Business Environment: Meaning, Characteristics and Importance

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  • Last Updated on 7 April, 2022

Table of Content

  1. Introduction
  2. Meaning of Business Environment
  3. Characteristics of Business Environment
  4. Importance of Business Environment
  5. Relationship between an Organisation and its Environment
  6. Environmental Influences on Business
  7. Environmental Analysis
  8. Environmental Scanning
  9. Components of Business Environment
  10. SWOT Analysis

Business Environment; SWOT analysis;

1. Introduction

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:

1 Complex
    • 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.
2 Dynamic
    • 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.

3 Relativity
    • 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.
4 Uncertainty
    • 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.
5 Multi-Faceted
    • 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.
6 Far Reaching Impact
    • 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.

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
    • 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.

2 Early Warning Signal
    • 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.

3 Customer Focus
    • 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.

4 Strategy Formulation
    • 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.

5 Change Agent
    • 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.

6 Public Image
    • 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.
7 Continuous Learning
    • 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.

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
    • 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.
2 Exchange of resources
    • 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.  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.

DID YOU KNOW

The organization receives inputs from the environment, and simultaneously it depends on the disposal of output. This process of perceiving the needs of the external environment and catering to them is called as interaction process.
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:

    • 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.

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:
    1. the inputs required by them and
    2. 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.

Steps:

The steps in environmental analysis are:

    1. scanning
    2. monitoring
    3. forecasting and
    4. assessment.

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

Importance:

    • 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.

1 Internal Environment4
    • 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.

2 External Environment
    • 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. Micro Environment
      2. Macro 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.


  1. www.mbaknol.com [Business Environment-concept]
  2. www.businessmantalk.com
  3. www.fordham.edu
  4. www.businessjargons.com
  5. Investopedia

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