Business Environment refers to the “Sum total of conditions which surround man at a given point in space and time. In the past, the environment of man consisted of only the physical aspects of the planet Earth (air, water and land) and the biotic communities. But in due course of time and advancement of society, man extended his environment through his social, economic and political function.”

In a globalised economy, the business environment plays an important role in almost all business enterprises. The significance of business environment is explained with the help of the following points:

  1. Help to understand internal Environment: It is very much important for business enterprise to understand its internal environment, such as business policy, organization structure etc. In such case an effective management information system will help to predict the business environmental changes.
  2. Help to Understand Market Conditions: It is necessary for an enterprise to have the knowledge of market structure and changes taking place in it. The knowledge about increase and decrease in demand, supply, monopolistic practices, government participation in business , is necessary for an enterprise.
  3. Determining Opportunities and Threats: The interaction between the business and its environment would identify opportunities and threats to the business. It helps the business enterprises for meeting the challenges successfully.
  4. Giving direction for growth: The interaction with the environment leads to opening up new frontiers of growth for the business firms. It enables the business to identify the areas for growth and expansion of their activities.
  5. Continuous learning: Environmental analysis makes the task of managers easier in dealing with business challenges. The managers are motivated to continuously update their knowledge, understanding and skills to meet the predicted changes in realm of business.
  6. Image building: Environmental understanding helps the business organization in improving their image by showing their sensitivity to the environment with which they are working.
  7. Meeting competition: It helps the firms to analyze the competitors’ strategies and formulate their own strategies accordingly.
  8. Identifying firm’s strength and weakness: Business environment helps to identify the individual strengths and weakness in view of technological and global developments.