Relationship between Environment and business

Business and environment interaction takes place in the following ways:

1. Business is affected by economic conditions of the environment. During recessionary conditions, for example, firms reduce the production or pile their inventories to sell during normal or boom conditions. Business, on the other hand, cab create artificial scarcity of goods by piling inventories and force the economic conditions to show sings of adversity while it is not actually so. Both business and environment, thus, affect and are affected by each other.

2. When financial institutions increase their lending rates, firms may resort to other sources of finance, like bank loans or internal savings (reserves). This may force the financial institutions to lower their interest rates. The financial environment and the business system, thus, act and interact with each other.

3. The firm’s micro environment consisting of its workers, suppliers, shareholders etc. affects the business activities and is, affected by them, Workers demand high wages, suppliers demand high prices and shareholders demand high dividends. Business firms reconcile the interests of diverse groups and satisfy their demand high wages, suppliers demand high prices and shareholders demand high dividends. Business firms reconcile the interests of diverse groups and satisfy their demands. If management resolves these demands, it will be positively affected by the environmental forces but if it fails to satisfy these demands, it becomes a victim of the environment.
Growing firms pay high wages and dividends to their worker and shareholders to maintain harmonious industrial relation and a positives business. Environment interface.

4. Business receive useful information from the environment regarding consumer’ tastes and preferences, technological development, Government policies, competitors ‘policies etc. and provides useful information to the environment regarding its goals, policies and financial returns. This information is transmitted to environment in the from of annual reports as a requirement of disclosure practices.

5. The basic function of a business enterprise, input-output conversion, is carried through active interaction with the environment. It receives inputs from the environment, converts them into outputs through productive facilities which are also receive from the environment and sends them back to the environment. A constant feedback is received from the environment to improve its performance.

6. The environment offers threats and opportunities to business systems which they overcome and exploit through their strengths and weaknesses. SWOT analyses helps in integrating the organization’s external environment with its internal environment.

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