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Dimensions of Business Environment

Last Updated : 02 Aug, 2023
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What is Business Environment?

Business Environment means the total of all individuals, institutions, and other forces that are outside the control of a business enterprise, but that may affect its performance. In other words, a business environment can be defined as all those conditions and forces under which a business is operated. These forces affect the working of business and it has to deal effectively with them. It encompasses the climate or the set of conditions: economic, social, political, or institutional, in which business operations are conducted.

Dimensions of Business Environment

Dimension of the business environment involves the ‘Micro and Macro’ environment. Micro environment means small or pertaining to one item in the environment. It refers to those internal and external factors, which exercise a direct influence on the working and performance of an individual business organization. A micro environment is also called a Direct Section Environment or Task Environment. Micro environment may be classified into two broad categories: internal and external factors. 

Whereas Macro environment refers to the general environment or remote environment under which a business enterprise and forces in its micro environment operate. The macro environment is not interacted with regularly or directly by any enterprise. The forces of micro environment create opportunities for the organization and pose threats to the company. The micro environment forces are less controllable than the micro forces. The macro environment consists of the following components- economic, social, technological, political, and legal environments. We will be studying all these components in detail.

1. Economic Environment:

It refers to all these forces that have an economic impact on business activities. We know that business is an economic organization. Therefore, its survival and growth are dependent on economic factors. The economic environment includes various factors, such as inflammation, interest rate, price level, money supply in the market, etc. These factors serve a business as an opportunity or as a threat to a business. Therefore, management always remains active to grab the opportunity and tries to change threats into opportunities. 

For example, the rise in interest rate increases the production cost due to an increase in the price of raw materials and wages. 

2. Social Environment:

The social environment of a business involves customs, cultures, and traditions that have lasted for many years. Any change in the social environment will affect the demand for a product, supply of labour, and capital. Business is a part of the society in which it operates, and cooperation between business enterprises and society will see a boom and will help in the growth of the enterprise. Whereas any confrontation between them may lead to a disaster, resulting in dissatisfaction amongst its customers and rejection of its products.  If the business enterprise failed to adapt to the changes, then its survival becomes difficult. They have to take care of the various forms of society and all economic activities must be focused on the scheme of social responsibility, like the same basis of wage payment for male and female workers, reservation of jobs for minorities, differently-abled people, and women.

For example, in India, various festive occasions, like Holi, Diwali, Eid, Christmas, New year, etc., provide lots of opportunities for manufacturing greeting cards and sweets, producing garments, and many other businesses and services. Social trends usually provide various opportunities and also threats to business enterprises, like at present there has been a health-conscious and fitness trend, especially amongst urban people that has brought in lots of change in this system.

3. Technological Environment:

The technological environment of a business refers to the broad features of science and technology in which a business enterprise operates. It includes forces relating to innovation and scientific development, which provides a newer base for producing goods and services, and also effective methods and techniques for operating a business enterprise. Now it is very common to see that retailers have a direct link with the suppliers who update their stocks when needed. By using the internet, people can look for flight timings, destinations, and fairs and book tickets online. Technological development has made it possible to book railways tickets from home or office at a convenient time instead of standing in queues at the railway booking counters, and today almost all commercial banks have started internet banking services whereby account holders can view their account at any point in time. Technological advance creates new methods of production and production techniques. Therefore, a business enterprise must be adaptable to new technology for its survival.     

For example, LED replace CRT monitors, and computers with multiple word processors replace single word processors. Digital watches have killed the business of traditional watches.

4. Political Environment:

It refers to the broad features of the political system in which a business enterprise operates, including political conditions such as general stability and peace in the country, and specific attitudes that the elected government representatives hold towards the business enterprise. These forces significantly affect the day-to-day functioning of the business enterprise. Whenever there is political stability, it increases the confidence of businessmen towards the political parties as they function within the framework of the political environment. The business managers are required to understand the changes in the political environment and also respect the orders of the judiciary system that it gives from time to time. All business firms are affected by the policy and practices of the government. Therefore, the business firm must study and analyze the political environment to adjust it as per changes.

For example, after opening up the economies in the 90s, the government of India allowed MNCs to boost the various types of industries, namely food processing industries like Pepsi Coca. IT companies have found Hyderabad, Bangalore, Chennai, Pune, Noida, Kolkata, etc., to be the most suitable locations primarily due to the supportive political environment in these cities.

5. Legal Environment:

It refers to the broad features of the legislature in which a business enterprise operates, including various legislations, which are placed and passed by the government in the parliament or state legislature. It also involves administrative orders issued by the government authorities, and courts, and also on recommendations made by the various committees. It is imperative for the management of all business enterprises to obey the law of the land for proper and smooth functioning. Non-compliance with the law will attract punishment as per the statutory provisions. Therefore, business managers must have adequate knowledge of various rules and regulations. In fact, such awareness and knowledge are pre-requisite for better business coordination and performance. 

For example, the Companies Act, Consumer Protection Act, Trademark Act, Trade Union Act, etc. These acts have been passed by the parliament, which have to be followed by all organizations.

Features of Business Environment: Different features of business environment include totality of external forces, specific and general forces, dynamic nature, inter relatedness, etc.

Importance of Business Environment: Business environment is important because of various reasons. It helps in coping with rapid changes, tapping useful resources, building corporate image, etc.

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