Dimensions Of Business Environment


Like individuals, businesses also have circumstances that cover them up. It is important to learn about the environment of businesses because it offers the idea to rectify the mistakes and make productive decisions as and when needed. The circumstances around businesses create business environments.

Business environments can be classified into five major categories which are the following −

  • Legal Environment

  • Economic environment

  • Political Environment

  • Social Environment

  • Technological Environment

Let us see each one in detail.

Legal Environment

The legal environment is comprised of laws and regulations enacted by governments and other legal authorities. It includes the laws passed by the government, various administrative and legal orders of government authorities, court judgments, and decisions provided by the central, state, or local governments.

Having legal knowledge is a prerequisite for running businesses without legal hassles which may prove to be costly. Realizing the legal environment helps business houses avoid legal tangles. In India, the legal environment includes various laws like Consumer Protection Act 1986, Companies Act 2013, Policies relating to licensing & approvals, and Policies related to foreign trade, etc.

Economic Environment

The Economic Environment is made of Economic Conditions prevailing in the Environment, the Economic System, and the Economic policies surrounding a Business Environment.

Economic Policies in Business Environment

The Government must meet a range of objectives like standards in education, health, and security policies, and it must maintain stability in the economy too. For the welfare of the public, local, state, and national level policies are enacted by governments that affect the Businesses’ planning and operation sectors profoundly. The existing economic environment directs the country’s numerous economic activities like Import and Export, Public debt, Tax structure, Industry, etc.

Rate of Inflation

Inflation plays a key role in establishing a growing economic Environment. When businesses flourish and there is an increase in the purchasing power of the consumer, the producer can ask for a premium price. Whereas, when there is an economic depression, the purchasing power of the consumers or investment power of consumers decreases, and the producer must re-establish the prices of the goods.

Demand and Supply Chain

The supply and demand curve of a commodity affects the economic Business Environment exclusively. Businesses are able to foresee and identify potentially profitable opportunities that would raise the incentive to the demand for a product after an increased production. The economic environment is highly dependent on the demand side, including the producer’s capability to meet the demand on time.

Political Environment

Political environment refers to the actions taken by the government, which may affect the routine activities of a business or company on a domestic or global level. Politics affect businesses. It is a very important factor for businesses to have a conducive political environment. If the political condition of a country is stable and the power of the country is business oriented, the businesses will flourish in such conditions. Otherwise, businesses may have to incur palpable losses which they want to avoid. That is why businesses prefer locations that have the minimum government intervention.

The government’s attitude towards business and industry, Stability of Government, and Peace in the country are some factors that affect businesses. So, businesses take every step by considering the political environment in which they run their businesses. If a country is politically unstable, there will be fluctuations in government rules which may include business rules too. In such circumstances, businesses will have to alter their strategy frequently. Such circumstances are unwelcome for businesses.

For example, political stability and the government’s attitudes towards business, industry, and employment, have brought many national and global business entrepreneurs and investors to India.

Social Environment

The Social Environment includes values, living standards, traditions, educational levels, etc. All these forces impact the Business sector of the country.


Values refer to various social paradigms and the enacted principles prevailing in society. Some of the values that are praised in India include non-discrimination, social justice, Freedom, Equality, etc. Organizations follow social values to maintain their prominence in society and to run their businesses with ease.

Traditions and Culture

Traditions and Culture are the social practices and traditions that are enduring for decades in the country and they influence businesses.

For example, festivals such as Christmas, Diwali, Ugadi, and Eid increase demand during festive seasons and provides opportunities for numerous businesses. Therefore, businesses must plan and strategize their business policies accordingly.

Trends in the Social Environment

Social trends are the general changes in impression or thought about a system, product, or business. Trends such as fitness and health trends in society are examples of this. Trends impact businesses in various ways.

For example, the fitness and health trend in society has derived a great demand for mineral waters, gyms, etc. Social media now plays a great role in forming trends the effects of which can be seen in lifestyle, fashion products, and so on.

Technological Environment

Technological environment refers to scientific improvements and innovations brought to society by science and technology. It provides new ways of manufacturing goods, offering services, and new methods and techniques of business operations.

Businesses must understand the level of scientific achievements in order to grab market share. This is applicable to a particular economy where technological advances must be checked before introducing the products. Also, as technological compatibility drives the demand for manufactured products proper understanding of the level of technological compatibility in society should be checked by a company.

For example, technological changes in the environment is the effect of e-commerce ventures in India. E-commerce has transformed the scenario of doing business, purchasing goods, and availing services at the click of a mouse or through mobile phones. The Digital India initiative of the government and steps toward a paperless society is changing the technological environment very fast in India.


Businesses should know the level of various dimensions of the business environment because these dimensions show the proper way to do business in a country. Without having good knowledge of any of the dimensions, no business can survive for a long time in a given economy. Knowledge of business environments is also handy in creating business strategies.

For example, if a business wants to establish a business in India, it must be aware of the legal and cultural aspects of India. Without knowing these factors, if a business tries to expand according to a foreign strategy, it won’t be successful in India.

Companies learn about the various types of environments before building the strategy to enter a new market as Lack of knowledge about the various dimensions of the business environment may lead to huge losses and lost revenues for companies.


Q1. How many types of business environments are there? What are they?

Ans. There are five types of business environments, namely social, political, legal, economic, and technological environments.

Q2. Name two factors associated with the political environment that affect businesses.

Ans. Political factors such as peaceful circumstances in the country, and political stability affect businesses to a large extent.

Q3. Name two technological advancements that have impacted Indian businesses hugely.

Ans. Two forms of technological advancements that have impacted India are e-commerce, and communication & information technologies.

Updated on: 13-Dec-2022

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