Business Environment

The term business environment means the sum total of all individuals, institutions and other forces that are outside the control of a business enterprise but may affect its performance.

Understanding the business environment helps improve performance because managers can:

- identify opportunities and get the first mover advantage;
- identify threats and use them as early warning signals;
- tap useful resources from the environment;
- cope with rapid changes in the market and technology;
- assist in planning and policy formulation;
- improve performance by continuously monitoring the environment and adopting suitable business practices.

So, a proper understanding of environment helps a business make better decisions and perform better.

An example is the demand for organic food. Here, different dimensions of the business environment are inter-related:

- Social environment: people have become more health-conscious.
- Technological environment: new methods of producing and preserving organic products are available.
- Economic environment: rising incomes increase buying power.
- Legal environment: food safety and quality regulations affect production and sale.

Thus, a change in one factor affects the others and influences the business as a whole.

The two impacts of changes in business environment on Krishna Furnishers Mart are:

1. Increase in competition — new entrants reduced its market share.
2. Market orientation — the firm had to study market trends and design products accordingly.

These are exactly the two impacts suggested by the hint.

Two specific forces of business environment are customers and suppliers. The chapter also lists other specific forces such as investors and competitors.

It is important for business enterprises to understand their environment because:

- it helps in identifying opportunities and getting the first mover advantage;
- it helps in identifying threats and receiving early warning signals;
- it helps in tapping useful resources from the environment;
- it helps in coping with rapid changes;
- it helps in planning and policy formulation;
- it helps in improving performance.

Since a business cannot control external forces, it must understand them and adapt to them for survival and growth.

a. Liberalisation: The removal of unnecessary controls and restrictions from business and industry. It means freeing industry from the licence-permit-quota raj.

b. Privatisation: The policy of giving a greater role to the private sector and reducing the role of the public sector.

c. Globalisation: The integration of the various economies of the world leading towards a cohesive global economy. It means increased interaction and interdependence among countries.