Relationship between Organization and Business Environment | Types of Business Environment

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Organization Environment Relationship

Organizations are open systems and they all establish, operate, and grow in the environment. Organizations always struggle to cope up with the changes in the environment.
A business organization is influenced by the environment in many ways- competitors, technology human behavior, capital, government policy, and socio-political pressure. As we know, today’s organizations are customer-driven and market-driven. They place great significance to understand relationships between an organization and its environment. As described earlier, organizations are viewed as open systems that obtain resources from the environment and transform them into outputs that are again returned to the environment in the form of finished goods or services. Organizations always struggle to cope up with the changes in the environment. Business managers have to use their knowledge and ability to understand complex elements of organizations to make business plan for the future. The main basis  for evaluating organization-environment relationships are:
1. Environmental changes and complexity
James D. Thompson suggests that the environment can be described along with two dimensions: degree of change and degree of homogeneity. He classified three degrees of uncertainty on the basis of the degree of environmental change and degree of environmental homogeneity
2. Competitive forces:
Michael E. Porter has suggested five competitive forces to assess organizations’ environments.
  • The threat of new entrants: In a competitive market there is the probability of entry of new competitors.
  • Competitive rivalry: This is the competitive relationship between organizations having the same lines of, Panchakkanya and Himal steel.
  • The threat of substitute products: The entry of new alternative products or services may substitute the need of existing products or services.
  • Power of buyers: The purchasing power of buyers influences the market share of manufacturers and suppliers.
  • Power of supplier: It is the ability of suppliers to influence potential buyers
3. Environmental Turbulence:
The organization may face the possibility of environmental turbulence without any warning. No business organization can anticipate such an environmental situation. Generally, natural calamities like earthquakes, volcanoes floods, etc create turbulence in a business organization.
Environmental Turbulence
Types of Environment:
All factors and forces affecting the survival and growth of business organizations are known as business environments.
All business organizations establish, operate, and grow within a wide range of factors. All factors and forces affecting the survival and growth of business organizations are known as business environments. Broadly there are two types of environments.
1. Internal Environment:
The internal environment is determined by forces operating within the organization. An organization has several forces operating within its internal system. The following are the components of the internal environment.
(a) Owners and Shareholders:
Shareholders play a major role and affect the organization in one or another way. They are investors of the organization. Being the owner of the business, shareholders have a direct interest in the performance of the organization. They are directly or indirectly involved in management. The interest and concern of shareholders influence the planning, coordinating, controlling, and evaluation.
(b) Board of directors:
Members of the board of directors are the representative of shareholders who are directly involved in the day-to-day operation of the organization. They try to represent the interests of shareholders. Their responsibility is to run the business in the best interest of the shareholders and other stakeholders. They are also involved in the preparation of long-term plans and business strategies of the organization.
(c) Employees:
Employees are the assets of an organization. Without the cooperation of employees and their productivity, an organization cannot attain its expected goals. Employees tend to differ in terms of belief, education, attitudes, and capabilities but they should focus on the same values and goals. Employees help create the climate within the organization.
(d) Unions:
Labor unions represent and protect the employees’ feelings and problems. Labor and management interact with each other on various issues such as negotiation on wages, working conditions, collective bargaining, etc.
(e) Organizational structure:
It is the hierarchy of authority and responsibility. Organizational structure is the foundation of an organization involving job definition, division of work, the hierarchy of authority and responsibility, and coordination among all the departments and members. It defines the formal relationship among executives and subordinates and also helps maintain a functional network among them. An organization’s structure may keep on changing. The best structure for an organization is flexible.
(f) Organizational culture & Resources:
It is the set of values that helps its members to understand what the organization stands for. Organizational culture encompasses values, norms, beliefs, customs, and symbols that guide behavior in an organization. Culture plays a major role in managerial behavior and overall effectiveness and long-term of the organization. For effective operation of the business, an organization needs resources consisting of human, financial, physical, and information. The success and failure of the organization depend upon the effective and efficient utilization of these resources. Availability and proper utilization of these resources influence organizational operation.
2. External Environment:
The external environment refers to forces and institutions outside the organization that potentially can affect the organization’s performance. The external environment can further be classified into two categories:
a) Task or Specific environment:
task environment includes immediate factors, which directly influence an organization. Each organization may have a unique task environment and it may change in accordance with time and situation. The task environment is also called the competitive or operating environment. The task environment consists of.
i) Customers:
The strategies of the competitors influence the customer’s behavior and choice. It may create a threat to the business. Customer pays money for goods and services and is the main source of revenue. Customers purchase the products or services the organization offers. Organizations cannot survive in an open market without customers. A customer may be an individual, a family, a business house, or an institution. Customers can demand lower prices, higher quality, unique product specifications, or better service.
ii) Competitors:
Every organization has to be concerned with competition. The organization must analyze the competition and establish a clearly defined marketing strategy in order to increase market share and proviée maximum customer satisfaction. Therefore, business managers need to work out Strategies to tackle competitors. Competition is the basic feature of an open market economy.
iii) Suppliers:
A business firm buys various types of resources and other necessities from the suppliers who play important role in the task environment. Suppliers provide the resources needed for production. Suppliers can raise their prices or provide poor-quality goods and services.
iv) Pressure groups:
Pressure groups also influence business organizations. Such groups have special interests to protect the members and society as a whole by drawing the attention of the media to the activities of the organizations. The pressure group consists of labor unions, media, social institutions, consumer associations, etc
v) Financial institutions:
Business organizations depend on financial institutions like commercial banks, development banks, finance companies, and insurance companies to meet their short terms and long-term financial needs and other services requirements.

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