Business Environment

The word ‘Business Environment’ has been defined by various authors as follows,
“Business Environment encompasses the -climate’ or set of conditions, economic, social,
political or institutional in which business operations are Conducted.”—Arthur M. Weimer
“Environment contains the external factors that create opportunities and threats to the business.
This includes socio-economic conditions, technology and political conditions.” – William Gluck
and Jauch
‘‘Business environment is the aggregate of all conditions, events and influences that surround
and affect it.”—Keith Davis
“The environment of business consists of all those external things to which it is exposed and by
which it may be influenced directly or indirectly”. —Reinecke and Schoell.
“The total of all things external to firms and industries that affect the function of the organisation
is called business environment.”—Wheeler
“Civilisations require challenges to survive. Thus environment also contains hostilities and
dangers that may be overcome by individuals and organisations.”—Arnold J. Toynbee
On the basis of the above definitions, it is very clear that the business environment is a mixture
of complex, dynamic and uncontrollable external factors within which a business is to be
operated.
Nature of Business Environment:
The nature of Business Environment is simply and better explained by the following
approaches:

(i) System Approach:

In original, business is a system by which it produces goods and services for the
satisfaction of wants, by using several inputs, such as, raw material, capital, labour etc.
from the environment
(ii) Social Responsibility Approach:
In this approach business should fulfill its responsibility towards several categories of
the society such as consumers, stockholders, employees, government etc.

(iii) Creative Approach:
As per this approach, business gives shape to the environment by facing the challenges
and availing the opportunities in time. The business brings about changes in the society
by giving attention to the needs of the people.

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.

Business Environment can be classified in to two categories Namely: 

A. Internal Environment: Internal Environment refers to the factors existing within a

business firm. These internal factors are considered to be controllable because the
 enterprise has control over these factors. The main internal factors which influences
Business Decisions are as follows:
1. Culture: The values, beliefs and attitudes of the founder and top management of
the company exercises a strong influence on what the company stands for, how it does
things and what it considers important. When the value system is shared by all the
members, the organization is likely to be more successful.
2. Mission And Objectives: The Objectives of all the firms is assumed to be Profit
Maximization in the long run. But Mission is different from this narrow objective of
profit maximization. Mission is defined as the overall purpose or reason for existence
which guides and influences a firm decisions and economic activities.
3. Top Management Structure: The structure of the organization also influences
the business decisions. The composition of the board of directors, the degree of
professionalization of management and the organizational structure of a company have a
important bearing on its business decisions.
4. Power Structure: The internal power relationship between the board of directors
and the Chief Executive Officer is an important factor. The extent to which the top
management enjoys the support of shareholders and employees at different levels, also
has an important bearing on decision making.

B. External Environment: External Environment refers to the factors existing outside a

business firm. These External factors are considered to be uncontrollable because the
enterprise has No or Partial control over these factors. Further, External Environment can
be divided into two types Namely:

1. Micro Environment: Micro Environment consists of the factors in the company's

immediate environment. These factors affects the performance of the company and its
ability to serve the customers. Micro Environment consists of the following:
1. Customers: Customers constitutes an important segment of the micro
environment. Customer is the king of the market and every business exists to serve its
customers. A business has no meaning until and unless there are customers to serve.
2. Suppliers: Suppliers are the person who supply various inputs such as money,
raw material, fuel, power etc. and help in the smooth conduct of business. Further, firms
should have more than one supplier so that changes in the policies of one supplier does
not effect their production schedules.
3. Competitors: Competitors form an important part of the Micro Environment.
Business Firms compete to capture a larger share in the market. They constantly watch
the competitors policies and adjust their policies to gain customer confidence.
4. Company Image And Brand Equity: The image and Brand Equity of the
company plays a very important and significant role in raising finance, forming
alliances, choosing dealers and suppliers etc.
 2. Macro Environment: The Macro Environment consists of the Economic and Non-
Economic variables that provide opportunities and threats to firms. This is largely
uncontrollable and therefore, firms must adjust their operations to these environmental
factors. Macro Environment consists of the following:
1. Political Environment: Political Environment consists of the elements relating to
government affairs. The political environment provides the framework within which
business has to function. The main components of Political Environment are:
 The Constitution of the Country.
 Political Organization: includes Philosophy of political parties, ideology
of the government, nature and extent of bureaucracy, influence of primary groups
etc.
 Political Stability: includes structure of Military and police force, election
system, Law and order situation etc.
 Image of the country and its leaders.
 Foreign policy alignment or non-alignment.
 Law Governing Business
2. Economic Environment: The Economic Environment consists of the economic
forces that affects the business activities. These forces influences the buying
behavior and spending patterns of consumers and institutions. The main
components of Economic Environment are:
 Economic System: includes Capitalist, socialist and Mixed Economic
System.
 Economic Policies: includes Monetary Policy, Fiscal Policy, Supply side
Policy etc.
 Economic Indices: includes Gross Domestic Product, Consumer Price
index, Per Capita Income etc.
 Financial Market: includes Share Market, Money Market, Derivative
Market, Capital Market.
 Industrial Infrastructure etc.
3. Social And Cultural Environment: Social Environment refers to the
characteristics of the society in which a business firm exists and operates. The
main components of social and cultural environment are:
  Demographic Forces: includes Size, Composition and Mobility of
Population.
 Social Institutions and Groups.
 Caste Structure and Family Organisation.
 Educational System and Literacy Rate.
 Customs, beliefs, values and life styles.
 Tastes and Preferences of People.
 Entrepreneurial Spirit.
4. Technological Environment: Technology is changing at a fast pace and
technological environment is dramatically affecting the business environment either
 due to easy import policies or because of technology up-gradation. The main
components of Technological Environment are:
 Rate of Technological change and Diffusion.
 New approaches to the production of goods and services.
 Use of New processes and equipment.
 Transfer of Foreign Technology.
 Impact of Technology on cost, quality and value chain.
5. Legal Environment: The Legal Environment consists of the regulatory forces
that will affect the business activities and operations. The main components of
Legal Environment are:
 Current Legislation.
 International Legislation.
 Regulatory bodies and processes.
 Tax Regulations.
 Competitive Regulations.
 Industry Specific Regulations.
 Government Regulations.
6. Natural Environment: The main components under Natural Environment
are:
 Climatic Conditions.
 Agriculture, Commercial, and other Natural Resources.
 Ecological System.
 Levels of Pollution.
So, From this blog, We have understood What Is The Concept Of Business Environment,
Characteristics Or Nature Of Business Environment And The Various Types Of Business
Environment. In short, Business Environment is the sum total of all the forces which affects the
business organization and its various activities.

What is international business environment definition?

International Business Environment is multidimensional including the political risks, cultural
differences, exchange risks, legal & taxation issues. ... The main cultural and social factors that
affect international business are language, education, religion, values, customs, and social
relationships.