What is business environment? The business environment is a complex mix of conditions, forces, and events, making it difficult to define and predict. Moreover, there is uncertainty in the business environment, so a single change in one area may have a completely different effect on another part of the world. This environment affects the survival, growth, and profitability of a business enterprise, so it is important to understand it carefully. But what is the purpose of understanding business environment?
Political environment – Political stability of the country, attitude of the government towards business, and economic development are factors that affect the business environment. Political stability builds confidence among the business community, while an unstable law & order situation erodes confidence. Therefore, businessmen must carefully examine the political environment, focusing on legal and administrative orders, court judgments, and various government agencies. It is also essential for businesses to comply with the law and regulations in the country.
The external environment – This includes factors outside the organisation. The boundaries between the two are never clear. Even shareholders are part of the environment. So, it is better to deal with the external forces first before the internal ones. However, some people argue that the reverse is better, as they are more easily influenced by them. To determine the importance of assessing the external environment, managers should identify the strengths and weaknesses of the environment. This will help them determine the timing of their cash flow.
The social environment – The economic environment has an important impact on the output side of business organisations. In business, the most important thing to consider is the customer, both direct and indirect. To understand what people want, and which ones will buy it, business owners must analyze the social environment. The social environment also includes other factors that affect consumer behaviour, such as socio-cultural, legal, and physical aspects. It is also important to understand the history of the country, as these factors influence the way the economy develops.
The external environment can have an impact on the company’s ability to succeed or fail. Understanding the environment can help you choose better positioning and planning for success in the long run. In addition to internal environment factors, external environmental factors can cause huge changes in a company’s performance. The business environment is constantly changing, so staying informed about it is essential for business success. When the external environment is changing, it can help a business remain competitive and profitable.
The external environment also includes the suppliers of inputs. Having an assured source of raw materials is important for a business firm’s smooth functioning. Otherwise, it will have to hold large amounts of stock, thereby raising costs and decreasing its profit margin. To combat this, some firms choose a backward integration strategy. Others set up captive production plants. This way, they can control costs and produce high-quality products. If a firm’s supply is uncertain, it will have to maintain huge stocks of raw materials, which will lower its profit.