Comprehensive Understanding Of Business Environment

Why do we need to know about Business Environment?

Understanding the environment within which a firm operates is crucial for its success. Firm’s interaction with its environment (whether it remains active or passive) defines its future.

Figure Showing Types Of Business Environment

Before we discuss Business Environment, we must know meanings of “Business” and “Environment”.

• Environment may be defined as the Surroundings or Conditions within which a person (or an entity) lives (or operates). For our discussion environment refers to all those forces, which have a bearing on the functioning of the business.

Some Definitions about Environment:
“The total of all things external to firms and industries which affect their organization and operation”—Bayard O. Wheeler
“Business environment encompasses the ‘climate’ or set of conditions, economic, social, political or institutional in which business operations are conducted” — Arthur M. Weimer

• Business etymologically means state of being busy for an individual (group, organisation or a society) or we can define business as anyone’s regular Profession or Occupation. We can even define it as a particular market like “Textile Business”. It may also be understood as the organised efforts of an enterprise to supply consumers with goods and services for profit. Thus this term is amenable, but while discussing it here we generally suppose that it means “any activity that includes purchase, manufacturing, marketing and selling of goods and services”.

Now as we know the meaning of above terms it is time to get started with our main discussion and that is on “Business Environment”

Let us begin with a question. In your opinion Do Individuals (Living Beings) live in vacuum? Do they interact with their environment to live?

Exactly, the answer is No, the individuals live within environment and they interact with it to live life.

So, it is as simple as above that, Businesses also do not function in vacuum. They operate within their relevant environment. In fact isn’t it the very basic purpose of doing business to interact with components of environment and achieve what it ought to achieve. Other scenario can be of the businesses which remain passive towards their environment, (ask yourself) what fate do they face? Do they flourish? Do they make profits? Do they maximize their wealth? Do they thrive? Do they even survive through the cut throat competition of market? You are right; they gradually decline and fade away in the oblivion.

Environment may provide immense opportunities for business or pose potential threats against it. Glueck and Jauch said: “The environment includes factors outside the firm which can lead to opportunities for or threats to the firm. Although there are many factors, the most important of the factors are socio-economic, technological, supplier, competitors and government”. I may want to add my own definition of Business Environment here and that is, “Environment is the Supplier, Worker and Consumer of a Business, it can be a friend at times or it can turn into a war enemy”. According to above definition business takes inputs and processing requirements (man and machine) from the environment and gives finished output to the environment.

To make this discussion even more interesting and interactive, stop reading for a moment and think of some businesses and ask questions to yourself, what output do they give to environment?

For your assistance here are two examples;

• Educational Institutions produce literate people.
• Food processing industry gives better and nutritional food.

If you reached here after reading the above text thoroughly, you surely understand what business environment is about. But it still is a way to go journey. Business environment has some unique features; it is complex, dynamic, multi faceted etc. Let us have some info on Characteristics of Business Environment.

Following are the most common Characteristics of Business environment. (Yes the list is not exclusive).

• Environment is complex: What would you call something which constitutes different interacting (mind it!) factors, events, influences and conditions? Is it complex? Yes! And that something is environment. You can get it in parts but grasping it completely is not child’s play.
• Totality of External Forces: Business environment is the sum total of all forces/influences eternal external to firms, hence it is aggressive in nature.
• Environment is dynamic: Environment keeps on changing in its shape and character because environment has different factors, events, influences and conditions encapsulated within it.
• Direct and Indirect Influences: Environment constitutes specific and general forces. Specific forces (Customers, Suppliers, Competitors etc.,) directly affect the functioning of an organisation. Whereas, general forces (Political, Social, Economic, Technological and Legal) affect the functioning indirectly.
• Environment has Multiple Faces: What shape and character an environment will assume depends on perception of observer. Same condition in an environment can be taken as opportunity by one observer and a threat by the other.

(We may understand this better by taking example of recent Controversy on 5/20 rule of Aviation in India (5/20 rule requires an Airlines in India to have five years operational experience and twenty aircrafts to fly internationally) in which Ratan Tata accused older airline (SpiceJet etc.) of using the above mentioned rule as a shield to keep their monopolistic power. Regardless of what the outcome of controversy will be, SpiceJet’s Ajay Singh in reply to Ratan Tata’s accusation said that “Vistara and Air Asia Should serve Indian people before serving abroad and strongly condemned the steps towards abolition of Rule 5/20 of Indian Aviation). Can you grasp the two faces of the same environmental condition?

If Rule 5/20 gets abolished, Ratan Tata, who is shareholder of Vistara and Air Asia (which are not eligible as per rule 5/20 of Indian Aviation to fly internationally in India), will win the opportunity. 

And SpiceJet and Other older airlines will face the threat of losing market share due to entry of new rivals.

• Environment has far reaching impact: Affecting business in several different ways environmental change has a far reaching impact on business.
• Environment is a Relative Concept: It differs from country to country or region to region. Political conditions in India differ from those in Iraq. Demand for “Phiran” (A Kashmiri Cultural dress) is fairly high in Kashmir (during winters only) but it is non-existent in USA.

Types of Business environment:

There are two major types of business environment, internal and external. A business has control in the internal environment, whereas it has no control on the external environment. It is therefore required by businesses, to modify their internal environment as per the changes and pressures from external environment.

Micro Environment

Micro environment is the immediate periphery of an organisation. Micro Environment affects an organisation directly and regularly. Micro Environment consists of:

• Consumer
• Competitors
• Organisation of the firm
• Market
• Suppliers
• Intermediaries

Macro Environment:

Macro Environment has broader dimensions. It mainly of consists demographic, political, legal economic, technological, social and environmental factors.