Question 1) Describe the components and significances of Business environment.

Answer)

Business Environment is a sum or collection of all internal and external factors such as
employees, customers’ needs and expectations, supply and demand, management, clients,
suppliers, owners, activities by government, innovation in technology, social trends, market
trends, economic changes, etc.

Components of Business Environment

A. Internal environment
Internal environment includes all those factors which influence business and which
are present within the business itself. These factors are usually under the control of business.
The study of internal factors is really important for the study of internal environment. These
factors are:
(i) Objectives of Business, (ii) Policies of Business, (iii) Production Capacity, (iv) Production
Methods, (v) Management Information System, (vi) Participation in Management, (vii)
Composition of Board of Directors, (viii) Managerial Attitude, (ix) Organisational Structure,
(x) Features of Human Resource, etc.
All the above factors do influence the decisions of business, but since all these factors
are usually under the control of business, they cannot be wholly included in the business
environment.

B. External Environment
External environment includes all those factors which influence business and exist
outside the business. Business has no control over these factors. The information about these
factors is important for the study of the external environment.
Some of these factors are those with which a particular company has very close
relationship. However, there are some other factors which influence the entire business
community.
Micro environment means that environment which includes those factors with which
business is closely related. These factors influence every industrial unit differently. These
factors are as under:
(i) Customers (ii) Suppliers (iii) Competitors (iv) Public (v) Marketing Intermediaries.
Additionally, also learn about the other components of business environment: -
(i) Economic Environment (ii) Technological Environment (iii) Social Environment (iv)
Demographic Environment (v) Political and Legal Environment (vi) Global Environment.

Significance of Business Environment:

Business Environment refers to the “Sum total of conditions which surround man at a
given point in space and time. In the past, the environment of man consisted of only the
physical aspects of the planet Earth (air, water and land) and the biotic communities. But in
due course of time and advancement of society, man extended his environment through his
social, economic and political function.”
In a globalised economy, the business environment plays an important role in almost
all business enterprises. The significance of business environment is explained with the help
of the following points:
(i) Help to understand internal Environment:
It is very much important for business enterprise to understand its internal
environment, such as business policy, organisation structure etc. In such case an
effective management information system will help to predict the business
environmental changes.
(ii) Help to Understand Economic System:
The different kinds of economic systems influence the business in different ways. It
is essential for a businessman and business firm to know about the role of capitalists,
socialist and mixed economy.
(iii) Help to Understand Economic Policy:
Economic policy has its own importance in business environment and it has an
important place in business. The business environment helps to understand
government policies such as, export-import policy, price policy; monetary policy,
foreign exchange policy, industrial policy etc. have much effect on business.
(iv) Help to Understand Market Conditions:
It is necessary for an enterprise to have the knowledge of market structure and
changes taking place in it. The knowledge about increase and decrease in demand,
supply, monopolistic practices, government participation in business etc., is
necessary for an enterprise.
Question 2) What is the Business environment? Explain the classification of Business
environment.

Answer)

The word ‘business environment’ indicates the aggregate total of all people,
organisations and other forces that are outside the power of industry but that may affect its
production. According to an anonymous writer- “Just like the universe, withhold from it the
subset that describes the system and the rest is environment”. Therefore, the financial,
cultural, governmental, technological and different forces which work outside an enterprise
are part of its environment. The individual customers or facing enterprises as well as the
management, customer groups, opponents, media, courts and other establishments working
outside an enterprise comprise its environment.

Classification of Business Environment

1. Static Environment
Business is affected by multiplicity of factors and forces, which constitute the environment
of business. As most of these factors are uncertain and also unpredictable, the business firm
will not have any control over them. However, certain factors may remain fairly static.

2. Dynamic Environment
In a dynamic environment, factors in the environment change very quickly, which cannot
be anticipated easily. Development in the fields of transportation, communication etc. has
made the world a closer one. Besides, economic environment also changes over time. In a
dynamic economy, population, human wants, capital resources, technology etc. are
continuously changing. Consequently, economic environment also changes.

3. Internal Environment
Internal environment refers to the internal factors of the business. It influences the strategy
of business operations and decisions. The value system of the founders of the business
enterprise, the mission and objectives of business organization and the business policies
adopted contributing to the success of the business are all matters connected with the internal
environment of the business.

4. External Environment
External environment refers to those factors, which are outside the business. The business
unit will not have any control over these factors. Almost all the factors we had discussed
already under economic and non-economic environment hold good for external environment
of the business. However, this external environment of business has been classified into two
namely,
1. Micro environment, and
2. Macro environment.

5. Market Environment and Non-Market Environment

We may distinguish between market environment and non-market environment. Market
environment tells about how the business firm’s environment is influenced by market forces
like demand and supply of the products of the firm, the number of firms competing in the
market, similar products etc. resulting in either price-competition or non-price competition by
the competing firms. Non-marketing environment denotes the laws enacted by the
Government, social traditions and other factors.