quality goods and services which will improve their quality of life (social environment) because their incomes are rising (economic environment).
- Dynamic nature:
The business environment is dynamic as it keeps on changing in terms of technological improvements, changes in fashion and tastes of consumers, entry of new competitors in the market, etc.
The business environment is uncertain as it is very difficult to predict future happenings, especially when environmental changes are taking place too frequently eg., in the case of information technology (IT) and fashion industries.
The business environment is a complex phenomenon that is relatively easier to understand in parts but difficult to grasp in its totality. For example, it knows the relative impact of the social, economic, political, technological, or legal factors on the change in demand of a product in the market. maybe very difficult to
The business environment is a relative concept since it differs from country to country and even region to region. For example, political conditions in the USA differ from those in India or China. Similarly, demand for sarees may be fairly high in India whereas it may be almost non-existent in France.
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Importance of Business Environment
In the present day competitive market, a business needs to remain alert and aware of its environment A good understanding of the environment by business managers enables them not only to identify and evaluate but also to react to the forces external to their firms. The significance of understanding the environment in shaping the future of business can be appreciated if we consider the following facts.
- It helps the firm to identify opportunities and get the first-mover advantage: ‘Opportunities’ refer to the positive external trends and changes that will help to improve a firm’s performance. The environment provides numerous opportunities for business success. Early identification of opportunities helps the firm to be the first to exploit them instead of losing them to competitors. For example, Maruti Udyog became the leader in the small car market because it was the first to recognize the need for small cars in India, where petroleum prices were rising and there was a large middle-class population.
- It helps the firm to identify threats and early warning signals: “Threats’ refer to the negative external trends and changes that will hinder a firm’s performance Besides opportunities, the environment happens to be the source of many threats. Environmental awareness can help managers to identify various threats on time and serve as an early warning signal For instance, if an Indian firm finds that an MNC is entering the Indian market with new substitutes, this works as a warning signal for the Indian firm. So, it can improve the quality of its products, reduce the cost of production, engage in aggressive advertisements, etc.
- It helps in assisting in planning and policy formulation: Since the business environment provides both opportunities and threats for the firm, its understanding and analysis can be the basis for deciding the future course of action (planning) or training guidelines for decision-making (policy)
- It helps in tapping useful resources: A business firm assembles various resources called inputs like finance, machines, raw materials, power and water, labor, etc. environment including financiers, government, and suppliers. Then, it supplies the environment with its outputs such as goods and services for customers, payment of taxes to the government, return on financial investment to investors, and from its so on. Because the enterprise depends on the environment as a source of inputs or resources and as an outlet for outputs, the enterprise designs policies that allow it to get the resources that it needs so that it can convert those resources into outputs that the environment desires.
- It helps in coping with rapid changes: Today’s business environment is getting increasingly dynamic where changes are taking place at a fast pace. All sizes and all types of enterprises are facing an increasingly dynamic environment. Turbulent market conditions, less brand loyalty, divisions and sub-divisions (fragmentation) of markets, more demanding customers, rapid changes in technology, and intense global competition are just a few of the images used to describe today’s business environment. To effectively cope with these significant changes, managers must understand and examine the environment and develop suitable courses of action.
- It helps in improving performance: The firms which continuously monitor their environment and develop a suitable course of action not only improve their present performance but also continue to succeed in the market for a longer period.