Business environment is a collective aggregate of all external factors, events and influences which affect and surround it. It is quite broad and continually changing because its individual components interact. It is quite different from the overall environment of business because it is driven by forces beyond the control of any individual. An individual’s actions can have only an adverse effect on his own business, but no such thing is likely to happen in the business environment. A business environment is quite narrow in scope as compared to the overall environment of business but still it is quite far from being ideal. There are some factors which are present in the business environment that can affect its overall performance and those are discussed below.
Economic Factors. The state of the economy is one of the most important factors that have a direct or indirect impact on the business environment. For example, a stable and growing economy provides a good environment for business enterprises. A country with a high level of infrastructure works well for businesses as it reduces the chances of facing any problem or difficulty in production, operation, deployment and maintenance. It also improves the productivity of the firm and minimises the cost involved in any particular activity. The state of the business environment and the growth level of the economy have direct or indirect effects on the organisation.
Demographic Factors. Directly related to the economic factors is the population distribution. Natural and unnatural demographic factors like unemployment, literacy, poverty, race and age have an uncontrollable impact on business decisions and the functioning of the organisation.
Natural forces. These are not very controllable and cannot be modified or influenced in any manner except by government action. They include climatic changes, soil fertility, rainfall, ultraviolet radiation, wind, snow fall, Pacific Ocean currents etc. Some of these factors are uncontrollable forces for business enterprises. All these factors have an effect on the functioning of the market, the quality of service provided by the firm, the acceptance or rejection of the firm in the market, the quantum of competition faced by the firm in the market and the ultimate success or failure of the business enterprise.
Government intervention. There are certain indirect and unavoidable forces which can adversely affect the business environment and the profitability of a firm. Natural disasters, political instability, sabotage, accidents, strikes, inflation, deflation and other socially or economically unacceptable practices can severely affect the market, the quality of service provided by the firm and the survival rate in the market. Government policies and rules and regulations can have an indirect and unforeseen effect on the market.
These are some of the factors that directly or indirectly and significantly affect the business environment. However, we can see that there are many factors affecting the dynamic environment. The business environment is affected by all these forces and many more factors. It may be difficult for any manager to make a perfect analysis of all these factors and relate them with each other. In order to study and understand the factors that directly or indirectly affect the dynamic environment, we require a good business environment planning.
The process of business environment planning includes three aspects analyses of present circumstances, analysis of future demographic and technological developments and identification of suitable external factors that will have a direct or indirect influence on the business environment. For analyzing the current or the past situation, one must go through and study the historical data. This data will give you a clear picture of the present trends and the recent development. On the other hand, for analyzing future demographic and technological developments, you need to survey the present population, the technology being used by them, and the future technical developments that will influence their activities.
After studying the various aspects, you will come to know the actual position of the business in the current scenario. The factors that affect the market are divided into two categories-external and internal factors. External factors refer to the external organisations and their activities, whereas internal factors refer to the internal management structures of the organisation. The main factors that affect the internal environment are competition, leadership, technocratic development, product quality, financial conditions and overall employee productivity.