Business Environment

Class 12 Business Studies

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.

1. Meaning of Business Environment

The economic, social, political, technological and other forces which operate outside a business enterprise are part of its environment. So also, the individual consumers or competing enterprises as well as the governments, consumer groups, competitors, courts, media and other institutions working outside an enterprise constitute its environment.

For example, changes in government's economic policies, rapid technological developments, political uncertainty, changes in fashions and tastes of consumers and increased competition in the market - all influence the working of a business enterprise in important ways. Increase in taxes by government can make things expensive to buy. Technological improvements may render existing products obsolete. Political uncertainty may create fear in the minds of investors. Changes in fashions and tastes of consumers may shift demand in the market from existing products to new ones. Increased competition in the market may reduce profit margins of firms.

2. Features of Business Environment

(i) Totality of external forces

Business environment is the sum total of all things external to business firms and, as such, is aggregative in nature.

(ii) Specific and general forces

Business environment includes both specific and general forces. Specific forces (such as investors, customers, competitors and supp­liers) affect individual enterprises directly and immediately in working. their day-to-day General forces (such as social, political, legal and technological conditions) have impact on all business enterprises and thus may affect an individual firm only indirectly.

(iii) Inter-relatedness

Different elements or parts of business environment are closely inter- related. For example, increased life expectancy of people and increased awareness for health care have increased the demand for many health products and services like soft drinks, fat-free cooking oil, and health resorts. New health products and services have, in turn, changed people’s life styles.

(iv) Dynamic nature

Business environment is dynamic in that it keeps on changing whether in terms of technological improvement, shifts in consumer preferences or entry of new competition in the market.

(v) Uncertainty

Business envir­onment is largely uncertain as it is very difficult to predict future happenings, especially when environment changes are taking place too frequently as in the case of information tech­nology or fashion industries.

(vi) Complexity

Since business env­ironment consists of numerous interrelated and dynamic conditions or forces which arise from different sources, it becomes difficult to comprehend at once what exactly constitutes a given environment.

(vii) Relativity

Business environment is a relative concept since it differs from country to country and even region to region. Political conditions in the USA, for instance, differ from those in China or Pakistan. Similarly, demand for sarees may be fairly high in India whereas it may be almost non-existent in France.

3. Importance of Business Environment

Just like human beings, business enterprises do not exist in isolation. Each business firm is not an island unto itself; it exists, survives and grows within the context of the element and forces of its environment.

1. It enables the firm to identify opportunities and getting the first mover advantage.
2. It helps the firm to identify threats and early warning signals.
3. It helps in tapping useful resources.
4. It helps in coping with rapid changes.
5. It helps in assisting in planning and policy formulation.
6. It helps in improving performance.

4. Dimensions of Business Environment

Business environment consists of five important dimensions including economic, social, technological, political and legal.

(i) Economic Environment

Int­erest rates, inflation rates, changes in disposable income of people, stock market indices and the value of rupee are some of the economic factors that can affect management practices in a business enterprise.

(ii) Social Environment

The social environment of business include the social forces like customs and traditions, values, social trends, society’s expectations from business, etc.

(iii) Technological Environment

Technological environment includes forces relating to scientific improvements and innovations which provide new ways of prod­ucing goods and services and new methods and techniques of operating a business.

(iv) Political Environment

Political environment includes political conditions such as general stability and peace in the country and specific attitudes that elected government representatives hold towards business.

(v) Legal Environment

Legal envi­ronment includes various legislations passed by the ­ Government administrative orders issued by government authorities, court judgments as well as the decisions rendered by various commissions and agencies at every level of the government - centre, state or local.