Business Environment

What is a Business Environment?

A business environment is a set of elements closely involved with a business’ activities. These factors have an internal or external influence over the company’s results, performance and growth.

Definitions of Business Environment

The term ‘business environment’ connotes external forces, factors and institutions that are beyond the control of the business and they affect the functioning of a business enterprise. These include customers, competitors, suppliers, government, and the social, political, legal and technological factors etc. While some of these factors or forces may have direct influence over the business firm, others may operate indirectly. Thus, business  nvironment may be defined as the total surroundings, which have a direct or indirect bearing on the functioning of business. It may also be defined as the set of external factors, such as economic factors, social factors, political and legal factors, demographic factors,  and technical factors etc., which are uncontrollable in nature and affects the business decisions of a firm.

  • Business Environment has been defined by Bayard O. Wheeler as “the total of all things external to firms and industries which affect their organization and operation”.
  • According to Arthur M. Weimer, business environment encompasses the ‘climate’ or set of conditions, economic, social, political or institutional in which business operations are conducted.
  • According to Glueck and Jauch, “The environment includes factors outside the firm which can lead to opportunities for or threats to the firm. Although there are many factors, the most important of the sectors are socio-economic, technological, supplier, competitors, and government.”
  • According to Barry M. Richman and Melvgn Copen “Environment consists of factors that are largely if not totally, external and beyond the control of individual industrial enterprise and their managements. These are essentially the ‘givers’ within which firms and their management must operate in a specific country and they vary, often greatly, from country to country”.

From the above definitions we can extract that business environment consists of factors that are internal and external which poses threats to a firm or these provide opportunities for exploitation.

What Does Business Environment Mean?

A business environment can be split in both a macro and micro-environment based on the perspective. A macro-environment is frequently associated with elements that affect all businesses regardless of their industry or size, as is the case for political or macroeconomic influences. On the other hand, the micro environment is known as the business competitive atmosphere, which includes competitors, customers and suppliers.

From a strategic perspective, analyzing the business environment is crucial to develop effective strategies to reach the company’s goals. Businesses normally hire consulting firms specialized in strategic analysis to research the current situation of this environment in order to understand the environment’s dynamics. These studies generally identify potential threats and opportunities that the company should incorporate to its strategic planning in order to reach its objectives. Finally, companies should stay flexible enough to adapt to sudden changes in the business environment. This ability to adapt will ensure the company’s survival even during the worst business scenarios.

Concept of Business Environment

A business firm is an open system. It gets resources from the environment and supplies itsgoods and services to the environment. There are different levels of environmental forces. Some are close and internal forces whereas others are external forces. External forces may be related to national level, regional level or international level. These environmental forces provide opportunities or threats to the business community. Every business organization tries to grasp the available opportunities and face the threats that emerge from the business environment. Business organizations cannot change the external environment but they just react. They change their internal business components (internal environment) to grasp the external opportunities and face the external environmental threats. It is, therefore, very important to analyze business environment to survive and to get success for a business in its industry.

It is, therefore, a vital role of managers to analyze business environment so that they could pursue effective business strategy. A business firm gets human resources, capital, technology, information, energy, and raw materials from society. It follows government rules and regulations, social norms and cultural values, regional treaty and global alignment, economic rules and tax policies of the government. Thus, a business organization is a dynamic entity because it operates in a dynamic business environment.

business environment
Factors influencing a business environment.

For the sake of simplicity the environmental forces could be classified into two categories:

  1. Internal environment and
  2. External environment.

1. Internal Environment:

The internal environment consists of conditions and forces within an organisation that affect the organisation’s management. Aspects of the internal environment include the organisation’s mission, cor­porate culture, owners and the board of directors, employees, other units of the organisation and unions.

The factors which exist within the organisation, imparting strength or causing weakness to the organisation, comes under internal environment. It includes:

  • Value System
  • Vision and Mission
  • Objectives
  • Corporate Culture
  • Human Resources
  • Labor Union

2. External Environment:

The external environment consists of those fac­tors that affect a firm from outside its organisational boundaries. Of course, the boundary that separates the organisation from its external environment is always not clear and precise. For example, shareholders are part of the organisation, but in another sense, they are part of its environment.

External Environment consists of those factors which provide an opportunity or pose threats to the business. It is further classified as:

  • Micro Environment: The immediate periphery of the business that has a continuous and direct impact on it is called Micro Environment. It includes suppliers, customers, competitors, market, intermediaries, etc. which are specific to the business.
  • Macro Environment: Macro Environment, is one such environment that influences the functioning and performance of every business organisation, in general. It comprises of the demographic, socio-cultural, legal, political, technological, and global environment.

Which part of environment is more important?

While analyzing the total (macro] environment, it is more effective to deal with the external forces first and then the internal, although some opine that the reverse order is better. For example, analysis of the internal environment might reveal a cash surplus, and top management might then decide to search the external environment for an investment opportunity, such as an acquisition.

Even here, examining external environment is essential to find whether the timing is right for an acquisition or any other use of cash. While deciding the internal-external order of analysis, one should not lose sight of aspects that work well in one set of conditions and change colour in another set of circumstances.

In actual practice, since both external and internal forces interact and impact organisational survival and growth, managers would do well to examine both sets of factors at the same time. The external environment reveals opportunities and threats and the internal environment uncovers strengths and weaknesses.

Literally, environment refers the surroundings external objects or circumstances in which someone or something exists. Here someone or something can be an individual, or a group of people, or an organisation. The performance of an individual or an organisation depends on the environment. The environment comprises forces which are outside or external to the business and forces that are internal to it.

Features of Business Environment

On the basis of the above discussion the features of business environment can be summarized as follows.

  • Business environment is the sum totals of all factors external to the business firm and that greatly influence their functioning.
  • It covers factors and forces like customers, competitors, suppliers, government, and the social, cultural, political, technological and legal conditions.
  • The business environment is dynamic in nature that means, it keeps on changing.
  • The changes in business environment are unpredictable. It is very difficult to predict the exact nature of future happenings and the changes in economic and social environment.
  • Business Environment differs from place to place, region to region and country to country.