A Business Encyclopedia

Business Environment

Definition: Business Environment means a collection of all individuals, entities and other factors, which may or may not be under the control of the organisation, but can affect its performance, profitability, growth and even survival. Every business organisation operates in a distinctive environment, as it cannot exist in isolation. Such an environment influence business and also gets affected by its activities.

Salient Features of Business Environment

  1. Dynamic: The environment in which the business operates changes continuously because there is a wide variety of factors that exist in the environment, causing it to change its shape and character.
  2. Complex: There are many forces, events and conditions that constitute business environment, arising from various sources. So, it is a bit difficult to understand the relative influence of a particular factor, on the operation of the organisation.
  3. Uncertain: Uncertainty is an inherent characteristic of business environment because no one can predict what is going to happen in future.
  4. Multi-faceted: A single change in the business environment, can be viewed differently by different observers because their perceptions vary.
  5. Far-reaching Impact: The survival, growth and profitability, of a business enterprise, depends largely on the environment in which it exists. A small change in the environment has a far-reaching impact on the organisation in different ways.
  6. Relative: The notion of business environment is relative since it varies from one location to another.

Components of Business Environment

The Business Environment is broadly classified, into two categories:

  1. Internal Environment: The factors which exist within the organisation, imparting strength or causing weakness to the organisation, comes under internal environment. It includes:
    • Value System
    • Vision and Mission
    • Objectives
    • Corporate Culture
    • Human Resources
    • Labor Union
  2. External Environment: External Environment consists of those factors which provide opportunity or pose threats to the business. It is further classified as:
    • Micro Environment: The immediate periphery of the business that has a continuous and direct impact on it is called Micro Environment. It includes suppliers, customers, competitors, market, intermediaries, etc. which are specific to the business.
    • Macro Environment: Macro Environment, is one such environment that influences the functioning and performance of every business organisation, in general. It comprises of demographic, socio-cultural, legal, political, technological, and global environment.

All business enterprises, functions within an environment, called as the business environment. An individual business firm survives and grows within the periphery of its environment. A firm is only a part of a big environment, and so there are only a few factors which are under the control of the firm. So, the firm has no other option, but to respond and adapt accordingly. If business persons possess a good understanding of the business environment, they can easily recognise, analyse and react to the forces that affect the firm.

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