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. In order to understand the relationship between an organization and its environment, we will look at the interactions between them in some primary areas.

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The Relationship between an Organization and its Environment

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.

Browse more Topics under Business Environment

• Meaning and Characteristics of Business Environment
• Importance of Business Environment
• Environmental Impact and Analysis
• Environmental Scanning
• Macro Environment – Demographic Environment
• Elements of Micro Environment
• Macro Environment – Economic Environment
• SWOT analysis
• Macro Environment – Political-Legal and Social Environment
• PESTLE Analysis
• Macro Environment – Technological Environment
• Strategic Response to the Environment
• Macro Environment – Global Environment

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:

1. Men or Manpower
2. Money
3. Method
4. Machine
5. 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.

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:

1. Administrative: These are either proactive or reactive responses to specific environments leading to forming or redefining the organization’s purpose and key tasks.
2. 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.
3. Collective: Many organizations cope with environmental dependence problems through strategic collective responses including methods like co-opting, bargaining, alliances, etc.

Solved Question on organization and its environment

Question: An organization and its environment primarily exchange:

1. information, resources, and supplies
2. resources, imports, and information
3. information, resources, and power/influence
4. None of the above

Answer: In the study of the relationship between an organization and its environment, we find that the three primary interactions between the two are the exchange of information, resources and influence, and power. Therefore, the correct answer is option c.