Question

Long answer type questions.

What is the business environment? Explain the importance of business environment.

Answer 1

Business environment refers to all the external forces that affect the performance of a business organisation. Such forces can be economic, social, political, technological or legal in nature. Thus, individuals, consumers, government and legal matters compose the business environment. For example, change in tastes and preferences of the consumers, changes in government policies, political scenario and legal polices influence the business environment. An organisation cannot control such forces but these forces may affect its performance either positively or adversely. For example, a change in consumers’ tastes in favour of a firm’s product increases the firm’s profitability. Similarly, the introduction of new technology leaves the current technology used by the firm obsolete and its products become comparatively inferior. Thus, it can be said that everything that is outside the purview of an organisation, but affects its performance, composes the business environment.

The following points highlight the importance of studying the business environment:
i. Identification of Opportunities - An analysis of the business environment enables an enterprise to identify various positive opportunities and thereby, be the first to take advantage in its competition with other companies.

ii. Identification of Threats - A study of the business environment can also help a company identify various threats or negative signals and enable it to take preventive measures timely and appropriately.

iii. 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 as 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 the resources that are required for the production of the goods and services in demand.

iv. Formulation of Plans and Policies - Through a study of the business environment, an organisation can identify various threats and opportunities to it, and accordingly, frame suitable plans and policies.

v. Improvement in Performance- Organisations that carefully study their business environment and accordingly adopt suitable plans and policies, are better enabled to improve their performance in the long run.