Concept of Business Environment:

The term business environment refers to the combination of various factors and forces which have direct and indirect influence on the functioning and growth of individual business. These factors may be internal or external to a business unit.

Bayord O. Wheeler defines business environment as “the total of all the things, external to a business firm, which affect the organization and its operations‟.

Thus, business environment can be explained as a combination of Internal and External factors that have an impact on business.

.Characteristics of Modern Business Environment:

The following characteristics of new modern business environment have emerged:

1.Bulk Size of Business:The mass production has become an integral part of modern business. As volume with expected lower costs rises, it helps to attain higher rates of output at low unit cost. It has become a common strategy to cope up with competition and earn higher profits.

2.Diversification:presently, every businessman invests his capital in diversified economic activities so that he can avoid negative effects of market fluctuations. Many firms invest their funds in different market locations and foreign economies in order to avoid the impact of adverse business situations, such as, recession, high inflation, lockout, strikes etc.

3.Change in Consumers’ Taste and Preference:The tastes and preferences of modern consumers have completely changed because of change in standard of living, consumption pattern, technology advancement etc. Now, people spend more money on services. A large proportion of consumers‟ income has been spent on entertainment, electronic gadgets, and luxuries.

4.Change in Distribution Channel:The revolutionary change in technology has drastically changed the conventional distribution system. Introduction of e- commerce has narrowed down the distribution channel

5.Globalization of Business:Modern business has now become global. MNC‟s are dominating the global markets. The Government of different countries are also liberalizing their economies by allowing foreign countries to enter their domestic markets.

6.Emergence of International Organizations:With the increase in cross border trade, the role of various international institutions, such as, WTO, IMF, World Bank, and regional organizations, like, SAARC, EU, and NAFTA has also increased. These organizations set rules and regulations for international trade.


A business environment is a conglomeration of various inner and outer forces, factors, and institutions that have an effect on the functioning and development of companies and firms. Among those factors, you can find the consumers, competitors, suppliers, the government, etc.

There are numerous ways to classify different types of business environments. We won’t get into all of them today. But we will talk about the two main ones –

The Internal and External business environments.

A) Internal Environment:

Survival of a business depends upon its strengths and adaptability to the environment. The internal strengths represent its internal environment. Financial resources represent financial strength of the company. Funds are allocated over activities that maximize output at minimum cost, that is, optimum allocation of financial resources.

i.Value system: The value system of the founders and those at the helm of affairs has important bearing on the choice of business, the mission and the objectives of the organization, business policies and practices.

ii.Mission and vision and objectives: Vision means the ability to think about the future with imagination and wisdom. Vision and mission are important factor in achieving the objectives of the organization. The mission is the medium through which the objectives are achieved.

iii.Management structure and nature: The structure of the organization also influences the business decisions. The organizational structure like the composition of board of directors influences the decisions of business as they are internal factors. The structure and style of the organization may delay a decision making or some other helps in making quick decisions.

iv.Internal power relationships: The relationship among the three levels of the organization also influences on the business. The mutual co-ordination among those three is an important need for a business. The relationship among the people working in the three levels of the organization should be cordial.

v.Human resource: The human resource is the important factor for any organization as it contributes to the strength and weakness of any organization. The human resource in any organization must have characteristics like skills, quality, high morale, commitment towards the work, attitude, etc. T he involvement and initiative of the people in an organization at different levels may vary from organization to organization. The organizational culture and overall environment have bearing on them.

vi.Company image and brand equity: The image of the company in the outside market has the impact on the internal environment of the company. It helps in raising the finance, making joint ventures, other alliances, expansions and acquisitions, entering sale and purchase contracts, launching new products, etc. Brand equity also helps the company in same way.

B)External Environment:

It refers to the environment that has an indirect influence on the business. The factors are uncontrollable by the business. There are two types of external environment.

1)Micro Environment

“The micro environment consists of the factors in the company’s immediate environment that affects the performance of the company. These include the suppliers, marketing intermediaries, competitors, customers and the public. The micro environmental factors are more intimately linked with the company than the macro factors.

Suppliers: An important force in the micro environment of a company is the suppliers, i.e., those who supply the inputs like raw materials and components to the company. The importance of reliable source/sources of supply to the smooth functioning of the business is obvious.

a)Customers: The major task of a business is to create and sustain customers. A business exists only because of its customers. The choice of customer segments should be made by considering a number of factors including the relative profitability, dependability, stability of demand, growth prospects and the extent of competition.

b)Marketing Intermediaries: The marketing intermediaries include middlemen such as agents and merchants that help the company find customers or close sales with them. The marketing intermediaries are vital links between the company and the final consumers.

c)Financiers: The financiers are also important factors of internal environment. Along with financing capabilities of the company their policies and strategies, attitudes towards risk, ability to provide non-financial assistance etc. are very important.

d)Public: Public can be said as any group that has an actual or potential interest in or on an organization’s ability to achieve its interest. Public include media and citizens. Growth of consumer public is an important development affecting business.

2)Macro Environment

Macro environment is also known as General environment and remote environment. Macro factors are generally more uncontrollable than micro environment factors.

a)Economic Environment: Economic environment refers to the aggregate of the nature of economic system of the country, business cycles, the socio-economic infrastructure etc. The successful businessman visualizes the external factors affecting the business; anticipating prospective market situations and makes suitable to get the maximum with minimize cost.

b)Social Environment: The social dimension or environment of a nation determines the value system of the society which, in turn affects the functioning of the business. Sociological factors such as costs structure, customs and conventions, mobility of labour etc. have far-reaching impact on the business. These factors determine the work culture and mobility of labour, work groups etc.

c)Political Environment: The political environment of a country is influenced by the political organization such as philosophy of political parties, ideology of government or party in power, nature and extent of bureaucracy influence of primary groups etc..

d)Legal Environment: Legal environment includes flexibility and adaptability of law and other legal rules governing the business. It may include the exact rulings and decision of the courts.

e)Technical Environment: The business in a country is greatly influenced by the technological development. The technology adopted by the industries determines the type and quality of goods and services to be produced and the type and quality of plant and equipment to be used..