Business Environment: Meaning, Components & Importance

The term “Business environment” represents the sum of all the individuals, institutions, competing organisations, government, courts, media, investors, and other factors outside the power of the business organisations but affects the business performance. Hence, changes in government economic policies, rapid changes in technology, changes in consumer tastes and preferences, increasing market competition, etc. are outside the business organisations' power but affect the business performance immensely.

For example, an increase in taxes by the government makes everything expensive in the market; technology changes may make the existing product obsolete, political uncertainty creates fear in the mind of investors, increase in competition in the market due to competitors may affect business profit, and changing in demand and preferences may increase the need for a new product and decrease the demand for old product.

Business Environment Definition

The term “Business environment " is the sum of all conditions, events, and influences that surround and affect business activities and growth.

Components of Business Environment

Internal - It combines the factors that exist within the company. These are –

• Human resources

• Value system

• Vision and mission

• Labour union

• Corporate culture

External - An external Environment includes those outside factors that exercise an influence on a business’s operations. It is further classified into two segments.

• Macro - Socio-cultural, political, legal, and global factors fall into this category.

• Micro - This environment has a direct and immediate impact on a business. It consists of customers, investors, suppliers, etc. 

Features of Business Environment

• The business environment is the sum of all external factors that affect its growth.

• The business environment includes both general and specific forces. Specific forces include investors, customers, competitors, and suppliers. These factors affect individual enterprises directly and immediately in their day-to-day working. General forces include social, political, legal, and technological conditions. The general forces affect the business environment individually.

• The business environment is dynamic.

• The business environment is highly uncertain.

• The business environment is a relative concept as it differs from country to country and even region to region.

Dimensions of Business Environment

The dimension of the business environment refers to the sum of all factors, enterprises, and forces that constitute direct or indirect influence over business activities. Such five key elements are listed below. 

1. Social Environment 

It implies the tradition, culture, customs, and values of a society in which the business exists. 

• Tradition: In India, festivals like Diwali, Christmas, and Holi provide a financial opportunity for several market segments like sweet manufacturers, gifting products suppliers, etc. 

• Value: A company that follows long-held values like social justice, freedom, equal opportunities, gender equality, etc. excels in that given society.

• Recurrent Trends: It refers to development or general changes in a society like consumption habits, fitness awareness, literacy rate, etc. which influence a business. For example, the demand for organic vegetables and gluten-free food is increasing; therefore, companies that manufacture food items keep this in mind to attract more crowds. 

2. Legal Environment 

It includes the laws, rules, regulations, and acts passed by the government. A company has to operate by abiding by the rules and regulations of laws like the Consumer Protection Act 1986, Companies Act 1956, etc. A proper understanding of these laws assists in the smooth operations of a company. 

Example: A cigarette-selling company compulsorily has to put the slogan “smoking is injurious to health” on every packaging.   

3. Economic Environment 

It involves market conditions, consumer needs, interest rate, inflation rate, economic policies, etc. 

• Interest Rate - For example, interest rates of fixed-income instruments prevalent in an economic environment impact the interest rate it will offer on its debentures.

• Inflation Rate - A rise in the inflation rate leads to a price hike; hence, it limits businesses. 

• Customer’s Income - If the income of customers increases, the demand for goods and services will rise too. 

• Economic Policies - Policies like corporate tax rate, export duty, and import duty influence a business.

4. Political Environment 

It consists of forces like the government's attitudes towards businesses, ease-of-doing-business policies, the stability of the governing body, and peace within the country. All of these factors are extremely crucial for a company to sustain itself.  If the central and local government sanctions, policies, or acts are in favour of businesses, the nation's overall economy strengthens due to increasing employment, productivity, and import and export of various products. 

Example - A pro-business government will make foreign investments more attractive in that country.   

5. Technological Environment

It comprises the knowledge of the latest technological advancements and scientific innovations to improve the quality and relevance of goods and services. 

A company that regularly keeps track of these news can mould its business strategies accordingly.

Example: A Watch Company that sells smartwatches and traditional watches will prosper as smartwatches are trendy recently. 

Practice Questions on Business Environment Dimensions with Answers

1. ____________ consists of economic conditions, economic policies, industrial policies, and economic systems.

• Business Environment

• Economic Environment

• Natural Environment

• None of the above

Ans. b) 

2. The External Environment of business is 

• Physical

• Demographic

• Economic

• All of these

Ans. d)

Importance of Business Environment

The business environment and its  importance are necessary for the following reasons:

• Enabling the identification of opportunities and taking immediate steps to explore the benefits. 

• Helping identify threats and early warning signals

• To cope with the immediate changes.

• Support in planning and policy.

• Improving the business performance. 

Impact of Government Policies on Business and  Industry

The different policies of the government, including liberalisation, privatisation, and globalisation, immensely impacts the working of enterprises in business and industry in terms of:  

• Increasing competition

• More demanding customers

• Rapidly changing technological environment

• Necessity for change

• Need for developing human resource 

• Market orientation

• Loss of budgetary support to the public sector.