Business Environment

Business Environment signifies the collection of individuals, entities and several significant internal and external factors which control the productivity and performance of a business. 

An environment determines the growth, profitability and even longevity of a business and gets altered by them as well. These factors influence the operations of a company directly or indirectly depending on its type. 

An awareness of the business environment helps businesses in assessing opportunities, assists in planning and the overall growth of an organisation. 

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 - Factors like socio-cultural, political, legal, global fall into this category.

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

Dimensions of Business Environment

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

  1. Social Environment 

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

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

  • Value : A company which 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, and literacy rate, etc. which influence a business. For example, the demand for organic vegetables and gluten-free food is increasing; therefore, companies which manufacture food items keeping this in mind attract more crowds. 

  1. Legal Environment 

It includes the laws, rules, regulations, acts passed by the government. A company has to operate by abiding by the rule 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.   

  1. Economic Environment 

It involves market conditions, consumer’s need, interest rate, inflation rate, economic policies, etc. 

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

  • Inflation Rate- A rise in inflation rate leads to price - hike; hence it poses limitations to 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.

  1. 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. If the central, as well as local government sanctions, policies or acts in favour of businesses, the overall economy of the nation 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.   

  1. 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 keeps track of this news regularly can mould their business strategies accordingly. 

Example: A Watch Company that sells smart-watches along with traditional watches will prosper as smart-watches are trendy recently. 

Solved Questions for you

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

  • Business environment

  • Economic environment

  • Natural environment

  • None of the above

Ans. b)

  1. External environment of business is 

  • Physical

  • Demographic

  • Economic

  • All of these

Ans. d)


What is the International Business Environment?

The changing dimension of the business environment gives birth to an advanced international environment for companies in a country. It denotes a periphery in which international companies run their business transactions across national borders. There are multiple dimensions of the international business environment concerning cultural differences, exchange risks, taxation and legal issues. It is also known as Globalisation. 

Since this environment lets companies exchange goods and services with other countries, the management team must have a sound knowledge about their operational market. 

Importance of Business Environment

  • Identifies business opportunities and possible threats

  • Helps in growing a business

  • Provides scope for learning

  • Efficiently tackles competitions

  • Aids in building a brand image

Environment plays a determining role in establishing a good performing company. Hence, learning all the essential dimensions of business environment class 12 is a must to achieve a firm grip on business studies. To know more about this topic and other allied topics of business studies, check out Vedantu’s website today. 

FAQ (Frequently Asked Questions)

1. What are the Types of Environment in Business?

Ans. Environment involves factors like socio-economical, supplier, technological, competition, clientele or customers, and political. Two more factors play a crucial role in determining the environment of business. They are – natural or physical and global environment.

2. Who are the Major Players in the Business Environment?

Ans. The forces which regulate a business environment are its competitors, suppliers, investors, customers, media, government, economic conditions, and several other external working factors. 

3. What does Micro Environment mean?

Ans. Micro Environment relates to the immediate factors that influence the direct and daily operations of a business. It is also called the task environment. It includes suppliers, customers, etc.

4. Why is the International Business Environment important?

Ans. A favourable International Business Environment effectively boosts the economy of a country. The competition between imports and exports lead to better product quality, lower price, wide range of selection and an improved standard of living.