Meaning and importance of business environment

The essentials

Business environment is the total of all external forces, individuals and institutions that are beyond the control of a business but can affect its working and results. These include customers, competitors, suppliers, government, investors, technology and social trends. Firms cannot change these forces, so they must understand and respond to them.

Key points

• Totality of external forces: everything outside the firm taken together.
• Specific and general forces: specific forces (customers, competitors, suppliers, investors) affect individual firms directly; general forces (economic, social, political, legal, technological) affect all firms indirectly.
• Inter-relatedness: different forces are closely connected; a change in one affects others.
• Dynamic nature: the environment keeps changing.
• Uncertainty: future changes are hard to predict.
• Complexity: many forces act together, so it is hard to understand fully.
• Relativity: the environment differs from country to country and region to region.
• Importance: helps the firm identify opportunities and get the first-mover advantage, identify threats and give early warning signals, tap useful resources, cope with rapid changes, assist in planning and policy formulation, and improve performance.

Exam tips

• A case where one firm spots a new demand before others shows 'identifying opportunities and getting the first-mover advantage'.
• A case where a firm prepares after noticing a new rival entering shows 'early warning signals'.

Common mistakes

• Including internal factors such as the firm's own staff policies in the business environment. The environment is external.
• Confusing relativity (differs by place) with dynamic nature (changes over time).