After reading this article you will learn about business firm and its environment.

Business firm may be visualized as an institution in society surrounded by environment i.e., various external forces influencing its functioning. It is said that business is a product of environment OR Business is the creation of its environment.

(1) The nature of business,


(2) Location of a business enterprise,

(3) The product to be manufactured or service to be rendered by the business unit,

(4) Size and volume of operations of the firm, and

(5) Price to be fixed for the product, etc., are determined by the environment within which the business operates.


The business firm consists of a set of internal factors and is confronted with a set of external factors (i.e., environment). This is the relation between a firm and its environment. The internal factors are regarded as controllable factors, as the firm has got control over these factors.

The firm can alter or modify internal factors to its advantage. The examples of internal factors are nature and number of personnel, physical facilities, organisation and functional means, such as marketing mix, to suit the environment.

The external or environmental factors are beyond the control of the business firm and the success of the firm will depend to a very large extent on its adaptability to the environment (factors) i.e., its ability to properly design and adjust the internal factors/variables to take advantage of the opportunities and to combat the threats of the environment.

The environment, if poses threats to a firm, it offers immense opportunities also for exploitation. Both these situations depend upon the environmental factors influencing the firm.



Relationship between Business Firm and Its Environment

The business is the product of environment or of factors such as technological, political, legal, economic, social, cultural, global and natural factors amidst which it (i.e., the business) functions.


Three features are common to this web of relationship between business and its environment:

(1) There is symbiotic relationship (Fig. 37.1) between business and its environment and among the environmental factors. In other words, business is influenced by its environment and, in turn, to a certain degree, it will influence the external forces. Similarly, political-legal environment influences economic environment and vice versa. The same is the relationship between other environmental factors too.

(2) These environmental factors are dynamic. They keep on changing as time passes and so does business.

(3) A particular business firm, by itself, may not be in a position to change its environment. But along with other firms, business will be in a position to mould the environment in its favour, to a large extent.