The importance of business environment & How it Shapes Success.
Understanding, the importance of the business environment is very important before starting any business/start-up.
Business environments are several factors that directly or indirectly affect business activities, growth, and performance.
Let us understand this with an example-
Let’s imagine you have started a business with years of earning and you noticed that very few people are interested in your products and services, the government of that locality is imposing high taxes on your business.
There is also a shortage of labor and resources, limited access to technologies, few suppliers, poor stakeholder engagement, and there is no demand for your product in that area.
What do you think will happen?
All your earnings and hard work will certainly go down the drain.
Your business will earn no profit and eventually shut down, which is the worst nightmare for any businessman.
Therefore, in this article, we will study the importance of business environment so that you can avoid the stones coming your way.
So let’s dive down into this.
Table of content
- What is the business environment?
- What is the importance of business environment?
- Types of Business Environment
What is a Business Environment?
Business environment refers to the internal and external factors that affect the business activities, its day-to-day operations, and its growth.
External factors consist of political forces, legal forces, technologies, economic conditions, climate, and competition.
Internal factors consist of organizational culture, values, vision of the company, its working environment, human resources, and organizational policies.
What is the importance of business environment?
The study of the business environment plays a vital role in business, it benefits the company in several ways.
1. Risk or threat–
it helps businesses analyze threats or risks like competition, political instability, and technological disruptions.
It helps businesses to reduce risks and take quick action according to the current environmental circumstances.
For example – we all have heard about the famous company Kodak but this company has failed because it could not adapt itself to the rise of digital photography.
This company didn’t embrace the idea of digital photography due to which it failed.
2. opportunity and growth-
properly studying the business environment helps businesses to identify threats as well as opportunities.
Studying the business environment can help businesses to find new ideas to implement in their business.
A proper market analysis can help businesses to find opportunities. It helps them to understand consumer trends, upcoming technologies, and emerging markets, and find new networks/partnerships.
For example – we all have heard about the company Uber, which connects drivers to people with just one tap from their phone.
Uber saw that the people were rooming around the streets looking for taxis and they also had to wait a lot for taxis, which caused them to get late to their destination.
So they offer a convenient and affordable app in front of the world that connects both drivers and people in just one click.
Understanding the importance of the business environment can do wonders for businesses just like Uber.
3. First mover advantage–
there’s a saying that the early bird catches the worm, similarly in the business world, the one who comes first gets the advantage.
by properly analysing the business environment company can identify opportunities that are not yet touched by its competitors.
Businesses can take advantage of several benefits by introducing their product and services to the market first.
Benefits like- bigger market share, competitive edge, greater customer loyalty, increase in brand image, and many more.
For example– the famous e-commerce company Amazon which was just an online bookstore looked at the upcoming opportunity and became the largest e-commerce company.
4. Competition–
The importance of business environment can’t be ignored in the competitive business world.
Healthy competition is very important in the market because of that the company produces quality products at affordable prices.
but at the same time, competition can be threatening to the businesses because it can take away customers and market share from the businesses.
The business environment tells about the current competition which helps the firm to take quick action and make powerful strategies to outrank their competitors.
For example- we all have heard about the company blockbuster video, it was a very successful brand but it drastically failed due to poor competitor analysis.
It was a dominant video rental industry but when Netflix came with its online streaming it posed a significant threat to Blockbuster’s traditional video rental business.
5. Adapting changes–
The business environment is very complex and dynamic in nature.
In business, anything can happen at any time, the only thing you can do is to make assumptions about the future.
In the business environment several factors are interconnected with each other that’s why there should be regular scanning of the business environment
For example- Coca-Cola the most famous beverage company had been facing challenges when most of its customers decided to go for a healthy side.
but when Coca-Cola saw such behavior from their customers, they launched Diet Coke and other sugar-free and low-calorie drinks which helped them to gain more market share.
So from this example, We can say they understand the importance of business environment and quickly adapt to the changing market.
Types of Business Environment
There are mainly 2 types of business environments-
Internal Business Environment
These are the set of factors that exist within the company and affect its growth, actions, decisions, and performance. These factors include organizational culture, values, vision, working environment, human resources, policies, etc.
Why scanning the internal environment is Crucial?
It plays a huge role in the organization. A business that understands the importance of business environment will never ignore the internal environment.
the company needs to scan its internal environment because –
1. It enhances Productivity-
It increases productivity because it helps the business to scan the internal environment like the work environment, employee needs, and way of doing work.
It helps to improve the work environment so that employees can feel safe and secure.
It helps to fulfill the needs of employees so that they can feel motivated.
It helps to find the best way of doing work which automatically increases productivity.
2. Improves working culture-
It is a very important part of the organization because if an organization has a poor working culture then it will affect the performance of the employees which will lead to delay of work.
It will make them feel demotivated.
3. Strengths and weaknesses-
Keeping in mind the importance of business environment the business should do proper internal scanning.
It will help a business to know its strengths and weaknesses.
Knowing their true potential can help a business to make strong plans for the future.
( businesses use SWOT analysis to know their strength, weaknesses, opportunities, and threats)
4. Risk management-
By checking the internal factors the organizations can know its threat and weaknesses.
They can make plans to minimize the risk.
5. Financial Health-
Finance plays a crucial role in any company any wrong decisions can make the company insolvent.
By scanning the internal environment organizations can know their financial health and financial indicators.
Also Read: Our article on Business Finance Basics.
6. Human resource management
Scanning the internal environment gives you an insight into the workforce and companies can know about the skills of different employees and can put the right employee in the right place.
This will increase productivity and also minimize the wastage of resources.
External Business Environment
These are the set of factors and forces of an organization that can impact its activities, performance, actions, and decisions.
External factors are complex to understand because businesses have zero control over them but they can enjoy the benefits and reduce the risk.
Adapting to these external forces is a crucial thing that highlights the importance of the business environment.
These forces include-
1. Political force–
These are the factors and forces of government policies, regulations, and political stability.
For Example – tax policies, trade policies, new laws, government instability, etc. all can directly affect the activities of the business.
2. Technological force–
These are the forces and factors that include innovation, advancement, and development of new technology.
Staying up to date is very important to succeed in the long run. A business can never move ahead of its competition if the technology is outdated.
For example – businesses using artificial intelligence in their day-to-day operation will work faster and more efficiently than their competitors.
3. Economic forces–
These are the forces that tell about the economic condition of the country like inflation rate, deflation rate, exchange rates, and interest rate that significantly impact the business operations.
For example- inflation, unemployment rate, GDP, and supply and demand dynamics can affect consumer spending and operational costs.
4. Legal forces–
These include laws and regulations of the government that can impact the business performance if not obeyed.
Any business must carefully examine the legal forces of the business environment.
For example- labor law, consumer protection laws, environmental laws, data protection, and privacy law.
Following the rules and regulations of the government will help the business to survive without any government interference.
5. Climate/environmental forces–
It involves the impact of ecological and environmental factors on business activities.
Businesses don’t have any control over that but businesses can understand the importance of the business environment and practice sustainable activities which will benefit the environment, society, and the business.
For example- scarcity of resources, changing seasons, water scarcity, and supply chain disruption caused by floods, earthquakes, etc can affect the activities of the business.
6. Competition-
It is a crucial part of any business.
Competition is beneficial for both the business and the customers because it helps companies to improve their products so that they can stand out in the competition and also provide valuable products and services to the customers.
Sometimes proper scanning helps companies to spot their competitors’ next move.
For example – to stay ahead of your competitors you have to win the price wars, adapt to new technologies, and has to make a good brand image by providing excellent quality products and services.
Why scanning the external environment is important?
External environment scanning is essential in business because it helps to avoid threats and grab opportunities,
It directly affects the success, performance, and growth of the business.
External business environment scanning can also help to identify whether the startup will run or not.
External business environment scanning is important because-
1. Opportunities–
It helps businesses to identify market trends, customer needs, and amazing opportunities and by understanding the companies can make their products according to it.
2. Emerging threats
By scanning the market the companies can identify their upcoming threats take immediate actions and make powerful strategies.
3. Innovation
While doing business environment scanning, companies get informed about industries’ advancement which will help them to drive innovation and maintain a competitive edge.
4. Adapt to changes
It helps organizations to adapt according to the changes and make quick decisions.
If a firm adapts itself according to the external environment then it will face no hindrances in its growth.
Conclusion
The business environment is very complex and dynamic and a business should constantly adapt itself to the changing environment.
A business should never ignore the importance of the business environment because it helps the company make strong strategies and also provides them useful insights.
The business environment helps in shaping success because it plays a role as a guiding force and it shapes the decisions and actions of the organizations.
