The environment occupies a very significant place in functioning of an organization. It refers to the forces that create conditions and influences on the capacity of a business firm to compete in the market. The ability to cope with the changing environment determines the survival of an organization. Thus, analysis of the environmental forces is the key to be an effective organization.

The business environment is sum total of all forces surrounding and influencing the life and development of an organization. According to Gareth: Business environment is defined as “The set of forces surrounding an organization that have the potential to affect the way it operates and its access to scarce resources”

Business manager have to understand changes and complexity of the environment forces to skillfully exercise them so as to increase firm’s competitive capacity in the market.

Organization – Environment Relationship

Business organizations are viewed as an open system. There is constant interaction between a business system and its environment. Organisation obtains resources from the environment and transforms them into outputs that are again returned to the environment in the form of finished goods and services.

Figure 1: Business system and its environment

Types of environment: The component of business environment is classified into two broad categories.

1. Internal Environment
2. External Environment.

1. Internal Environment: Internal Environment is defined as all the forces and conditions within an organization that influence organizational behavior. An organization’s internal environment has the following components:

1. Employees: They are the main components and important assets of an organization. Employees are responsible to work as per the direction, goals, rule and regulation of the company. To work on these goals and directions, organization has to motivate and satisfy employees with specific reward policy. Without the cooperation of employees and their productivity, organization cannot attain their expected goals.
2. Shareholder and Board of Directors: Shareholders being the owners of business have a direct interest in the performance of the organization. The directors are elected by them (shareholders), who represent their interest in the board. The board is responsible to manage company and formulate appropriate strategy and long term planning. They evaluate overall organization performance and provide direction to the top level management for the growth of an organization.
3. Culture: Every organization has its own culture. Culture refers to a set values, beliefs of an organization under which it is functioning. It helps to bind all employees and comply with organizational rules and regulation. Culture has a powerful influence on the process of organizational change and decision making.
4. Labor Unions: Labor Union represents the problems and feeling of their members to management. The good relation between labor union and management avoid unnecessary disturbances in an organization.

2. External Environment:

External Environment is the condition and forces outside the organization that are relevant to its operation and influences the organizational activities. There are two categories of the external environment.

1. General Environment
2. Task(Specific) Environment

a. General Environment: General Environment consists of those forces that put direct pressure on organizational activities. They are as follows;

1. Economic Environment: General economic conditions are critical to the success of an organization. It is defined as the nature and direction of the economic system of a country and their impacts in the individual organization. The economic factors such as, national income, saving, investment, monetary policy, economic growth, interest rate, consumption pattern, employment rate etc. have great impact on functioning of an organization. Managers should devote much of their time and resources to forecast the economy and anticipating changes. Components :( Economic System, Economic Policies, Business Cycle, Capital Market)
2. Socio-Culture Environment: The socio-culture environment affects the behavior of people and their organization. It includes, values, beliefs, lifestyle, family-system, opinions, and assumptions widely held by the citizen of the particular country. These elements of society directly influence business organization. Components: (Attitude and Beliefs, Religion, Language, Education, Social Organisation, Class System)
3. Political Environment: It refers to the influence from government institution, strategies of the political parties, policies of state and local government, and relationship between government and business organization .Political Environment is important to the manager because:

1. It imposes certain legal constraint on the business.
2. It establishes a market atmosphere that may be pro-business or anti-business.
3. It has the potential to provide stability needed for long term business planning. Components: (Constitution, Political Parties, Government, International Political Events)

    iv. Technological Environment: Technology is the practical application of scientific knowledge. Radical development has occurred over the past several years in communication, information, and automation including robotics. This development brings both opportunity and threats for the organization. Thus, organization should utilize its strength to capitalize the opportunity and neutralize the threats. Components: (Up-gradation and Maintenance, Information & Communication Technology)

b. Task(Specific) Environment: The specific environment comprise the following factors:

1. Customer: Customer exchange resources, usually in the form of money for a organization’s product and services .A customer may be individual, a family, a business house or an institution. Customer not only buys the product or services they also give valuable ideas, opinions information and reaction related to it. Thus mangers should maintain close relationships with them.
2. Suppliers: Suppliers are the organizations which provide resources (material, men, machines, capital etc) t to other business firms. As the quality and price of the raw materials receive from the suppliers determine the quality of output, the business firms try to obtain lower prices, better quality work, and faster deliveries. Which strength the competitive position or an organization.
3. Government: The role of the government is to regulate business systems and to protect the interest of the consumers and the general public .It has greater influence on corporate policies, procedures and business practice of modern organization.
4. Competitors: It refers to an organization that competes for resources with other organization. The organization must analyze the competition and establish clearly defined marketing strategy in order to provide superior customer satisfaction and to increase market share.
5. Media: The media keeps eye on the vital decision or actions of the business firm having general public interest. Therefore managers need to have good communication with both media and external audiences and deal with them effectively and promptly.
6. Financial institution: Organization depend on a variety of financial institution such commercial banks, merchant banks and insurance companies to supply fund for maintaining and expanding their activities. The term and condition of loans and advances and quality and promptness of their services have an impact on the performance of a business.
7. Special interest group: It refers to environmentalist, unions, consumers, advocates, and much other professional organization. There organizations pressurize the company or business firm to advance their position and issues like quality service, price, waste management, environmental protection etc.