Business Environment

What is Business Environment ?

Meaning of Business Environment

Business environment may be considered as a set of factors that influence the functioning and effectiveness of a business. Interacting and transacting with the environment is the basic need of every business organisation. Thus, there is a mutual interdependence between business and the environment.

Definitions of Business Environment

According to Keith Davis :
"Business environment is the aggregate of all conditions, events and influence that surrounds and affect it".

According to Andrews :
"The environment of a company as the pattern of all external influences that affect its life and development".

According to W.F. Glueck and Lawrence R. Jauch :
"The environment includes factors outside the firm, which can lead to opportunities or threats to the firm. Although there are many factors, the most important of these factors are socio-economic, technological, supplier, competitors and government".

The nature of business environment is ever changing and unstable. The future of any business enterprise is dependent and determined by the relevant risks and opportunities. The risks and opportunities are those factors which lie beyond the control of a company's management system. The customers, competitors, stakeholders, brokers, business trends, policies, government activities, social and economic factors, and technological advancements are all the components of an organisation which combine to form the business environment.

Components of Business Environment 

An understanding of environment and changes related to it is very essential for business enterprises. Those business enterprises which scan their environment and are always prepared to adapt changes, may achieve success. Contrary to this, enterprises which fail to adjust as per their environment are unable to survive in the long term. Types of business environment can be broadly classified into : 
1) Internal Environment
2) External Environment

Components of Business Environment

Internal Environment

Environment that has a direct influence on the business is termed as internal environment. The internal factors which influence the business environment are controllable in nature. Hence, the factors like physical facilities and organisation and functional means can be revised and transformed as per the requirements of the environment. The strategy and decisions of internal organisation is determined by the following key internal factors :

Internal Components of Business Environment

1) Value system : 
The selection of business, its mission, vision and objectives, business policies and practices are all elements of value system in an organisation. The founders and management team of a business enterprise play an important role in the decision making of the value system.

2) Mission and Vision and Objectives : 
Vision is a broader view to define the future prospects of the business. Vision aids in meeting the objectives of the business organisation. Mission is the short term action through which objectives are attained.

3) Management Structure and Nature : 
Generally, business decisions are persuaded by the organisational structure. This structure comprises of board of directors, managers, executives, etc. The number of members in an organisational structure determines the duration of decision making.

4) Internal Power Relationships :
The coordination between the levels of organisational structure is very important. The three levels i.e. top, middle and bottom levels must have mutual relationship among them. This helps the organisation to function smoothly.

5) Human Resource : 
Human resource is the key component of any organisation. They define the strength and weakness of an organisation. The essential requirements of human resource include skills, quality, commitment, sincerity, right attitude, etc. The level of employee's participation and initiative varies from organisation to organisation and is determined by the organisational culture.

6) Company Image and Brand Equity : 
The internal environment of the enterprise is affected by the image that it carries in the outside market. The image of the organisation helps in raising capital, mergers, and other alliances etc. Likewise, brand equity also influences the organisation.

7) Miscellaneous Factors : 
Various other factors. that determine the success or failure of a business are as follows :

i) Physical Assets and Facilities : 
The availability of assets and facilities is very important for the smooth functioning of the business. The facilities influencing the competitiveness of the firm include technology, production, labour, etc.

ii) Research and Development : 
The capability to innovate and compete is determined by the R&D department of an organisation. However, it is one of the external factors. It also influences the internal environment of the business.

iii) Marketing Resources : 
Marketing effectiveness of an organisation is directly influenced by the resources such as marketing department of the company, marketing personnel, distribution channel, and brand equity.

iv) Financial Factors : 
Finance is the life blood of an organisation. Proper allocation of financial resources affects the business performance, strategies and business policies. Some important factors: influencing the internal environment are financial policies, financial capital, etc.

External Environment

External environment are those factors which exists outside the business firm. The external factors of a company are also known as uncontrollable factors like economic factors, socio-cultural factors, demographic factors, legal factors, technological factors, etc.

The external factors are beyond the control of business enterprise. Therefore, success of a firm is highly dependent on the capability to appropriately adjust and design the internal factors. This helps to make most of the opportunities and overcome threats in the environment. Usually, the business environment is considered as the external environment of the business. But every business enterprise comprises of two types of environment i.e. internal and external environment. The external environment consists of two vital elements : 
1) Micro Environment
2) Macro Environment

External Components of Business Environment

1) Micro Environment :
Micro environment refers to the factors which directly influence the performance of the company. In other words, these factors are the most immediate environment of the company. The micro factors include suppliers, competitors, marketing intermediaries, consumers, and public. These factors are affected by the macro elements of the business environment.

The micro environmental factors are more closely related to the company in contrast to the macro factors. The micro factors affect different industries in different ways. Thus, a firm may apply the micro factors which are applicable for a particular business activity. 

For example, the micro environment of a restaurant can be its customers, other restaurants, suppliers of raw material, human resources etc. 

The success or failure of a firm depends on how effectively it deals with its micro elements such as: 

i) Customers : 
Customer is the most important element of the business enterprise. The main aim of any business is to attract and retain its customers. This helps the business to attain long term survival and profitability. Therefore, to increase the level of loyal customers, business enterprise should carefully observe the needs and wants of the customers and fulfill them effectively. The business enterprises must also analyse the changing tastes and preferences of the customers and make changes in its product and services accordingly. No business can neglect the customer's interest, as this may adversely affect the company. Hence, "customer is the central focus of the business environment".

ii) Suppliers : 
Suppliers are those who supply raw materials, components and machines to the business enterprises. The suppliers are an important micro factor in the business environment. They should be trustworthy and cordial with business enterprise. This will help the enterprise to attain the customer expectations and companies will become free from the burden of keeping heavy stocks.

iii) Marketing Intermediaries : 
Intermediaries are those who act as a mediator between the manufacturer and final consumer. The number of marketing intermediaries varies according to the size and type of distribution network. Marketing intermediaries are beneficial to the organisation only when there is a proper coordination between channels without any hurdle.

iv) Competitors : 
The organisations which manufacture similar products and try to conquer over the market share are termed as competitors. To earn more profit and stay competitive, the company needs to monitor the competitor's activities and then prepare its future plan. This helps the company to remain beyond its competitors in the long run.

v) General Public : 
The general public is also an indispensable part of business environment. The positive and negative responses of the public directly influence company's image. This can also affect the sales and revenue of the company. The activities such as noise pollution, air pollution, no waste disposal, etc., may create adverse effect on the company's image.

2) Macro Environment :
Macro environment prevails outside the business enterprise. These are the external factors which are uncontrollable and affect the business operations. Depending on macro factors, many changes need to be made in the areas like production, marketing, management, etc. 

The key macro environmental factors are listed as follows :

i) Political Environment : 
The factors such as state government, political institutions, policies and legislation's, public and private stakeholders influence the business environment. The stability and success of the business depends on the prevailing political environment. Sometimes, the changes made in the government policies (e.g. tax policies, government contracts, etc.) and regulations (e.g. safety regulations) affect the smooth functioning of the business.

ii) Economic Environment : 
The economic conditions of a country may affect the business decisions and plans of organisation. The factors such as economic rate, unemployment ratio, foreign exchange rates, and inflation and deflation. conditions can help or create problems in the management of the business environment.

iii) Social Environment : 
Social environment comprises of the customs and values of the society from where the business originates. The business enterprises, at large are influenced by the factors such as the changing tastes and preferences of customers, standard of living and educational level. 
For example, the advertisement slogan "Come Alive" was used by the Pepsi Cola Company to promote its product. This advertisement was misunderstood by people. of a particular region. They perceived "Come Alive" as "Coming out of Graves". As a result, there was no sale of the product in that region. Consequently, the company changed its slogan as it is impossible to survive in the market by overlooking societal values.

iv) Technological Environment : 
It refers to the changes in the business operations such as use of modern equipment, upgraded technologies, improved production techniques, etc. These changes must be monitored by the organisation to remain competitive in the market. The technological changes help the business enterprise to provide standardized and quality products to the customers.

v) Physical Environment : 
In the short and long term, concerns related to the environmental changes are crucial for business. The environmental changes like natural disasters can affect the overall business operations like production and supply, damage of company's assets, etc. To handle such situations environmental risk assessment techniques are used by the companies.

vi) Legal Environment : 
Any business transaction has to follow certain laws and legislation's. An organisation cannot ignore the legal factors, as this may change the way it operates. A proper legal environment is essential for all business organisations. Some of the major legislation's which affect the business are Essential Commodity Act, Weights and Measures Act, Trade Mark Act, etc.

vii) International Business Environment : 
It is composed of various legal and political systems, economic policies, accounting standards, environmental standards, labour policies, language and cultural differences, export and import regulations, tariffs, foreign exchange policies, trade agreements, etc. All these elements may undergo significant variations from one country to another. Objectives of a business enterprise and methods to achieve them are the governing factors for its business operations in an international business environment.