What is Business Environment?

Meaning of Business Environment:

The word ‘business environment’ indicates the aggregate total of all people, organisations and other forces that are outside the power of industry but that may affect its production. According to an anonymous writer- “Just like the universe, withhold from it the subset that describes the system and the rest is environment”. Therefore, the financial, cultural, governmental, technological and different forces which work outside an enterprise are part of its environment. The individual customers or facing enterprises as well as the management, customer groups, opponents, media, courts and other establishments working outside an enterprise comprise its environment.

Importance of Business Environment:

Just like us, business operations do not survive in confinement. Every enterprise is not an island to itself; it subsists, endures and develops within the circumstances of the part and forces of its situation. While an individual enterprise is able to do minute to change or manage these forces, it has no choice to reacting or modifying according to them. Good knowledge of the environment by business managers allows them not only to recognise and assess but also to respond to the forces outside to their enterprises. The significance of the business environment and its perception by managers can be understood if we contemplate the below-mentioned following points:

(A) It Helps in Identifying Opportunities and Making First Mover Advantage

The environment provides numerous opportunities, and it is necessary to identify the opportunities to improve the performance of a business.
Early identification gives an opportunity to an enterprise be the first to identify opportunity instead of losing them to competitors. Example: ‘Airtel’ identified the need for fast internet and took first-mover advantage by providing 4G speed to its users followed by Vodafone and Idea.
Asian paints lost market share to Nerolac because it failed to match its technology.

(B) It Helps the Firm Identify Threats and Early Warning Signals

The business environment helps in understanding the threats which are likely to happen in the future.
Environmental awareness can help managers identify various threats on time and serve as an early warning signal. Example: Patanjali products have become a warning signal to the rest of the FMCG
The sector to develop similar products. Similarly, if an Indian firm finds that a foreign multinational is entering the Indian market with new substitutes; it needs to prepare accordingly.
Chinese mobile phones have become a threat for Indian mobile phone manufacturers.

(C) It Helps in Tapping Useful Resources

Business and industry avail the resources (inputs) from the environment and convert them into usable products (outputs) and provide to society.
The environment provides various inputs (resources) the like finance, machines, raw materials, power and water, labour, etc.
The business enterprise provides outputs such as goods and services to the customers, payment of taxes to the government, to investors and so on.

Example: With the demand for the latest technology, manufacturers will tap the resources from the environment to manufacture LED TVs and Smart TVs rather than collecting resources for colour or Black & White TVs.

(D) It Helps in Coping With Rapid Changes

The business environment is changing very rapidly, and the industry is getting affected by changing market conditions.
Turbulent market environment, less brand loyalty, divisions of markets, changes in fashions, more demanding customers, and global competition are some examples of changing the business environment.

Example: Jack Ma started Alibaba as he could see the potential of interest in E-Commerce.

(E) It Helps in Assisting in Planning and Policy Formulation

The business environment brings both threats and opportunities to a business.
Awareness of business environment helps in deciding future planning or decision making.

Example: Multiple entries of Chinese phones like VIVO, Gionee, OPPO, etc. have posed a threat to local players like Micromax, Karbonn, Lava etc. to think afresh how to deal with the situation.

(F) It Helps in Improving Performance

Environmental studies reveal that the success of any enterprise is closely bound with the changes in the environment.
The enterprises which monitor and adopt suitable business practices not only improve their performance but become leaders in the industry also.

Example: Apple has been successful in maintaining its market share due to its proper understanding of the environment and making suitable innovations in its products.

Features of Business Environment:

(A) The totality of External Forces

Business environment includes everything which is outside the organisation.
If we add all these forces, they will form a business environment.

Example: When Pepsi and Coca-Cola got permission to set up their business in India, it was an opportunity for them and threat for local manufacturers like gold spot, camp-cola etc.

(B) Specific and General Forces

Specific forces are those forces which directly affect the operational activities of the business enterprise.
Example: Suppliers, Customers, Investors, Competitors, Financers etc.
General forces are those forces which indirectly affect the functioning of business enterprises.

Example: Economic, Social, Political, Legal and Technological conditions.

(C) Inter-relatedness

Different forces of business environment are interrelated to each other.
One component of the business environment affects the functioning of other components.

Example: The increased life expectancy of people and awareness of health consciousness has increased the demand for many health products like diet coke, olive oil, and so many health products.

(D) Dynamic Nature

The business environment is dynamic in nature and keeps on changing in terms of :

(a) Technological improvement,

(b) Shifts in consumer preferences,

Example: Many established companies in FMCG (Fast Moving Consumer goods) sector are focusing on producing the goods with natural ingredients with the entry of ‘Patanjali Products’.

(E) Uncertainty

The changes in the business environment cannot be predicted accurately because of future uncertainties.
It is very difficult to predict the changes in the economic and social environment.

Example: There has been a sharp decline in the prices of Android smartphones due to the entry of many new companies.

(F) Complexity

All forces of the Business environment are interrelated and dynamic, which makes it difficult to understand.
Complex nature of Business environment can be understood if we study it in parts.
Example: Increase in goods and service tax to 15 % would increase the revenue of the government (economic), which would help the government to improve social being of people (social) and reduce the personal disposable income of rich people and thereby controlling inflation.

(G) Relativity

Business Environment differs from place to place, region to region and country to country.

Example: In China, the electricity to the industry is provided at cheaper rates as the consumption increases and hence, it leads to mass production whereas, in India, it is otherwise, higher consumption of electricity leads to costly electricity which results in lower production & higher cost of production.

Why It is Important for Business Enterprises to Understand Their Environment?

A) It Benefits in Tapping Useful Resources

Business and industry avail the resources (inputs) from the environment and convert them into usable products (output) and provide to society.
The environment provides various inputs (resources) like finance, machines, raw materials, power and water, labour etc.
The business enterprise provides outputs such as goods and services to the customers, payment of taxes to the government, interest/dividend to investors and so on.

(B) It Helps in Coping With Rapid Changes

The business environment is changing very rapidly and the industry is getting affected by changing market conditions.
Turbulent market environment, less brand loyalty, divisions of markets, changes in fashion, more demanding customers, and global competition are some examples of changing the business environment.

Example: Jack Ma started Alibaba as he could see huge potential in E-Commerce.

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