Business Environment

Meaning of Business Environment:

The word ‘business environment’ indicates the aggregate total of all people, organisations and other forces that are outside the power of industry but that may affect its production. According to an anonymous writer- “Just like the universe, withhold from it the subset that describes the system and the rest is environment”. Therefore, the financial, cultural, governmental, technological and different forces which work outside an enterprise are part of its environment. The individual customers or facing enterprises as well as the management, customer groups, opponents, media, courts and other establishments working outside an enterprise comprise its environment.

Importance of Business Environment:

Just like us, business operations do not survive in confinement. Every enterprise is not an island to itself; it subsists, endures and develops within the circumstances of the part and forces of its situation. While an individual enterprise is able to do minute to change or manage these forces, it has no choice to reacting or modifying according to them. Good knowledge of the environment by business managers allows them not only to recognise and assess but also to respond to the forces outside to their enterprises. The significance of the business environment and its perception by managers can be understood if we contemplate the below-mentioned following points:

  • It allows the enterprise to distinguish opportunities and getting the first mover advantage: Opportunities connect to the positive visible courses or qualifications that will assist an enterprise to enhance its potency. The environment furnishes various opportunities for trading success. The first description of possibilities benefits an enterprise to be the first to utilise them rather than missing them to contenders.
  • It assists the firm to distinguish threats and early warning signs: Threats refer to the external environment courses and qualifications that will limit an enterprise’s production. Besides opportunities, the environment appears to be the cause of many perils. Environmental consciousness can assist the managers to recognise several warnings on time and work as an early indication sign.
  • It helps in tapping useful resources: Environment is a cause of various resources for managing a business concern. To engage in any type of pursuit, an enterprise convenes several resources called inputs like machines, finance, power raw materials, labour and water, etc.,

IMPORTANCE OF UNDERSTANDING BUSINESS ENVIRONMENT

(a) IT HELPS IN IDENTIFYING OPPORTUNITIES AND MAKING FIRST MOVER ADVANTAGE

  • The environment provides numerous opportunities and it is necessary to identify the opportunities to improve the performance of a business.
  • Early identification gives an opportunity to an enterprise be the first to identify opportunity instead of losing them to competitors.
  • Example:
  • ‘Airtel’ identified the need for fast internet and took first mover advantage by providing 4G speed to its users followed by Vodafone and Idea.
  • Asian paints lost market share to Nerolac because of its failure to match its technology.

(b) IT HELPS THE FIRM IDENTIFY THREATS AND EARLY WARNING SIGNALS

  • The business environment helps in understanding the threats which are likely to happen in the future.
  • Environmental awareness can help managers identify various threats on time and serve as an early warning signal.
  • Example:
  • Patanjali products have become a warning signal to the rest of the FMCG
  • The sector to develop similar products. Similarly, if an Indian firm finds that a
  • Foreign multinational is entering the Indian market with new substitutes, it needs to prepare accordingly.
  • Chinese mobile phones have become a threat for Indian mobile phone manufacturers.

(c) IT HELPS IN TAPPING USEFUL RESOURCES

  • Business and industry avail the resources (inputs) from the environment
  • and convert them into usable products (outputs) and provide to society.
  • The environment provides various inputs (resources) the like finance, machines, raw materials, power and water, labour, etc.
  • The business enterprise provides outputs such as goods and services to the
  • Customers, payment of taxes to the government, to investors and so on.
  • Example:
  • With the demand for the latest technology, manufacturers will tap the resources from the environment to manufacture LED TVs and Smart TVs rather than collecting resources for colour or Black & White TVs.

(d) IT HELPS IN COPING WITH RAPID CHANGES

  • The business environment is changing very rapidly and the industry is getting affected by changing market conditions.
  • Turbulent market environment, less brand loyalty, divisions of markets, changes in fashions, more demanding customers, and global competition are some examples of changing the business environment.
  • Example:
  • Jack Ma started Alibaba as he could see the potential of interest in E-Commerce.

(e) IT HELPS IN ASSISTING IN PLANNING AND POLICY FORMULATION

  • The business environment brings both threats and opportunities to a business.
  • Awareness of business environment helps in deciding future planning or decision making.
  • Example:
  • Multiple entries of Chinese phones like VIVO, Gionee, OPPO, etc.
  • have posed threat to local players like Micromax, Karbonn, Lava etc. to think afresh how to deal with the situation.

(f) IT HELPS IN IMPROVING PERFORMANCE

  • Environmental studies reveal that the success of any enterprise is closely bound with the changes in the environment.
  • The enterprises which monitor and adopt suitable business practices not only improve their performance but become leaders in the industry also.
  • Example:
  • Apple has been successful to maintain its market share due to its proper understanding of the environment and taking suitable innovations in its products.

5-6 MARKS QUESTIONS

Q.1 WHAT IS MEANT BY ‘BUSINESS ENVIRONMENT’? STATE FEATURES OF ‘BUSINESS ENVIRONMENT’.

ANSWERS:

BUSINESS ENVIRONMENT

  • The term business environment is the sum total of all individuals, institutions and another type of forces which are outside the control of the business enterprise.

FEATURES OF BUSINESS ENVIRONMENT

(a) TOTALITY OF EXTERNAL FORCES

  • Business environment includes everything which is outside the organisation.
  • If we add all these forces, they will form a business environment.
  • Example:

    When Pepsi and Coca-Cola got permission to set up their business in India, it was an opportunity for them and threat for local manufacturers like gold spot, camp-cola etc.

(b) SPECIFIC AND GENERAL FORCES

  • Specific forces are those forces which directly affect the operational activities of the business enterprise.
  • Example: Suppliers, Customers, Investors, Competitors, Financers etc.
  • General forces are those forces which indirectly affect the functioning of business enterprises.
  • Example: Economic, Social, Political, Legal and Technological conditions.

(c) INTER-RELATEDNESS

  • Different forces of business environment are interrelated to each other.
  • One component of the business environment affects the functioning of other components.
  • Example:
  • The increased life expectancy of people and awareness of health consciousness has increased the demand for many health products like diet coke, olive oil and so many health products.

(d) DYNAMIC NATURE

  • The business environment is dynamic in nature and keeps on changing in terms of :
  • (a) Technological improvement,

    (b) Shifts in consumer preferences,

    (c) Entry of new competition in the market.

  • Example:
  • Many established companies in FMCG (Fast Moving Consumer goods) sector are focusing on producing the goods with natural ingredients with the entry of ‘Patanjali Products’.

(e) UNCERTAINTY

  • The changes in the business environment cannot be predicted accurately because of future uncertainties.
  • It is very difficult to predict the changes in the economic and social environment.
  • Example:
  • There has been a sharp decline in the prices of Android smartphones due to the entry of many new companies.

(f) COMPLEXITY

  • All forces of the Business environment are interrelated and dynamic which makes it difficult to understand.
  • Complex nature of Business environment can be understood if we study it in parts.
  • Example:

    Increase in goods and service tax to 15 % would increase the revenue of the government (economic), which would help the government to improve social being of people (social) and reduce the personal disposable income of rich people and thereby controlling inflation.

(g) RELATIVITY

  • Business Environment differs from place to place, region to region and country to country.
  • Example:
  • In China, the electricity to the industry is provided at cheaper rates as the consumption increases and hence, it leads to mass production whereas, in India, it is otherwise, higher consumption of electricity leads to costly electricity which results in lower production & higher cost of production.

1 MARK QUESTIONS

Q.1 WHY IS IT SAID THAT BUSINESS ENVIRONMENT IS UNCERTAIN? (COMPTT. 2014)

ANSWER: The business environment is uncertain because the changes in the environment take place very rapidly due to changes in the taste of customers, technology, government policies etc.

Example: There has been a sharp decline in the prices of Android smartphones due to the entry of many new companies which was uncertain in nature.

Q.2 WHY IS BUSINESS ENVIRONMENT CALLED DYNAMIC? STATE. (COMPTT. 2014)

ANSWER: The environment is called dynamic because it keeps on changing in terms of technological improvements, changes in the preferences or behaviour of customers, entry of competitors in the market etc.,

Q.3 ‘LUXURY GOODS’ ARE IN MORE DEMAND IN EUROPE IN COMPARISON TO AFRICA’. WHICH FEATURE OF BUSINESS ENVIRONMENT IS REFLECTED HERE?

ANSWER: ‘Relativity’ is the feature which is reflected here.

Q.4 BUSINESS ENVIRONMENT INCLUDES BOTH “SPECIFIC AND GENERAL FORCES”. LIST GENERAL FORCES.

ANSWER: General forces: Economic, Social, Technological, Political and Legal.

Q.1 WHAT IS MEANT BY ‘BUSINESS ENVIRONMENT’? STATE ANY THREE POINTS OF ITS IMPORTANCE. (DELHI 2015)

(OR)

EXPLAIN ANY FOUR POINTS OF IMPORTANCE OF UNDERSTANDING BUSINESS ENVIRONMENT BY A MANAGER. (CBSE SAMPLE PAPER 2016)

(OR)

WHY IS UNDERSTANDING ‘BUSINESS ENVIRONMENT’ IMPORTANT FOR MANAGERS? STATE ANY FIVE POINTS.

(OR)

STATE ANY FIVE POINTS WHICH CLARIFY HOW UNDERSTANDING OF BUSINESS ENVIRONMENT HELPS THE MANAGERS.

(OR)

EXPLAIN BY GIVING ANY FOUR POINTS, WHY “IN THE PRESENT COMPETITIVE MARKET, IT IS ESSENTIAL FOR A BUSINESS TO REMAIN ALERT AND AWARE OF ITS ENVIRONMENT”?

ANSWER:

BUSINESS ENVIRONMENT

The term business environment is the sum total of all individuals, institutions and other type of forces which are outside the control of the business enterprise.

IMPORTANCE OF UNDERSTANDING BUSINESS ENVIRONMENT:

(a) IT HELPS IN IDENTIFYING OPPORTUNITIES AND MAKING FIRST MOVER ADVANTAGE

  • The environment provides numerous opportunities and it is necessary to identify the opportunities to improve the performance of a business.
  • Early identification of opportunities helps an enterprise to be the first to exploit them instead of losing them to competitors.
  • Example:

    (1)‘Airtel’ identified the need for fast internet and took first mover advantage by providing 4G speed to its users followed by Vodafone and Idea.

    (2)Asian paints lost market share to Nerolac because of its failure to match its technology.

(b) IT HELPS THE FIRM TO IDENTIFY THREATS AND EARLY WARNING SIGNALS

  • The business environment helps in understanding the threats which are likely to happen in future.
  • Environmental awareness can help managers to identify various threats on time and serve as an early warning signal.
  • Example:

    Patanjali products have become the warning signal to rest of the FMCG companies to develop similar products. Similarly, if an Indian firm finds that a foreign multinational is entering the Indian market with new substitutes, it needs to prepare accordingly.

(c) IT HELPS IN TAPPING USEFUL RESOURCES

  • Business and industry avail the resources (input) from the environment and convert them into usable products (output) and provide to society.
  • The environment provides various inputs (resources) like finance, machines, raw materials, power and water, labour etc.
  • The business enterprise provides outputs such as goods and services to the customers, payment of taxes to the government, interest/dividend to investors and so on.
  • Example:

    With the demand for the latest technology, manufacturers will tap the resources from the environment to manufacture LED TVs and Smart TVs rather than collecting resources for colour or Black & White TVs.

(d) IT HELPS IN COPING WITH RAPID CHANGES

  • The business environment is changing very rapidly and the industry is getting affected by changing market conditions.
  • Turbulent market environment, less brand loyalty, divisions of markets, changes in fashion, more demanding customers, and global competition are some examples of changing the business environment.
  • Example:

    Jack Ma started Alibaba as he could see huge potential in E-Commerce.

(e) IT HELPS IN ASSISTING PLANNING AND POLICY FORMULATION

  • The business environment brings both threats and opportunities to a business.
  • Awareness of business environment helps in deciding future planning or decision making.
  • Example:

    Multiple entries of Chinese phones like VIVO, Gionee, OPPO, etc. have posed a threat to local players like Micromax, Karbonn, Lava etc. to think afresh how to deal with the situation.

(f) IT HELPS IN IMPROVING PERFORMANCE

  • Environmental studies reveal that the success of any enterprise is closely bound with the changes in the environment.
  • The enterprises which monitor and adopt suitable business practices not only improve their performance but become leaders in the industry also.
  • Example:

    Apple has been successful to maintain its market share due to its proper understanding of the environment and taking suitable innovations in its products.

3-4 MARKS QUESTIONS

Q.1 EXPLAIN HOW DOES THE UNDERSTANDING OF BUSINESS ENVIRONMENT HELP THE MANAGEMENT IN THE FOLLOWING:

(A) TAPPING USEFUL RESOURCES; AND

(B) COPING WITH RAPID CHANGES. (DELHI COMPARTMENT 2015)

(OR)

WHY IT IS IMPORTANT FOR BUSINESS ENTERPRISES TO UNDERSTAND THEIR ENVIRONMENT? EXPLAIN BRIEFLY. (NCERT)

ANSWER:

(a) IT BENEFITS IN TAPPING USEFUL RESOURCES

  • Business and industry avail the resources (inputs) from the environment and convert them into usable products (output) and provide to society.
  • The environment provides various inputs (resources) like finance, machines, raw materials, power and water, labour etc.
  • The business enterprise provides outputs such as goods and services to the customers, payment of taxes to the government, interest/dividend to investors and so on.
  • Example:
  • With the demand for the latest technology, manufacturers will tap the resources from the environment to manufacture LED TVs and Smart TVs rather than collecting resources for colour or Black & White TVs.

(b) IT HELPS IN COPING WITH RAPID CHANGES

  • The business environment is changing very rapidly and the industry is getting affected by changing market conditions.
  • Turbulent market environment, less brand loyalty, divisions of markets, changes in fashion, more demanding customers, and global competition are some examples of changing the business environment.
  • Example:

    Jack Ma started Alibaba as he could see huge potential in E-Commerce.

1 MARK QUESTIONS

Q.1 “THE UNDERSTANDING OF BUSINESS ENVIRONMENT ENABLES THE FIRM TO IDENTIFY OPPORTUNITIES.” WHAT IS MEANT BY ‘OPPORTUNITIES’ HERE?

ANSWER: Opportunities refer to external trends which are advantageous to the firm.

Example: With make in India project, a lot of Indian companies have got an opportunity to showcase their talent, with the help of government support.

Q.2 “THE UNDERSTANDING OF BUSINESS ENVIRONMENT ENABLES THE FIRM TO IDENTIFY THREATS.” WHAT IS MEANT BY ‘THREATS’ HERE?

ANSWER: Threats refer to obstacles which come in the way of the smooth functioning of business enterprises. These may be in the form of government regulations, short supply of labour, material, competitors, adverse policy etc.,

The above mentioned is the concept, that is elucidated in detail about the Business Environment for the class 12 Commerce students. To know more, stay tuned to BYJU’S.