There are five dimensions of the business environment that influence many firms. These dimensions include the economic environment, the social environment, the political environment, the legal environment, and the technological environment.
The economic environment includes what the rate of inflation is, the current level of interest rates, and how much money is made by consumers, as well as local, state, and national economic policies. These factors influence the performance of a company. For example, if consumer income drops, it may be more difficult for a company to sell its products and to make an acceptable profit.
The social environment includes customs, educational levels, literacy rates, demographics, and lifestyle choices. For example, a company that misinterprets local customs and traditions may struggle to be successful.
The technological environment includes the changes in technology that may aid in the operation of a business. A company must stay current with new technological trends. These may impact consumer preferences for products. These may also impact the cost of the production of products. For example, landline phones are disappearing as more people use cell phones. Newer, more efficient machinery may help reduce a company’s operating costs that could help the company be more competitive.
The legal environment includes the rules and regulations that impact the business environment. It is important that the business leaders understand these rules and regulations and follow them. Failure to do so could be very costly.
The political environment includes the political stability within a country and how supportive the government is towards the business community. A lack of political stability may deter business investment and expansion. Governments that develop unfriendly policies towards businesses may risk losing those businesses to other countries or may discourage businesses from increasing investment and expanding their operations.