Meaning of Business Environment

The term ‘business environment’ means the sum total of all individuals, institutions and other forces that are outside the control of a business enterprise but that may affect its performance.


  1. Totality of external forces:

Business environment is the sum total of all things external to business firms. It includes the combined effect of social, political, legal, economic and technological factors.

  1. Specific and general forces:

Business environment includes both specific and general forces.

Specific forces can be like investors, customers, competitors and suppliers affecting individual enterprises directly and immediately in their day-to-day working.

General forces are like social, political, legal and technological conditions affecting all business enterprises , thus affecting an individual firm only indirectly.

  1. Inter-relatedness:

Different elements or parts of business environment are closely interrelated.

For example, increased awareness for health care have increased the demand for many health products and services like fat-free cooking oil  which in turn have changed people’s life styles.

  1. Dynamic nature:

Business environment is dynamic as it keeps on changing due to factors like technological improvement, changes in the govt. policy, shifts in consumer preferences or entry of new competitor in the market.

  1. Uncertainty:

Business environment is largely uncertain as it is very difficult to predict future effect of frequent environmental changes like in case of information technology or fashion industries.

  1. Complexity:

It is very difficult to understand at once the effect of any individual factor as business environment consists of various interrelated and dynamic conditions or forces arising from different sources.

For example, it may be difficult to know the extent of the relative effect of the social, economic, political, technological or legal factors on change in demand of a product in the market.

  1. Relativity:

Business environment is a relative concept since it differs from country to country and even region to region.

For example, political conditions in the USA, differ from those in China or Pakistan. Similarly, due to different social conditions demand for sarees is fairly high in India in comparison to its demand in France.

Importance of Business Environment

The importance of business environment and its understanding by managers can be understood from the following facts:

  1. First mover advantage:

Study of environment provides numerous opportunities for business success. Opportunities means the positive external changes that can help a firm to improve its performance, which if identified helps an enterprise to be the first to make their best use instead of losing them to competitors.

For example, Maruti Udyog became the leader in the  small car market because it  was the first to understand the need for small cars in times of rising petroleum prices and a large middle class population in India.

  1. Early warning signals:

Environmental awareness can help managers to identify various threats on time and serve as an early warning signal. Threats are the external environment trends and changes that can hinder a firm’s performance.

For example, if an Indian firm finds that a foreign multinational is entering the Indian market with new substitutes, it will act as a warning signal and the Indian firm will take necessary action.

  1. Tapping useful resources:

Business uses various inputs like finance, machines, raw materials, power and water, labour, etc. from environment and delivers back to environment its outputs like goods and services for customers, payment of taxes to government, return on financial investment to investors and so on. All this can be done properly only if there is proper understanding of environment.

  1. Coping with rapid changes:

Business environment is changing very fast like turbulent market conditions, less brand loyalty, more demanding customers, rapid changes in technology and global competition. To effectively cope with these changes, managers must develop suitable courses of action.

  1. Planning and policy formulation:

The understanding of opportunities and threats can be the basis for deciding the future course of action (planning) or training guidelines for decision making (policy).

For example, entry of new competitors in the market, would make an enterprise think afresh about how to deal with the situation.

  1. Improving performance:

It has been revealed by many researches that the firms which adapt with the rapidly changing environment are able to improve their performance and stay longer in the market.

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