Meaning of Business Environment
The term business environment means the totality of all individuals, institutions and other forces that are outside a business but that potentially affect its performance.
Everything which is outside the business constitutes the business environment. Customers, government, society, competitors, legal system and various market forces are part of business environment.
Features of Business Environment
Totality of external forces
All the external forces have cumulative effect on the business. In other words, they are aggregating in nature.
Specific and general forces
Some of the forces are of general nature, while some others are specific in nature. The general forces affect all sorts of business entities in more or less the same way. Social, political and legal factors are examples of general forces. Customers, competitors and investors are examples of specific forces.
All the forces of the business environment are related to each other. For example: political system of a country is influenced by social norms and vice versa is also true. Similarly, legal system is a product of social norms and political system of the country.
Business environment is dynamic in nature, i.e. it keeps on changing. The business environment of the country in the 1980s was entirely different from that in the 1990s. Things have undergone massive changes in the 21st century.
Business environment is always uncertain. Sometimes, a well chalked out plan of a business organisation may go off the track because of unforeseen circumstances. The pandemic that engulfed the whole world in 2020 is a good example of uncertainty of business environment. While the pandemic entailed windfall gains for the pharmaceutical industry, it spelt doom for the hospitality industry.
Business environment is too complex to be understood by mere mortals. It is easier to understand in parts but very difficult to understand in totality.
Business environment is relative in the sense that it changes from one country to another. In a large country, like India the business environment changes even from one region to another. Glass bangles have huge market in our country but that is not the case for the market in the USA. Similarly, coconut oil is used for cooking in south India but it is primarily sold as hair oil in north India.
Importance of Business Environment
Business environment and its understanding are important for:
- Enabling the identification of opportunities and getting the first mover advantage
- Helping in the identification of threats and early warning signals
- Coping with the rapid changes
- Assisting in planning and policy
- Improving the performance