Business Environment: Meaning, Characteristics and Importance

Definitions of Business Environment

– 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

• Different elements of business environment are closely inter-related and interdependent.
• It is complex in the sense that it is very difficult to know the exact influence of a particular factor on the entity.
• A change in one element affects the other elements. Economic environment influences the non-economic environment which in turn affects the economic conditions.
  For example:
  • The economic liberalisation in India since 1991 has opened up new opportunities for private sector and foreign entrepreneurs.
  • The social pressures against pollution led to the enactment of anti-pollution laws.
  • The introduction of smart mobile phones has made cd player, watches, camera, etc. almost obsolete.
  • Therefore, managers should not consider environmental factors in isolation from one another. Although it is difficult to analyse the impact in totality.

• Dynamic means keeps on changing from time to time.
• The volatility prevails in the environment due to constant change in nature, shape, character and pervasiveness of the varied influencing factors.
  For example:
  • In music industry, audio cassette was replaced by CD. Later on even the market of CD is affected due to smart phones. At present, the film industry makes more revenue from ringtones and caller tunes rather than by selling music CDs.
  • Before COVID-19 pandemic, the small multi-screen theaters were popular. But now there is a change in trend in the cinema industry and movies are skipping theatrical releases and are going for direct digital releases on OTT platforms such as Netflix, Amazon Prime Video, Disney+Hotstar, Zee5, MX player, SonyLIV, etc.

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.

• Business environment is a relative concept. It differs from country to country and even region to region.
• Capitalist economies like those of USA and UK have a different kind of environment than communist economies. The nature of economic system in a country affects the environment of business.
• The technology in one country differs from that in another country.
  For example:
  • In India, the Honda Activa 7G is expected to launch by mid 2022, whereas in USA 10G scooters are being launched.

• Business environment is largely uncertain because it is very difficult to forecast the future environment.
• When the environment is volatile, i.e. changes very fast, uncertainty increases.
  For example:
  • In some industries like Fashion, Film, Information Technology, etc. It is almost impossible to predict the future trend.

• The term implies “having many different parts or sides”.
• Due to complexity, uncertainty and dynamism of a business environment, there is a continuous change in its shape, character and scope.
• The perception of the observer is very important as a new change or development may bring fresh opportunities to one but may be a threat to another.
  For example:
  • The Covid-19 has shifted offline to online learning. It has opened new avenues for ed-tech players like UpGrad, Vedantu, CL Educate, Toppe, etc. It has also given the PC industry a boost due to robust increase in demand for tablets.
  • On the other hand, it has created a threat on the people engaged in school canteens, transportation of students, etc.

• The term implies “having important and widely applicable effects or implications”.
• Each business organization operates in its unique environment and it influences and being influenced by such environment.
• The business environment has a very great influence not only on the growth but also on the survival of the organization. If you do not change as per the changed scenario, the business may come to an end.
  For example:
  • The famous WIPRO company was started in 1945 to manufacture and sell vegetable oil. In 1966, when Azim Premji took over the company from his father, expanded into IT. At present, WIPRO is one of the world’s largest and most successful IT services companies.
  • The food delivery apps have introduced a new concept of online booking and delivery from your favourite restaurant. The major players include Zomato, Swiggy, Foodpanda, etc. The impact of this development proved to be far reaching for the players in restaurant industry. Now, they can cater the services to a consumer located at a far place, without his physical presence, through there delivery apps.
  • Mukesh Ambani group tapped into the changes in its environment, moved from textile and refinery to retail outlets, mobile services, news and business channels, etc.

• It is related with determining the opportunities.
• Awareness of environment helps an enterprise to take advantage of early opportunities instead of losing them to competitors.
• 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.

• Environmental awareness serves as an early warning signal. It makes a firm aware of the impending threat or crisis so that the firm can take timely action to minimize the adverse effects, if any.
• 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.

• Environmental understanding makes the management sensitive to the changing needs and expectations of consumers.
• 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.

• Environmental monitoring provides relevant information about the business environment.
• Such information serves as the basis for strategy making.
• 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.

• Business leaders act as agents of change.
• They create a drive for change at the gross root level.
• 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.

• A business firm can improve its image by showing that it is sensitive to its environment and responsive to the aspirations of public.
• Leading firms like Reliance Industries, ICICI Bank and others have built good image by being sensitive and responsive to environmental forces.
• Environmental understanding enables business to be responsive to their environment.

• Environmental analysis serves as broad based and ongoing education for business executives.
• It keeps them in touch with the changing scenario so that they are never caught unaware.
• With the help of environmental learning managers can react in an appropriate manner and thereby increase the success of their organisations.
• Knowledge of changing environment can keep the organisation dynamic in its approach.

• The organization scans the external environment.
• Important information is generated after scanning, and it helps the organization to get over the problem of uncertainty and competitiveness of the external environment.
• Such information is gathered on economic activity and market conditions, social and demographic factors, technological developments, activities of rival organizations, etc.
• The organization uses this information for planning, decision-making, and control purposes.
• This information may be current or projected, but both are important for the organization.
• This information is also transmitted to several external agencies, either voluntarily, inadvertently or legally.

• Apart from information, there is an exchange of information also.
• To produce goods and services, a firm needs inputs from its environment: finance, materials, workforce, equipment, etc. The acquisition of these inputs requires interaction between organization and market.

The resources are typically categorized as 5 M’s:

1. 1.  Men
   2. Money
   3. Method
   4. Machine
   5. Material

• The interaction is also required to dispose of its output to a wide range of clientele such as customers, employees, shareholders, creditors, suppliers, local community, the general public, etc.

(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:

• The business environment is inclusive.
• It has command over resources, information and other inputs.
• It offers opportunities for growth on the one hand and constraints on the other.

(b) Organization may be well-positioned:

Sometimes organization enjoys considerable power and influence over some of the elements of the external environment:

• Organization may have command over information and resources.
• Such organizations have more autonomy and freedom of action.
• They can dictate terms of its environment and mould them to its will.

• Internal environment is a component of the business environment, which is composed of various elements present inside the organization, that can affect or can be affected with, the choices, activities and decisions of the organization.
• It encompasses the climate, culture, machines/equipment, work and work processes, members, management and management practices.
• In other words, the internal environment refers to the culture, members, events and factors within an organization that has the ability to influence the decisions of the organization, especially the behaviour of its human resource.
• 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.

• A business does not operate in a vacuum.
• The business operates in a complex business environment and is duly affected by it.
• These factors that happen outside the business are known as external factors or influences.
• The external factors or the environment not only affect the business’s internal functions but also create pressure on the organization to revisit and redefine, if necessary, its objectives and strategies.
• There are two major types of external environment:

1. 1. Micro Environment
   2. Macro Environment