Business environment is defined as the sum total of all individuals, institutions and other forces that are outside the control of a business enterprise but that may affect its performance. As one author has succinctly explained it– “Just take the universe, subtract from it the subset that represents the organisation, and the remainder is environment”. Thus, operating outside a business enterprise are the economic, social, political, technological and other forces which operate outside a business enterprise. So also, the individual consumers or competing enterprises as well as the governments, consumer groups, competitors, courts, media and other institutions working outside an enterprise forms its environment. The important point is that these individuals, institutions and forces are likely to impact the performance of a business activity although they happen to exist outside its boundaries. For example, changes in government’s economic policies, rapid technological developments, political uncertainty, changes in fashions and tastes of consumers and increased competition in the market — all influence the working of a business enterprise in important ways. Increase in taxes by government can make things expensive to buy. Technological improvements may render existing products obsolete. Political instability and uncertainty may create fear in the minds of investors. Changes in fashions and tastes of consumers may shift demand in the market from existing products to new ones. Increased competition in the market may reduce revenue of firms.
It can be saidthat business environment has the following features:
(i) Totality of external forces: Business environment is the sum total of all things external to business firms and, as such, is aggregative in nature.
(ii) Specific and general forces: Business environment includes both specific and general forces. Specific forces (such as investors, customers, competitors and suppliers).