CHAPTER – 3
Meaning of Business Environment
Business environment refers to all the external forces— including economic, social, political, technological and legal—that affect the performance of a business organisation. These forces can affect the performance of the organisation either in a positive or in a negative manner. For example, a change in consumer’s tastes and preferences in favour of a firm’s product increases the demand for its product. On the other hand, political instability can have an adverse impact on its performance.
External forces are outside the purview or control of an organisation but affect its performance.
Features / Characteristics of Business Environment
The following diagram depicts the various features of a business environment.
1) Aggregate of external forces: A business environment is the aggregate of all the external forces such as individuals, consumers, government and legal matters that affect the performance of an organisation either positively or negatively. 2) Interrelated: The different forces of a business environment are interrelated with one another. For example,
in income of the consumers in demand for consumer durables 3) Ever-changing: A business environment is dynamic. For example, the consumer’s tastes and preferences, technology, political conditions, etc., change continuously. 4) Uncertain: The dynamism in the forces of a business environment implies that they are highly uncertain and cannot be predicted easily.
5) Complex: As a business environment is the aggregate of different interrelated forces, understanding it is quite difficult.
6) Relative: A business environment is relative in nature and differs from one region to another depending on various factors. For example, political conditions, religious beliefs, etc., are different in different regions.
Specific and General Business Environment
Specific environment: A specific business environment refers to a business environment in which an organisation is acted upon by external forces specific to the particular organisation and its performance is affected directly by these forces. For example, a change in consumer tastes and preferences for the products of a business enterprise directly affects the demand.
General environment: A general business environment refers to a business environment in which general external forces affect the performance of all the organisations simultaneously. These forces affect a particular organisation only indirectly. For example, a change in political conditions affects the performance of all the organisations in the region simultaneously.
Importance of Business Environment
The following diagram highlights the importance of a business environment.
As an organisation is constantly affected by various external forces, an understanding of these forces is necessary for its successful functioning. The following points highlight the importance of studying the business environment.
1) Identification of opportunities: An analysis of a business environment enables an enterprise to identify various positive opportunities and thereby take first advantage in its competition with other companies.
2) Identification of threats: A study of a business environment can help a company analyse positive opportunities, but this study can also help it identify various threats or negative signals and take preventive measures timely and appropriately. 3) Accumulation of useful resources: A business environment, on the one hand, provides an organisation various inputs required for its functioning, and on the other hand, acts a source of demand for the goods and services produced by it. Thus, it is important for an organisation to understand its environment and use those resources from it that are required for the production of the goods and services in...
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