Dimensions of business environment that influences the performance of many firms are: 1. Economic Environment 2. Social Environment 3. Technological Environment 4. Political Environment 5. Legal Environment!

The Dimensions or the factors constituting the business environment include political, social, technological, legal and economic factors which are considered important for taking decisions and for improving the operations of a firm.

These are a part of general environment which influences the performance of many firms at the same time.

1. Economic Environment:


Economic Environment consists of factors like inflation rates, interest rates, consumers’ incomes, economic policies, market conditions etc. which affect the performance of a business firm.

(a) Interest Rates:

Changes in the interest rates greatly affect the demand for goods and services. For example, low long term rates on home loans are beneficial for banks and consumers both.

(b) Consumer Income:


Increase in the incomes of the consumers leads to increase in their purchasing power. Hence, demand for goods and services rises.

(c) Inflation Rate:

High inflation rate increases the cost of production and hence puts constraints on firms.

Economic Environment is fully regulated by RBI (Reserve Bank of India). RBI influences the interest rate in the country, has full control on the flow of money in the economy. It also regulates the working of all banks in India.


Following are the main aspects of Economic Environment:

(i) The role of public and private sectors in the existing structure of the economy.

(ii) The rate of increase in GNP and per capita income both at current and constant prices.

(iii) Amount of exports and imports of different products.


(iv) Increase in transportation and communication facilities.

(v) Trends in agricultural and industrial production.

(vi) Amount of savings and investments.

(vii) Internal as well as external public debts.


(viii) Nature of money supply in the economy.

(ix) Planned outlay in private and public sector.

(x) Balance of payments and changes in foreign exchange reserves.

2. Social Environment:

Social environment implies traditions, literacy rates, educational levels, values, customs, lifestyle, demographic distribution and other characteristics of the society in which the organization exists.


Traditions mean customs or social practices that have passed on from one generation to another e.g. celebration of festivals (Diwali, X’ mas, Gurpurab, Id etc.) gives significant financial opportunity to many businesses like sweets’ manufacturers, card campaigns, companies dealing in Gift products etc. Values mean standards that a society holds in high esteem e.g., freedom, social justice, equal opportunities etc. which are cherished by us all.

Changes in social environment affect the demand for a product, supply of labour and capital. If a business fails to adapt to such changes, its survival becomes difficult. Cooperation between business and society can make business boom (WIN-WIN) whereas confrontation between them may lead to disaster (LOSS-LOSS).

Any business is a part of the society in which it operates. The buying and consumption habits of the people, their languages, customers’ preferences/tastes etc. are the factors that influence the business. Businessmen should be alert enough to visualize the factors that directly or indirectly affect their organization.

Cooperation between business and society will see business boom and will help in the growth of professional managers as well as the country whereas failure of any business organization in adapting itself to changes in the social environment will lead to dissatisfaction amongst its customers and rejection)of its products. This shift of demand can ever endanger the very survival of that business.


For example, equal pay for male and female workers, demand for reservation in jobs for minorities and women etc. are examples of social need that organisation have to take care of.

Main Aspects of Social Environment:

(i) People’s attitudes towards new products or improvements in old products, lifestyles, occupational distribution etc.

(ii) Consumption habits of the people.

(iii) Composition of family.

(iv) Life expectancies.


(v) Quality of life.

(vi) System of education and rate of literacy.

(vii) Presence of women workers.

(viii) Shifts in populations

(ix) Birth and Death rates.

(x) Expectations from the workers.

3. Technological Environment:


The forces related to scientific improvements and innovations for improving quality of goods and services and new techniques for operating the business, are all part of technological environment. It includes new approaches, new procedures and new equipments to transform inputs into outputs. It facilitates an organization’s efficiency and effectiveness so that it can try to remain at par with the best in the world.

Technological changes provide opportunities for some enterprises and become threats for some others. For example, digital watches killed the business prospects of traditional watches, TV has adversely affected radio and cinema industry, mobile phones have taken over the market from landline phones.

Moreover, new innovations in different fields such as medicine, telecommunication, bio technology, food preservatives etc. have resulted in many opportunities and threats for many firms.

Similarly, the new technological changes in computers and electronics such as CD ROM, Internet, and World Wide Web etc. have proved very useful to the business firms in advertising their products, in having direct links with suppliers to replenish the stocks when required, in having flexible manufacturing system etc.

4. Political Environment:

Political Environment consists of forces such as political stability and peace in the country and attitude of the ruling party and its representatives towards business. These forces significantly affect the functioning of business.

Whenever there is political stability, it increases the confidence of businessmen whereas political instability, adversely affects the business. For example even after opening of our economy inl991, many foreign companies found it very difficult to enter the Indian market because of ‘Bureaucratic Red Tape’. As a result, many of these companies got discouraged from doing business in India.


Main Aspects of Political Environment:

(i) Government’s attitude and the nature of intervention towards various industries.

(ii) Pressure by government and allied agencies.

(iii) Political parties and their policies.

(iv) Political ideologies and practices of ruling party.

(v) Nature of ruling party and government.


(vi) Constitution of the country.

(vii) Nature of country’s relation with foreign countries, particularly neighbours.

Business functions within the framework of political environment. Generally, governments’ policies change with the change of guard in power. Business is required to understand and follow such changes and also respect the orders that judiciary gives from time to time.

For example, after globalization, government of India allowed many foreign companies to enter the Indian market for giving boost to different industries like food processing industry etc. That paved the way for entry of multinationals on a large scale.

5. Legal Environment:

Legal environment consists of rules and regulations, framed by the Parliament, under which business must operate. To exist and grow, business is required to follow all the rules and regulations that constitute this environment.

Legal Environment includes different laws passed by the government, administrative orders issued by government authorities, courts and also various ‘recommendation made by various commissions agencies at three levels of the government – central, state, local. It is very essential for the management of any business firm to obey these rules and regulations for smooth functioning of the business.


Non obedience to these rules can land the business enterprises in many legal problems. In India, business firms are required to have complete knowledge of acts like Companies Act 1956, Consumer Protection Act 1986, Industrial Disputes Act 1947, and Competition Act 2002 and so on.

The influence of legal environment can be explained with the help of government regulations in order to protect the consumers’ interests. For example, it is compulsory that the Advertisement/Packaging of Cigarettes should carry the statutory warning that “Cigarette is injurious to health”.