Meaning of Business environment

• The term ‘business environment’ means 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.
• Business environment refers to forces and institutions outside the firm with which its members must deal to achieve the organisational purposes.  
  Here, Forces = economical, social, political, technological etc.
  Institutions = suppliers, customers, competitors etc.
• Thus, the economic, social, political, technological and other forces which operate outside a business enterprise are part of its environment.
• 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 constitute its environment.
• The important point is that these individuals, institutions and forces are likely to influence the performance of a business enterprise 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.
• Increases in taxes by the government can make things expensive to buy.
• Technological improvements may render existing products obsolete.
• Political 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 profit margins of firms.