Business Environment Notes:
Today’s coolest ventures are start-ups. These enterprises have changed the way the world looks at businesses these days. Yet, we often hear that while some start-ups make fortunes, others do not succeed and thus wrap up after attempting to make it big in the world. But what is this factor which affects which business succeeds and which doesn’t? The business environment is a concept which aims to decode the conditions around a business and what influences its future. This Business Environment Notes compilation shall give you a comprehensive overview of the subject. Read on for the business environment notes for better understanding of the subject!
What is Business Environment?
Business environment is defined as the combination of internal and external factors that influence a company’s operating situation. In other words, Business Environment is 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.
Types of Business Environments
Business environments have been classified in different ways.
- MICRO ENVIRONMENT. internal environment
- MACRO ENVIRONMENT. external environment
- MARKET ENVIRONMENT.
Microenvironment comprises of the factors which operate in the immediate environment of the company, thus affecting the performance of the company. Suppliers, competitors, Marketing intermediaries, customers, pressure groups and the general public make up the macro environment. Supplier, including the financial labour inputs, is an important factor in the microenvironment of business. Suppliers are also those institutions which supply money to the organization, e.g., Stockholders, banks and other similar organizations. The job of managers is always to try and ensure a steady flow of inputs at the lowest price. Customers – individuals, industries, governments or other institutions make up an important factor in the internal environment of business. They form the demand segment of the market which ensures the existence and operation of the business. Labour force is the other important component of the internal business environment. Other stakeholders of micro business environment include business associates, competitors, regulatory agencies and the marketing intermediaries.
The macro environment is the sum total of major external and uncontrollable factors which influence an organization’s decision making, thus affecting its strategies and performance. Economic, demographic, natural, cultural and political forces make up the macro environment of the business. Thus, it is categorized into the economic environment, socio-cultural environment, political and government environment, and the international environment.
Examples – Government regulations, competitors in business, changes in cultural tastes, changes in interest rates, climate change or disasters etc.
Another classification is:
- Economic environment
- Non-economic environment.
The determinant of survival and success of the business in the long term. It has three components: Economic conditions, Economic policies and Economic systems.
Economic conditions: The economic status of the country. Some factors are: gross domestic product, per capita income, availability of capital, the strength of capital market markets for goods and services, foreign exchange reserve, growth of foreign trade, etc.
Economic Policies: The rules and regulations set up by the government which influence the direction and guide economic decisions. Businesses are expected to follow these policies and adapt to changes whenever instructed to do so. Some of these are :
(i) Industrial policy
(ii) Fiscal policy
(iii) Monetary policy
(iv) Foreign investment policy
(v) Export –Import policy (Exim policy)
Economic system:- There are three economic systems, the capitalist system – favouring privat ownership of businesses, the socialist system favouring state ownership of businesses and the mixed system having features of both systems.
- Social environment – social factors like customs, traditions, values,
beliefs, poverty, literacy, life expectancy rate etc. These influence how people value the services or products of a business.
- Political environment – The ideology of political parties, the stability of government, protectionism, political awareness of the consumers and decisions of political parties affect operations of businesses.
- Legal environment– Various laws exist regulating the nature of operations, establishing and closing of businesses, employment and social security of workers etc.
- Technological environment Production and distribution methods, techniques etc.
- Demographic environment – The size, density, distribution and growth rate of population.
- Natural environment – Location, resource availability, weather of the place etc.
Characteristics of a Business Environment
- Business environment is the sum total of all external and internal factors of the business which influences and determines its functioning.
- Factors like customers, competitors, suppliers, government, and
the social, cultural, political, technological and legal conditions make up the business environment.
- The business environment is ever-changing, thus it is dynamic in nature.
- Business Environment differs geographically, and culturally.
- The changes in business environment are unpredictable.
Importance of the business environment
(a) Determines Opportunities and Threats: The interaction constantly going on between the business and the environment helps in identification of opportunities and challenges, helping the firm grow qualitatively and quantitatively.
(b) Directing Growth Trends: New frontiers of growth for the business firms open up via interaction of environment and businesses.
(c) Continuous Learning: Managers constantly improve their knowledge base and skill-sets depending on the nature of interaction between the business and the environment.
(d) Strategies to meet Competition: Environmental analysis helps businesses to come up with new strategies to foil competition.
(e) Identifying Firm’s Strength and Weakness: A SWOT analysis of the business and its environment helps in clarifying the vision and targets of the business with respect to local national and global goals.
(f) Perception moulding: Understanding and being sensitive to the environment in which the firm is operating helps it to make its perception better. Corporate Social Responsibility initiatives are a good example, in which businesses contribute to the betterment of the environment in which they operate.
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