Business Environment: Meaning, Characteristics and Importance
- Blog|Other Laws|
- 352 Views
- 13 Min Read
- By Taxmann
- Last Updated on 7 April, 2022
Table of Content
- Meaning of Business Environment
- Characteristics of Business Environment
- Importance of Business Environment
- Relationship between an Organisation and its Environment
- Environmental Influences on Business
- Environmental Analysis
- Environmental Scanning
- Components of Business Environment
- SWOT Analysis
Just like human beings, business also does not function in an isolated vacuum. Businesses function within a whole gambit of relevant environment and have to negotiate their way through it. The extent to which the business thrives depends on the manner in which it interacts with its environment. A business, which continually remains passive to the relevant changes in the environment, is destined to gradually fade-away in oblivion. To be successful business has not only to recognize different elements of the environment but also respect, adapt to or have to manage and influence them. The business must continuously monitor and adapt to the environment if it is to survive and prosper.1
The basic challenge before any company is its survival. For long term survival, a company must have at least the following two capabilities:
(a) The ability to prosper and
(b) The ability to change
The elements of environment of business and commerce are elaborated in this chapter. The present chapter also discusses the relationship between organization and its environment; environmental analysis and scanning, and organizations response to the environment.
2. Meaning of Business Environment
The term business environment means “the aggregate of all the forces, factors and institutions which are external to and beyond the control of an individual business enterprise but which exercise a significant influence on the functioning and growth of individual enterprises.”
Definitions of Business Environment
|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.
– Barry M. Richman and Melvgn Copen
Business environment is the aggregate of all conditions, events and influences that surround and affect business.
– Keith Davis
Business environment refers to “the total of all things external to firms and industries which affect their organisation and operation.
– Bayord O. Wheeler
Business environment encompasses the climate or set of conditions, economic, social, political, or institutional in which business operations are conducted.
– Arthtur M. Weimer
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.
– Glueck and Jauch
Initially only external forces were considered as the business environment. But in modern scenario, business policies and actions are affected by internal forces also. Thus, the integral elements of business environment include both the internal as well as the external factors, as both have an impact on business.
3. Characteristics of Business Environment
The important characteristic features of the business environment may be listed as follows:
DID YOU KNOW
In relation to screening spectrum of films, “OTT” is the abbreviation of ‘Over the Top’. OTT refers to TV and film content that can be viewed using the internet connection instead of satellite service or cable connection.
|6||Far Reaching Impact||
Therefore, the management of a business enterprise must have a deep understanding and appreciation of the environment. The changes taking place in the environment must be continuously monitored to judge their impact on business. Appropriate and timely steps must be taken to face the environmental changes.
4. Importance of Business Environment
The survival and success of any enterprise depends upon its inherent capabilities (physical, financial, human and other resources) and its ability to adapt to the changing environment. It is very important for business firms to understand their environment and changes occurring in it.
Business enterprises which know their environment and are ready to adapt to environmental changes would be successful.
On the other hand, firms which fail to adapt to their environment are unlikely to survive in the long run.
Some of the direct benefits of understanding the environment are given below:
|1||First Mover Advantage||
For example, Maruti Suzuki became the leader in small car market because it was the first to recognise the need for small car on account of rising petroleum prices and a large middle class.
|2||Early Warning Signal||
For example, ‘when new firms entered in the mid segment cars (threat), Maruti Suzuki increased the production of its Esteem threefold. Increase in production enabled the company to make faster delivery. As a result, the company captured a substantial share of the market and became a leader in this segment.
For example, Hindustan Unilever and several other FMCG companies launched small sachets of shampoo and other products realising the wishes of customers. This move helped the firms to increase sales.
For example, ITC realised that there is a vast scope for growth in the travel and tourism industry in India and the Government is keen to promote this industry because of its employment potential.
Study of environment enables an organisation to analyse its competitors’ strategies and thereby formulate effective counter strategies. All strategic decisions such as what business to do, whether to expand or reduce a business, and so on require a thorough understanding of the internal and external environment of the organisation.
For example, contemporary environment requires prompt decision-making and power to people. Therefore, business leaders are increasingly delegating authority to empower their staff and to eliminate procedural delays.
5. Relationship between an Organisation and its Environment
Since a business does not operate in a vacuum, external factors affect its actions. These factors may be related to micro as well as macro environment. An organization gets a range of opportunities, limitations, pressures and threats from the external environment. The style, structure, scope and functioning of the enterprise is affected by this environment. There is a close relationship between the organization and the environment. The nature of the relationship depends on the various parameters of an organization like its size, management, nature of ownership, age and nature of business, etc. In the significant areas of interaction, the focus of the relationship is on exchange. These areas of interaction are outlined below:
|1||Exchange of information||
|2||Exchange of resources||
The resources are typically categorized as 5 M’s:
|3||Exchange of influence and power||There are two aspects in this regard:
(a) Organization is conditioned and constrained:
The external environment can impose its will on the organization as it holds considerable power over a firm due to the following reasons:
(b) Organization may be well-positioned:
Sometimes organization enjoys considerable power and influence over some of the elements of the external environment:
6. Environmental Influences on Business
As per Barry M. Richman and Melvyn Copen, “Environment factors or constraint are largely if not totally, external and beyond the control of individual industrial enterprises and their managements. These are essentially the ‘givers’ within which firms and their managements must operate in a specific country and they vary, often greatly, from country to country.”
- The extent to which the business thrives, depends on the manner in which it interacts with its environment.
- If a business desires to be successful, it should recognize all the various elements of the environment so that it may mange its affairs to manage and adopt them in their better interest to survive and prosper.
- A successful business has to identify, appraise, and respond to the various opportunities and threats in its environment.
- The Business functions as a part of broader environment. All the organizations differ in terms of their inputs, processes, outputs, etc.
- The environment influences the business as organizations depend on the external environment for:
- the inputs required by them and
- for disposing of their outputs in a mutually beneficial manner.
It is important to note that this input-output exchange activity is a continuous process that prevails over the long term. Thus, the environment influences the business and there should be an active interaction with the external environment.
7. Environmental Analysis
Environmental Analysis2 is a process of identifying the relevant factors that have a direct or indirect impact on the effective and efficient functioning of the business. In other words, Environmental analysis is a strategic tool. It is a process to identify all the external and internal elements, which can affect the organization’s performance.
The analysis entails assessing the level of threat or opportunity the factors might present. These evaluations are later translated into the decision-making process. The analysis helps align strategies with the firm’s environment.
The steps in environmental analysis are:
- forecasting and
Utility of Environment Analysis:
Environmental analysis helps the strategists in the following manner:
- In anticipation of opportunities
- In planning or taking optimal responses to these opportunities.
- In developing an early warning system to prevent threats or in developing the strategies which can turn a threat to the firm’s advantage.
Goals of Environment Analysis:
The three basic goals of Environmental analysis are as follows:
(a) To provide an understanding of current and potential changes taking place in the environment.
(b) To provide inputs for strategic decision making.
(c) To facilitate and foster strategic thinking in organizations
8. Environmental Scanning
It has already been discussed that an organizational environment consists of both external and internal factors. The success of the organisation depends upon these factors. Knowledge of environmental changes is very helpful in the formulation and implementation of business plans. A business can obtain this knowledge through environmental scanning. The development and forecasts of these influencing factors should be scanned by the entities.
Environmental scanning3 is the ongoing tracking of trends and occurrences in an organization’s internal and external environment that bear on its success, currently and in the future. The results are extremely useful in shaping goals and strategies.
Environmental scanning can be defined as the process by which organizations monitor their relevant environment to identify opportunities and threats affecting their business for the purpose of taking strategic decisions.
In other words, it is the process of gathering information regarding company’s environment, analysing it and forecasting the impact of all predictable environmental changes. It helps the managers to decide the future path of the organization.
The following are the factors need to be considered in environmental scanning:
|1||Events||These are certain happening in the internal or external organisational environment which can be observed and tracked.|
|2||Trends||Trends are the general tendencies or the courses of action along which events take place. Trends are grouping of similar or related events that tend to move in a given direction, increasing or decreasing in strength of frequency of observation; usually suggests a pattern of change in a particular area.|
|3||Issues||Issues are the current concerns that arise in response to events and trends. Identifying an emerging issue is more difficult. Emerging issues start with a value shift, or a change in how an issue is viewed|
|4||Expectations||Expectations are the demands made by interested groups in the light of their concern for issues|
- Environmental scanning is the process by which organizations monitor their relevant environment to identify opportunities and threats affecting their business.
- With the help of environmental scanning, an enterprise can consider the impact of different events, trends, issues and expectations on its business operations.
- Firms which systematically analyse and diagnose the environment are more effective than those which do not. For example, some Indian firms suffered considerably because they failed to appreciate the tightening regulations against environmental pollution
9. Components of Business Environment
The components of business organizations are Internal and external. Further, the external components may relate to Micro or Macro environment.
The factors which are under the control of the organization, but can influence business strategy and other decisions are termed as internal factors. It includes:
(a) Value System: Value system consists of all those components that are a part of regulatory frameworks, such as culture, climate, work processes, management practices and norms of the organization.
(b) Vision, Mission and Objectives: The company’s vision describes its future position, mission defines the company’s business and the reason for its existence and objectives implies the ultimate aim of the company and the ways to reach those ends.
(c) Organizational Structure: The structure of the organization determines the way in which activities are directed in the organization so as to reach the ultimate goal. It can be matrix structure, functional structure, divisional structure, bureaucratic structure, etc.
(d) Corporate Culture: Corporate culture or otherwise called an organizational culture refers to the values, beliefs and behaviour of the organization that ascertains the way in which employees and management communicate and manage the external affairs.
(e) Human Resources: Human resource is the most valuable asset of the organization, as the success or failure of an organization highly depends on the human resources of the organization.
(f) Physical Resources and Technological Capabilities: Physical resources refers to the tangible assets of the organization that play an important role in ascertaining the competitive capability of the company. Further, technological capabilities imply the technical know-how of the organization.
There are two major types of external environment:
10. SWOT Analysis5
SWOT (strengths, weaknesses, opportunities, and threats) analysis is a framework used to evaluate a company’s competitive position and to develop strategic planning.
SWOT analysis assesses internal and external factors, as well as current and future potential.
A SWOT analysis is designed to facilitate a realistic, fact-based, data-driven look at the strengths and weaknesses of an organization, initiatives, or within its industry.
The organization needs to keep the analysis accurate by avoiding pre-conceived beliefs or gray areas and instead focusing on real-life contexts.
- www.mbaknol.com [Business Environment-concept]
Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While the Taxmann has exercised reasonable efforts to ensure the veracity of information/content published, Taxmann shall be under no liability in any manner whatsoever for incorrect information, if any.
Taxmann Publications has a dedicated in-house Research & Editorial Team. This team consists of a team of Chartered Accountants, Company Secretaries, and Lawyers. This team works under the guidance and supervision of editor-in-chief Mr Rakesh Bhargava.
The Research and Editorial Team is responsible for developing reliable and accurate content for the readers. The team follows the six-sigma approach to achieve the benchmark of zero error in its publications and research platforms. The team ensures that the following publication guidelines are thoroughly followed while developing the content:
- The statutory material is obtained only from the authorized and reliable sources
- All the latest developments in the judicial and legislative fields are covered
- Prepare the analytical write-ups on current, controversial, and important issues to help the readers to understand the concept and its implications
- Every content published by Taxmann is complete, accurate and lucid
- All evidence-based statements are supported with proper reference to Section, Circular No., Notification No. or citations
- The golden rules of grammar, style and consistency are thoroughly followed
- Font and size that’s easy to read and remain consistent across all imprint and digital publications are applied