Meaning: - Business Environment consists of all those forces or factors both internal and external that affects the working of a business. Analysis of the internal environment helps a firm to identify its strengths and weakness, and the analysis of the external environment helps to identify opportunities and threats. Thus, environment analysis helps to undertake the SWOT analysis, i.e., strength, weaknesses, opportunities and threats.

Definitions: - According to Keith Davis, Environment of the business means the aggregate of all conditions, events and influences that surround and affect it.”

The role and importance of business Environment analysis is briefly explained as follows:

1.      Identification of Strengths: -The analysis of the internal environment helps to identify the strengths of the firm. For instance, if the company has good personnel policies in respect of promotion, transfer, training, etc., then it indicates strength of the firm in respect of personnel policies. After identifying strengths, the firm must try to consolidate its strengths by further improvement in its existing plans, policies, and resources.

2.      Identification of Weaknesses: -The analysis of the internal environment indicates not only strengths but also weakness of the firm. A firm may be strong in certain areas, whereas, it may be weak in some other areas. The firm should identify such weaknesses so as to correct them as early as possible. For instance, the machines used by the firm may be outdated; therefore, the firm may replace the obsolete machines with new ones so as to improve the quality and quantity and also to reduce the cost of production.

3.      Identification of Opportunities: -An analysis of the external environment helps the business firm to identify the opportunities in the market. The business firm should make every possible effort to grab the opportunities, as and when they come. Failure to do so would mean that someone also would grab the opportunities.

4.      Identification of Threats: -Business may be subject to threats from competitors and others. Therefore, environmental analysis helps to identify threats from the environment. Identification of threats at an earlier date is always beneficial to the firm as it helps to defuse the same. Identification of competitors’ strengths is very much helpful for the firm to take immediate actions to counter the strategy of the competitors by introducing a new product or entering into new markets or in new product lines.

5.      Effective Planning: -A proper study of environment helps a business firm to plan its activities properly. Before planning, it is very much necessary to analyse the internal as well as external environment. After SWOT analysis, the firm can identify specific objectives, which in turn helps to frame proper plans.

6.      Facilitates organising of resources: -A Proper analysis of environment enables a firm to know the demand potential in the market. Accordingly, the firm can plan and organize the right amount of resources to handle the activities of the organisation.

7.      Optimum use of Resources: -A study of technological development, government policies, demographic pattern, etc. will help the business firm to plan its activities and allocate the limited resources in a better way.

8.      Helps to be active and alert: - Environmental analysis help a business firm to remain active and alert in the competitive market. In the absence of environmental analysis, a business firm may adopt a casual approach towards business, which in turn leads to failure or closure of the business.