Business environment refers to all those factors and forces, which lie outside a business enterprise and are beyond its control.These factors and forces exercise a significant influence on business.
There is close and continuous interaction between business and its environment.
(a) Economic Environment:
The economic environment consists of the factors and forces concerning with means of production and distribution of wealth.It compromises of interest rate, rate of inflation, value of GDP, per capita income, tax rates, disposable income, etc.
Significant Effect of Economic Environment on Business Firms:
The economic elements affect the business firms in the following ways:
(i) With an increase in the rates of taxation, business expenses increase. This causes a rise in the prices of goods, leading to fall in demand for such goods.
(ii) With an increase in the inflation rates, there is a rise in the cost of production. This affects the profits of the business adversely.
(iii) A rise in the per capita and disposable income will lead to an increase in the demand for goods and services.
(i) Components of Economic Environment:
1. Structure of economy
2. Rate of growth of GNP
3. Per capita income
4. Rates of savings and investments
5. Balance of Payments
6. Value of exports and imports
7. Agricultural and industrial production
8. Money supply in the economy
9. Public debt
(b) Social Environment:
The social environment consists of all the social and cultural forces within which business firms operate.It comprises of customs and traditions, values, social trends, etc.
Significant Effect of Social Environment  on Business Firms:
The social elements affect the business firms in the following ways:
(i) Traditions
It refers to such social practices that are followed for decades. Traditions like celebrations of festivals provide greater opportunities to business like confectionary, sweets, greeting cards, gift galleries, etc.
(ii) Trends
It refers to changes and inclination towards new products.Emerging trend of health and physical fitness provide opportunities to business like gyms, diet drinks, mineral water, food supplements, etc.
(iii) Values
It refers to concepts that a society holds in high esteem, such as freedom, social justice, equality, etc. Values affect business enterprises by making it more responsible towards society, enforcing non-discriminatory employment practices and providing freedom of choice to its customers.
(ii) Components of Social Environment 
1. Concern with quality of life
2. Life expectancy
3. Expectations from workforce
4. Birth and death rates
5. Population shifts
6. Educational system and literacy rates
7. Consumption habits
8. Composition of family
9. Attitudes towards product innovations, lifestyles, etc.
(c)  Legal Environment:
Business has to function within the framework of laws and regulations of the country.Non-compliance with these regulations can create legal problem for business enterprises.
A number of laws have been implemented by the government through the enactment of the Companies Act, Foreign Exchange Management Act, Factories Act, Competitions Act, etc.
Significant Effect of  Legal Environment  on Business Firms:
The legal environment affects the business firms in the following ways:
(i) The advertisement of alcoholic beverages is prohibited, which affects the marketing of such products.
(ii) Products like tobacco and cigarettes are required to carry a statutory warning on their packages, 'Smoking is injurious to health'.
(iii)  Components of Legal Environment
1. Legislation passed by the government
2. Court judgments
3. Decisions of various commissions and agencies at every level of administration
4. Administrative orders.
(d) Political Environment:
The political environment consists of the forces concerning management of public affairs and their impact on business.It includes political conditions in the country and attitude of the government towards business and business policy.
Significant Effect of Political Environment  on Business Firms:
The political elements affect the business firms in the following terms:
(i) Political unrest and threat to law and order adversely affect confidence of investors and reduce the level of investment in the economy.
(ii) Decisions regarding offering subsidy to the producers give a boost to such industries.
(iv) Components of Political Environment
1. The constitution of the country 
2. Political stability
3. Political ideology
4. Political outlook on business sectors
5. Extent and nature of government intervention in business
6. Degree of politicization of business and economic issues.

Positive impacts of government policy changes are:
(i) Investment in research and development
 In the present scenario, business units are investing more in research and development in order to associate with  latest technology. It has enabled the faster growth of industries.
(ii) Creation of products as per the demand of customers 
With the entry of MNC's in India, there has been increase in the demand of inputs. Now no shortage of goods persists in the market.
The customers are enjoying a surplus and good quality products of different brands. This helps in making the buyer sovereign to the market.
Negative impacts of government policy changes are :
(i) Threats from MNC 
With the entry of MNC in India, it has posed serious threat to domestic business and industries, due to the comparative advantage they have in terms of financial and technological resources.
(ii) Higher labour turnover ratio 
With the entry of MNC's in India, there has been tremendous increase in the labour turnover ratio. Hence, Indian industries are finding it difficult to retain its best brains with them.

Impacts of government policy changes on business and industry are:
(i) Increasing competition
 Changes in the rules of licensing and entry of foreign firms has increased the competition for Indian firms in many industries like banking, communication etc.
(ii) More demanding customer
 Due to increase in competition and availability of large number of products, customers are becoming more choosy.
(iii) Market orientation 
Earlier, firms use to produce first and then sell the goods in the market, but now, producers have become market oriented, where they analyse the market first and then produce goods accordingly.

Social change Consumers prefer good quality and branded prices.
Economic change Consumers are price sensitive.

(i) Totality of external forces Business environment is aggregative in nature because it is the sum total of all the factors, individuals and institutions which affect its performance.
(ii) Inter-relatedness
All the elements of business environment are closely related. A change in one factor immediately affects another factor.

Four examples of changes in business environment that affect business enterprises are:
(i) Increase in taxes by the government can make products expensive, causing reduced demand.
(ii) Technological improvements may render existing products obsolete.
(iii) Change in taste and fashion may shift demand.
(iv) Increased competition may reduce profit margins.

Importance/Benefits of business Environment 
Business enterprises cannot work in isolation. Therefore, a good understanding of environment not only helps the manager to deal with uncertain situations but also helps enterprises to identify the benefit from opportunities that the environment offers. The following points highlight the importance of business environment:
1.It Enables the firm to identify Opportunities and Get the First Mover Advantage 
Opportunities are the positive trends that help firms to grow. A good knowledge of business environment helps a manager to identify such opportunities earlier to take its benefit, rather than losing it to other competing enterprises.
For example, Maruti Udyog was the first automobile company in India to recognize the opportunity to develop small cars, due to which, it is still one of the market leaders in that segment.
2.It Helps the Firm to identify Threats and Early Warning Signals
Threats refer to the negative trends, which will hinder the performance of the enterprise. The businessmen, who are able to scan and understand the business environment on time get a warning signal to deal with such negative changes. e.g. due to entry of many automobile companies in India, Maruti Udyog had started paying attention towards making strategies to survive in the competition.
 3.It Helps in Tapping Useful Resources
Environment is a source of various resources for business like finance, machinery, raw materials, etc. Contrary to this, business enterprise supplies goods and services to the society in the form of taxes, products, return on investment, etc.. A good understanding of environment helps that firm to convert such resources into output required by the environment and society.
4.It helps in Coping With Rapid Changes
Business environment is fast changing due to turbulent market conditions, more demanding customers, changing technology and increasing global competition. In order to cope up with such changes and derive benefit from them, managers must examine their environment and develop suitable action.
5.It Assists in Planning and Helps in Policy Formulation
Since, business environment is a source of identifying both opportunities and threats, its proper analysis and understanding provide the base for planning and guides in framing policies.It helps an enterprise to decide the future course of action and provides guidelines for decision-making.
6.It Helps in improving Performance
An enterprise that monitors its environment continuously, is in a position to improve not only its present performance but also improve its future performance. This ensures success of the business in the long-run.

Impact of LPG (Liberalisation, Privatisation, and Globalisation) Policy Changes on Business and Industry
The policy of liberalisation, privatisation, and globalisation of the government has made a significant impact on the working of enterprises in business and industry.They have become more customer focused and have adopted measures to improve customer relationship and satisfaction.
Following are some of the challenges faced by the business and industries.
1. Increasing Competition
Changes in the rules of industrial licensing and entry of foreign firms, has increased the competition for Indian firms especially in service industries such as banking, communication, health, etc.
2. More Demanding Customers
Due to increase in competition, wider choice of products is available in the market.As a result, customers are becoming more choosy.He is now regarded as the 'King of the market'.
3. Rapidly Changing Technological Environment
Increased competition in market forces the firms to develop new ways to survive and grow in market.Due to this, smaller firms face tough challenges for transformations in processes, technology, machines, and products.
4. Necessity for Change
Rapid change in the market forces the enterprises to continuously modify their operations.
5. Need for Developing Human Resource
The new market conditions require people with higher competence and greater commitment.Thus, the need to develop human resource is increasing.
6. Market Orientation
Earlier firms used to produce first and then sell goods in the market.But now, in the fast changing world, production-oriented technique is changed to market orientation, where firms study and analyse the market first and produce goods accordingly.
7. Loss of Budgetary Support to the Public Sector
The central government's budgetary support for financing the public sector outlays has declined over the years.
Public sector undertakings have realised that in order to survive, they will have to develop their own resources and be more efficient.

Business environment is the sum total of all individuals or institutions and other forces that are outside the control of a business enterprise but that may affect its performance.Features of Business Environment:

Importance/Benefits of business Environment 
Business enterprises cannot work in isolation. Therefore, a good understanding of environment not only helps the manager to deal with uncertain situations but also helps enterprises to identify the benefit from opportunities that the environment offers. The following points highlight the importance of business environment:
1.It Enables the firm to identify Opportunities and Get the First Mover Advantage 
Opportunities are the positive trends that help firms to grow. A good knowledge of business environment helps a manager to identify such opportunities earlier to take its benefit, rather than losing it to other competing enterprises.
For example, Maruti Udyog was the first automobile company in India to recognize the opportunity to develop small cars, due to which, it is still one of the market leaders in that segment.
2.It Helps the Firm to identify Threats and Early Warning Signals
Threats refer to the negative trends, which will hinder the performance of the enterprise. The businessmen, who are able to scan and understand the business environment on time get a warning signal to deal with such negative changes. e.g. due to entry of many automobile companies in India, Maruti Udyog had started paying attention towards making strategies to survive in the competition.
3.It Helps in Tapping Useful Resources
Environment is a source of various resources for business like finance, machinery, raw materials, etc. Contrary to this, business enterprise supplies goods and services to the society in the form of taxes, products, return on investment, etc.. A good understanding of environment helps that firm to convert such resources into output required by the environment and society.
4.It helps in Coping With Rapid Changes
Business environment is fast changing due to turbulent market conditions, more demanding customers, changing technology and increasing global competition. In order to cope up with such changes and derive benefit from them, managers must examine their environment and develop suitable action.
5.It Assists in Planning and Helps in Policy Formulation
Since, business environment is a source of identifying both opportunities and threats, its proper analysis and understanding provide the base for planning and guides in framing policies. It helps an enterprise to decide the future course of action and provides guidelines for decision-making.

Importance/Benefits of business Environment 
Business enterprises cannot work in isolation. Therefore, a good understanding of environment not only helps the manager to deal with uncertain situations but also helps enterprises to identify the benefit from opportunities that the environment offers. The following points highlight the importance of business environment:
1.It Enables the firm to identify Opportunities and Get the First Mover Advantage 
Opportunities are the positive trends that help firms to grow. A good knowledge of business environment helps a manager to identify such opportunities earlier to take its benefit, rather than losing it to other competing enterprises.
For example, Maruti Udyog was the first automobile company in India to recognize the opportunity to develop small cars, due to which, it is still one of the market leaders in that segment.
2.It Helps the Firm to identify Threats and Early Warning Signals
Threats refer to the negative trends, which will hinder the performance of the enterprise. The businessmen, who are able to scan and understand the business environment on time get a warning signal to deal with such negative changes. e.g. due to entry of many automobile companies in India, Maruti Udyog had started paying attention towards making strategies to survive in the competition.
3.It Helps in Tapping Useful Resources
Environment is a source of various resources for business like finance, machinery, raw materials, etc. Contrary to this, business enterprise supplies goods and services to the society in the form of taxes, products, return on investment, etc.. A good understanding of environment helps that firm to convert such resources into output required by the environment and society.
4.It helps in Coping With Rapid Changes
Business environment is fast changing due to turbulent market conditions, more demanding customers, changing technology and increasing global competition. In order to cope up with such changes and derive benefit from them, managers must examine their environment and develop suitable action.

(i) Preferences to minority section
(ii) Improve their standard of living
(iii) Being considerate
(iv) Equality

i) Rising standard of living.
ii) Economic development.
iii) Distribution of wealth.
iv) Encouragement of middle class sections.

i) Fall in Standard of living
ii) Increase in Domestic Expenditure
iii) Increase in the cost of agricultural products