: What is the concept of Business Environment? Explain the nature and significance of the study of Business Environment.

Ans: Business organisation has to interact and transact with its environment. Hence, both the business and environment are totally interrelated and mutually interdependent. Business environment refers to those aspects of the surroundings business enterprise, which affect or influence its operations and determine its effectiveness.

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”.

The business environment is always changing and is uncertain. It is because of dynamism of environment. As it is already said that the business environment is the sum of all the factors outside the control of management of a company, the factor, which are constantly changing, and they carry with them both opportunities and risks or uncertainties which can, make or mark the future of business.

Business environment encompasses all those factors that affect a company’s operations and includes customers, competitors, stakeholders, suppliers, industry trends, regulations other government activities, social and economic factors and technological developments. Thus, business environment refers to the external environment and includes all factors outside the firm, which lead to opportunities and threats of a firm.

Nature of Business Environment

The nature of business environment is as follows:

1.      Complex: Business environment is compound in nature. Environment consists of a number of factors, events, conditions and influences arising from different sources which impact business thus making the business complex.

2.      Interdependence: The environment of the business is made of social, economic, legal, cultural, technological, and political factors. These factors of the environment are inter-dependable. The economic status of a country affects the development of technology. A rich country can make sufficient expenditure on the research and development.

3.      Dynamic: Business environment is constantly changing process. Business environment is dynamic as it keeps on changing in terms of technological improvement, shifts in consumer preferences or entry of new competition in the market. The various forces in the environment keep on changing from time to time thus making business dynamic and not static.

4.      Inter-relatedness: The different factors of business environment are co-related. For example, let us suppose that there is a change in the import-export policy with the coming of a new government. In this case, the coming of new government to power and change in the import-export policy are political and economic changes respectively. Thus, a change in one factor affects the other factor.

5.      Impact: Business environment has both long term and short term impact. Environment therefore has different effects on different firms in the same industry, for example, drugs.

6.      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.

7.      Relativity: It is a relative concept since it differs from country to country and region to region. Political conditions in the USA, for example 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.

Significance of Business Environment

Some of the direct benefits of understanding the business environment are given below:

1.      Customer Focus: Environmental understanding makes the management sensitive to the changing needs and expectations of consumers. For example: Hindustan Lever 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.

2.      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. With the help of this knowledge ITC planned new hotels both in India and abroad.

3.      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 others have built good image by being sensitive and responsive to environmental forces. Environmental understanding enables business to be responsive to their environment.

4.      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 are caught unaware. With the help of environmental learning managers can react in an appropriate manner and thereby increase the success of their organisations.

5.      Giving Direction for Growth: The interaction with the environment leads opening up new frontiers of growth for the business firms. It enables the business to identify the areas for growth and expansion of their activities.

6.      Change Agent: Business leaders act as agents of change. They create a drive for change at the grass root level. In order to decide the direction and nature of change, the leaders needs to understand the aspirations of people and other environmental forces through environmental scanning. 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.