The Company and its Environment

Company may be visualized as an institution in society surrounded by environment i.e., various external forces influencing its functioning. It is said that business is a product of environment OR Business is the creation of its environment.

1. The nature of business,
2. Location of a business enterprise,
3. The product to be manufactured or service to be rendered by the business unit,
4. Size and volume of operations of the firm
5. Price to be fixed for the product, etc., are determined by the environment within which the business operates.

The business firm consists of a set of internal factors and is confronted with a set of external factors (i.e., environment). This is the relation between a firm and its environment. The internal factors are regarded as controllable factors, as the firm has got control over these factors.

The firm can alter or modify internal factors to its advantage. The examples of internal factors are nature and number of personnel, physical facilities, organisation and functional means, such as marketing mix, to suit the environment.

The external or environmental factors are beyond the control of the business firm and the success of the firm will depend to a very large extent on its adaptability to the environment (factors) i.e., its ability to properly design and adjust the internal factors/variables to take advantage of the opportunities and to combat the threats of the environment.

The environment, if poses threats to a firm, it offers immense opportunities also for exploitation. Both these situations depend upon the environmental factors influencing the firm.

Relationship between an Organization and its Environment

The environment of a business has a great impact on the functioning of the firm. It offers opportunities and threats along with limitations and pressures influencing the structure and functioning of the business.

Exchanging Information

An organization and its environment exchange information between themselves. Organizations need information about the external environment for planning, decision-making and control purposes. Hence, they analyze the environment’s variables along with studying their behavior and changes.

Further, the information generated by this analysis helps the organization handle the problems of uncertainty and complexity of the business environment. Therefore, firms try to gather information pertaining to market conditions, economic activity, technological developments, demographic factors, socio-political changes, competition activities, etc.

Also, the organization also transmits information to external agencies. It does so, either voluntarily or inadvertently. Therefore, the exchange of information is an important interaction between an organization and its environment forming the basis of their relationship.

1. Exchanging Resources

Apart from exchanging information, an organization and its environment also exchange resources. A firm needs inputs like finance, manpower, equipment, etc. from its environment. Typically, the resources required by an organization are categorized into 5 M’s:

• Men or Manpower
• Money
• Method
• Machine
• Material

An organization uses these inputs to produce goods or services or both. Acquisition of these inputs usually requires an interaction between the firm and the markets. This interaction can be in the form of competition or collaboration. Nevertheless, the purpose is to ensure a constant supply of inputs.

On the other hand, the organization depends on its environment for the sale of its goods and services. This process also requires interaction between the firm and its environment. Further, the firm must

Perceive the needs of the environment and develop products or services to meet those needs.

Satisfy the demands and expectations of the clientele groups. These groups are:

• Consumers
• Employees
• Shareholders
• Creditors
• Suppliers
• Local Community
• The general public, etc.

2. Exchanging Influence and Power

The third important interaction between an organization and its environment is the exchange of influence and power. By now, we understand that the external environment holds considerable power over a firm due to the following reasons:

• The business environment is inclusive
• It has a command over the resources, information, etc. which the firm requires
• It offers opportunities for growth on one hand and threats and constraints on the other

Hence, the environment can impose its will on the organization. On the other hand, there are times and scenarios when an organization holds a position wherein it can wield considerable power and influence over some aspects of the external environment. This usually happens when the firm has command over resources and information.

An organization with a higher degree of power over its environment has more autonomy and freedom of action. Also, the firm can dictate terms to its environment and mold them to its will.

An Organization’s Response to its Environment

In order for an organization to respond well to its environment, it must be able to monitor and make sense of its environment and have an internal capacity to develop effective responses. An organization’s response to its environment can be of the following three types:

• Administrative: These are either proactive or reactive responses to specific environments leading to forming or redefining the organization’s purpose and key tasks.
• Competitive: A change in the competitive environment can force an organization to respond with actions that can help it gain a competitive advantage over its rivals.
• Collective: Many organizations cope with environmental dependence problems through strategic collective responses including methods like co-opting, bargaining, alliances, etc.