Business Environment: Definition, Nature, Importance, and Components

Learn Business Environment: Business means human activity directed towards producing or acquiring wealth through buying and selling goods. It can define as “the forces, factors, and institutions with which the businessman has to deal with to achieve its objectives”. Here are articles explain Business Environment with their topics of Meaning, Definition, Nature, Importance, and Components. It is a complex field of commerce and industry in which goods and services are created and distributed in the hope of profit within a framework of laws and regulations.

What does mean Business Environment? Explain Meaning, Definition, Nature, Importance, and Components.

Environment scanning can define as a process by which organizations monitor their relevant environment to identify opportunities and threats affecting their business. No company can survive in the market by ignoring the effects of Business Environment. As well as, efficient management analyses the environment and makes changes in organizational policies to integrate its activities with Business Environment.

The most suitable example to prove the impact of Business Environment is the controversial case of Pepsi and Coke Company. Business Environments provide constraints as well as opportunities for the businessman. For example, the regulation such as the MRTP Act and wealth restriction put constraints on the businessman. On the other hand, the liberalization policies, import relaxation policies bring opportunities for the businessman.

Definition of Business Environment:

The word business environment has been defined by various authors as follows,

According to Wheeler as;

“The total of all things external to firms and industries that affect the function of the organization is called business environment.”

According to Arthur M. Weimer as;

“Business Environment encompasses the -climate’ or set of conditions, economic, social, political or institutional in which business operations are conducted.”

According to Keith Davis as;

‘‘Business environment is the aggregate of all conditions, events, and influences that surround and affect it.”

Thus the business is an economic activity performed by human connection with the production and exchange of goods and services with a profit motive under the laws and regulations of the country. Based on the above definitions, it is very clear that the business environment is a mixture of complex, dynamic and uncontrollable external factors within which a business is to operate.

Nature of Business Environment:

The nature of Business Environment is simply and better explaining by the following approaches;

1] System Approach:

In original, business is a system by which it produces goods and services for the satisfaction of wants, by using several inputs, such as, raw material, capital, labor, etc. from the environment.

2] Social Responsibility Approach:

In this approach, the business should fulfill its responsibility towards several categories of society such as consumers, stockholders, employees, government, etc.

3] Creative Approach:

As per this approach, the business gives shape to the environment by facing the challenges and availing the opportunities in time. Also, the business brings about changes in the society by giving attention to the needs of the people.

Importance of Business Environment:

The importance of business environment explains with the help of the following points:

1] Help to understand internal Environment:

It is very much important for business enterprises to understand their internal environment, such as business policy, organization structure, etc. In such a case an effective management information system will help to predict the business environment changes.

2] Help to Understand Economic System:

The different kinds of economic systems influence the business in different ways. A businessman and business firm need to know about the role of capitalists, socialist and mixed economy.

3] Help to Understand Economic Policy:

Economic policy has its importance in the business environment and it has an important place in business. Also, the business environment helps to understand government policies such as export-import policy, price policy; monetary policy, foreign exchange policy, industrial policy, etc. have much effect on business.

The big plans or strategies and policies in the organization are formed keeping in mind the business environment because the strategies and policies have to execute in the presence of environmental factors. Scanning of environmental factors helps to find out the problems of business and makes a better strategy to resolve them.

4] Help to Adapt and Adjust with the Rapid Changes:

In today’s world, changes are taking place very fast and these fluctuations have a great impact on business. So it is important to understand these changes as fast as possible. The business environment helps to scan the problems of the companies and also helps to remove them for future benefits.

The businessman did changes in their internal environment also to match the external environment. With the help of a scanning environment, the Ambani bros recognized that today’s environment demands quick decision so they shifted from centralization to decentralization.

5] Help to Understand Market Conditions:

An enterprise must know the market structure and changes taking place in it. The knowledge about the increase and decrease in demand, supply, monopolistic practices, government participation in business, etc., is necessary for an enterprise.

Components of Business Environment (Download PDF file):

Every business firm consists of a set of internal factors and it also confronts a set of external factors. The following components factor you a more clear and comprehensive explanation about the different factors of the internal and external business environment.

Internal Business Environment:

Several factors influence the various strategies and decisions within the organization’s boundaries. These factors are known as internal factors and are given below:

1] Human Resources:

It involves the planning, acquisition, and development of human resources necessary for organizational success. It points out that people are valuable resources requiring careful attention and nurturing. Progressive and successful organizations treat all employees as valuable human resources. The organization’s strengths and weaknesses also determined by the skill, quality, morale, commitment, and attitudes of the employees. Organizations face difficulties while carrying out modernizations or restructuring process by the resistance of employees. So, the issues related to morale and attitudes should seriously be considered by the management. Moreover, global competitive pressures have made the skillful management of human resources more important than ever. The support from the different levels of employees supports the management in the different decisions and their implementations.

2] Company Image:

One company issues shares and debentures to the public to raise money and its instruments oversubscribe while the other company seeks the help of different intermediaries like underwriters to generate finance from the public. This difference underlies the distinction between the images of the two companies. Also, the image of the company matters in certain other decisions as well as forming joint ventures, entering contracts with the other company or launching new products, etc. Therefore, building a company image should also be a major consideration for the managers.

3] Management Structure:

Gone are the days when business was carried out by the single entrepreneur or in the formation of partnerships. Now it has reshaped itself into the formation of the company where it is run and controlled by the board of directors who influence almost every decision. Therefore, the composition of the board of directors and nominees of different financial institutions could be very decisive in several critical decisions. The extent of professionalization is also a crucial factor while taking business decisions.

4] Physical Assets:

To enjoy economies of scale, a smooth supply of produced materials and efficient production capacity are some of the important factors of business that depend upon the physical assets of an organization. These factors should always keep in mind by the managers because these play a vital role in determining the competitive status of a firm or an organization.

5] R & D and Technological Capabilities:

Technology is the application of organized knowledge to help solve problems in our society. The organizations which are using appropriate technologies enjoy a better competitive advantage than that of their competitors. The organizations which do not possess strong Research and Development departments always lag in innovations which seems to be a prerequisite for success in today’s business. Therefore, the R & D and technological capabilities of an organization determine a firm’s ability to innovate and compete.

6] Marketing Resources:

The organizations which possess a strong base of marketing resources like talented marketing men, strong brand image, smart salespersons, identifiable products, wider and smooth distribution network and high quality of different services, make effortless inroads in the target market. As well as, the companies which are having so strong basis can enjoy the fruits of brand extension, form extension, and new product introduction, etc. in the market.

7] Financial Factors:

The performance of the organization is also affected by certain financial factors like capital structure, financial position, etc. Certain strategies and decisions are determined based on such factors. Also, the ultimate survival of organizations in both the public and private sectors is dictated largely by how proficiently available funds are managed. So, these were some of the factors related to the internal environment of an organization. These factors are generally regarded as controllable factors because the organization commands control over these factors and can modify or alter as per the requirement of the organization.

External Business Environment:

Companies operate in the external environment that forces and shape opportunities as well as threats.

These forces represent “noncontrollable”, which the company must monitor and respond to. SWOT (Strengths, weaknesses, opportunities, and threats) analysis is very much essential for the business policy formulation which one could do only after examination of the external environment. The external business environment consists of macro-environment and micro-environment.

1] Micro Environment:

The company’s immediate environment where routine activities affect by certain actors. Suppliers, marketing intermediaries, competitors, customers, and the public operate within this environment. Also, the micro factors don’t need to affect all the firms. Some of the factors may affect a particular firm and do not disturb the other ones. So, it depends on that to what type of industry a firm belongs to. Now let’s discuss in brief some of the micro-environmental factors.

• Suppliers.
• Customers.
• Competitors.
• Marketing Intermediaries, and.
• Publics.

2] Macro Environment:

With the rapidly changing scenario, the firm must monitor the major forces like demographic, economic, technological, political/legal and social/cultural forces. The business must pay attention to their casual interactions since these factors set the stage for certain opportunities as well as threats. These macro factors are, generally, more uncontrollable than the micro factors. A brief discussion of the important macro-environmental factors give below:

• Demographic Environment.
• Economic Environment.
• Technological Environment.
• Political or Legal Environment, and.
• Social-cultural Environment.