Business Environment:

Meaning: The term Business Environment represents the sum of all the individuals, institutions,
conditions, events that surround and affect business activities and its growth. These are the factors
which are outside the power of the business organization but affect the business performance.
Hence changes in government economic policies, rapid changes in technology, changes in
consumer tastes and preferences, increasing market competition etc. are outside the business
organisation’s control but affect the business performance immensely.

Significance: The survival and success of a business firm depend on its innate strength –
resources at its disposal and its adaptability to the environment and the extent to which the
environment is favourable to the development of the firm.

The external environment factors play an important role in the strategy formulation of any business
organization. The success and failure of an organization depends upon the scanning of an
environment and thus, finding out the new opportunities and averting the threats that the changing
environment may pose to the industry.

Business firms which are competent enough to foresee the possible alterations in the environment
factors and plan accordingly are more likely to succeed and progress.

Components of Business Environment:

Internal: it combines the factors that exist within the company. These are human resources, value
system, vision and mission, trade union, company culture etc.

External: An external environment includes those outside factors that exercise an influence on
business operation. It is further classified into two segments – (i) Macro and (ii) Micro

Macro Environment:

Demographic, socio-cultural, political and legal, technological, economical, international.

Micro Environment:

Customers, suppliers, investors etc.