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Importance of Business Environment

Last Updated : 02 Aug, 2023
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What is Business Environment?

Business environment means the total of all individuals, institutions, and other forces that are outside the control of a business enterprise, but that may affect its performance. In other words, the business environment can be defined as all those conditions and forces under which a business is operated. These forces affect the working of the business, and it has to deal effectively with them. It encompasses the climate or the set of conditions: economic, social, political, or institutional, in which business operations are conducted.

Importance of Business Environment

Importance of Business Environment

A business environment can not exist in isolation rather each business enterprise exists, survive, and grows within various forces of the business environment. The enterprises have insignificant or no control over the environment and are left with no other alternative, but to adapt themselves according to these forces. A detailed understanding of the environment by the business enables them not only to identify and evaluate, but also to react to these changing external forces in order to survive, and grow a good analysis by a business manager. This helps them to take suitable actions at the right time by formulating the right strategies, which help in improving business performance, looping with the changes to increase profits, combat competitors, and maintain the existing market share. The importance of the business environment has arisen due to the following benefits:

1. It enables the firm to identify opportunities and get the first-mover advantage:

A business environment provides numerous opportunities for the success of the business. Here, opportunities refer to the positive external changes or trends that will help in improving the performance of the business enterprise, and early identification of environmental opportunities will help the enterprise to capitalize or exploit the opportunities by being the first to exploit instead of losing the opportunities to the competitors. 

For example, Maruti Suzuki India Ltd. became the leader of the small car segment in India because it was the first to recognize the need for low maintenance, low mileage, and small family cars in an environment with rising petroleum prices and an increasing middle-class population, likewise Tata Motor made the low priced car. Later other automobile manufacturers came up with similar products, but they were unable to exploit the market to the extent Tata Motors did.

2. Helps the firm to identify threats and early warning signals: 

Besides opportunities, a business environment is also a source of varied threats of crisis. Threats refer to that trend or changes in the external environment, which hinders the performance of the business enterprise. A proper environmental understanding and awareness can help business managers to recognize various threats on time, which also serves as a warning signal.

For example, especially in India, they come up with many innovative products and substitutes, so the existing business enterprise must consider this as a warning signal and must handle the threat proactively well ahead of the launch of the MNCs products. They must adopt various methods, like improving the quality of the product identifying areas where the cost of production can be due, and engaging in aggressive advertising, publicity and sales promotion. 

When other car manufacturing companies entered the small and mid-segment cars, Maruti Suzuki increased the production of its cars to make faster delivery. This way company could become a market leader.

 3. Helps in tapping useful resources:

Business enterprises depend upon the environment as a source of input or resources (such as raw materials, water, labour, machines, finance, etc.) and as outlets for their output (goods and services). The business managers must design the policies that allow the enterprise to get the resources so that they can convert them into outputs that the consumers desire. Business arranges for payments of taxes to the government, providing reasonable and fair returns to their investors, fulfilling corporate social responsibilities, and so on. All these can be done very effectively by understanding what the environment has to offer and what it needs. 

For example, with the rise in demand for LED, the company started arranging raw materials for LED instead of a CRT monitor.

4. Helps in coping with rapid changes:

The business environment should be monitored regularly by the organizations in order to remain updated. The business Environment enables the business to cope with the changes in the external environment and make relevant changes in their external environment. Besides, decision-making should be faster and procedural delays should be eliminated.

For example, the management of Google is continuously busy adding new features to its search engine to remain ahead of changes made by other competitive search engines. 

5. Helps in better reputation or building corporate image:

An understanding of the business environment helps business managers to make realistic plans and policies, and also ensure their effective implementation. Consequently, the business environment will surely achieve its goals smoothly and consistently, and this fact also generates a feeling amongst the people that the business environment is sensitive to its environment, and as a result, the reputation gets enhanced.

For example, earlier General Electric Company had various products, including air condensers, computers, etc., but they discontinued making A.C and computers, as they could not achieve reasonable market share. General Electric had the policy that either captures major market share for their products supplying best to its customers or else moves out from the concerned business. 

6. Help in continuous learning and improving performance:

All types of business environments are facing an increasingly dynamic business environment where changes are taking place at a fast pace. Rapid changes in technology, instant global competitors, more demanding customers, low brand loyalty, division and subdivision of markets are just a few of the images that describe the present business environment, and the future of the business environment is closely associated with what is happening in the environment, so the business environment that continuously monitors the environment, and adopts suitable ways of action based on their environment learning experience will be the one to succeed in the market for a longer period.

For example, Indigo is a low-cost airway affordable to the masses. They fly their plains on time, and that becomes their strength. The company used to collect feedback from the customers about their preferred timings and set their flight timings accordingly to get seats filled up. People choose Indigo over full-price airlines for their reliability. This is how they improved their performance. 

Features of Business Environment: Different features of business environment include totality of external forces, specific and general forces, dynamic nature, inter relatedness, etc.

Dimensions of Business Environment: The different dimensions of business environment include Economic Environment, Social Environment, Technological Environment, Political Environment, and Legal Environment.

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