Environment is made of different elements. These elements are called environmental elements. Such elements directly and indirectly influence the ability to achieve organizational goals. These elements can be
classified in two groups. They are: internal environmental elements and external environmental elements. The same classification is also called the types of environment. The following figure clarifies the types of environment:
Internal environment
An organization has internal environment which includes owner, board of directors, employees, and culture. Such elements directly influence a business organization. As these elements remain under the control of the organization, the management should utilize them in favor of the organization by using their ability, experience and skill.
The components of internal environment are Owners, Culture, Employees, and Board of Directors and so on.
External environment
External environment of an organization can also be classified in two categories. They are general environment and task environment. The general environment is not related to organization but task environment is related.
1. General environment: The elements of general environment do not remain under the control of organization but they directly affect the organizations. Economic, political, legal, social, cultural and technological elements are general elements. These elements remain out of organization but greatly affect an organization. Organization should make favorable by monitoring and analyzing these external elements. Following figure clearly shows the general environmental elements:
a. Economic environment: Economic environment is an important element of general environment. Inflation, interest rate, unemployment etc. are its main elements. As these elements directly affect the business organizations, decisions should be taken after having deeply studied and analyzed them. These elements do not remain under control of business . so, the business organizations cannot affect these elements. Rather the organizations are affected by them.
i. Inflation: The price of goods and services goes high during the time of inflation. Companies have to pay high price for the necessary resources to produce goods or services. As a result, the cost of goods or services increases. The companies compulsorily increase the price of their goods or services to recover their investment. In this way, the price hike of goods or services directly affects the demand, or demand goes down.
ii. Interest rate: If the rate of interest increases, the customers do not like to borrow money. Similarly, the companies also have to pay the interest rate if thy borrow. In this way, the cost of only increases resulting to price hike of goods or services. This affects demand or demand goes gown.
iii. Unemployment: the unemployment situation also affects the demand of goods or services. So, this is also one of the important elements of economic environment. Companies get good chances to select employees. As only a small number of people decreases. As a result, the demand declines.
b. Political-legal environment: Political and legal environment is also included in general environment. Political philosophy, political system, political organizations, legal system, court, legal administration etc. are included in this. Theses elements also do not remain under the control of organizations. So, decisions should be taken after deep study and analysis of these elements.
i. Political philosophy: Political philosophy may be democratic or socialist or mixed. In democratic countries private companies play important roles. In the socialist philosophy the government plays important roles. In the mixed political philosophy, the political philosophy, the role of both the private sector and state play important roles. So, business organizations should analyze political philosophy also. In Nepal, both the private and government sectors have important roles.
ii. Political system: Political system includes political ideology, election prices, the process of government formation etc. Besides, political stability or instability also consists in it. This factor also affects business organization.
iii. Political institution: This includes executive (Government), legislative (Parliament) and judiciary (court of law). These political institutions also affect business organizations.
iv. Legal System: The things what business organizations can do and what they cannot do are stated in legal system. Besides, the rights and interests of labors and consumers are also clearly explained.
v. Court: Court is also included in the environment of business. Court solves the legal problems. There may be different types of courts according to the level and nature of legal problems, court settle disputes.
vi. Administration of law: Administration of law is also one of the elements to affect business organization. This includes th law implementation bodies. They are government bodies, police, advocates etc.
c. Socio-cultural environment: Socio-cultural environment is one of the important elements of general environment. This include population, pressure groups, reference groups, lifestyle, social classes, religion, language etc. these elements directly affect organizations, so decisions should be taken only after their deep study and analysis.
i. Demography: The elements such as growth of population, size of population, age group, population distribution, urbanization, migration, etc. are included in demography. These elements affect business organizations. So a manager should analyze such demographic elements for taking rational decision.
ii. Pressure groups: Pressure groups do different activities for different social and group interests. Such activities affect business organizations. Consumer, civil society, human rights organizations, woman organization, environment protection group etc. are the pressure groups. So a manager should also analyze the pressure groups and their activities for taking proper decisions.
iii. Reference groups: Reference group is also called affecting group. Such group binges change in the consumers behavior. For example: famous film stars, musicians, other popular personalities fall in reference group. They can bring changes in consumer’s life style, fashion, behavior belief etc.
iv. Life style: Social change brings change in the life style of people. The life style of people is expressed in their activities, behavior, interest views or ideas etc. such changes in people affect business organizations. Os, a manager should also study and analyze such things.
v. Social class: All the people do not belong to the same class in any society. Some are rich and some others are poor. On the basis of middle class and lower class. Generally the interest, capacity of expenses and behavior of the people of same class become similar. Such social classes affect business organizations.
vi. Religion: Religion is an element of socio- cultural environment. Religion also affects business organization. Os, business organization should think over this element. The consumer’s groups may be Hindu, Muslim, and Christian etc. so, a business organization should think over religion also.
vii. Language: the other important element of socio-cultural environment is language. Language works as the communication media. It directly affects organizational activities. English, Chinese, French, Sanskrit, Urdu, Hindi, Nepali etc. are the languages used by consumers. Languages are different in different countries. Various languages can be spoken in a country. So, language is also and important element of socio- cultural environment.
d. Technological environment: The other important elements of general environment are technological environment. The level of technology, pace of technology, researches and development budget technology transfer etc. are included in technological environment. These elements also directly affect business decision. So, the managers should regularly study and analyze technological environment.
i. Level of technology: The level of technology is labour and capital dominated. Labor dominated technology uses much manpower whereas capital dominated technology uses modern machineries and equipments.
ii. Pace of technology: Technology is dynamic. Its pace of change is very fast. So a manager should adopt changing technological environment.
iii. R & D budget: Customer’s needs keep on changing. Old technology may be useless to fulfill the changing needs. So it is necessary to develop new technology. Research and development is the main basis of development of new technology. So a manager should pay attention towards this aspect.
iv. Technology transfer: Top import new technology from developed countries to technologically poor countries is called technology transfer. Technology can be transferred trough projects, multinational companies, technical assistance, trade etc.
2. The task environment: Task environment is one of the important elements of external environment. This includes competitors, customers, suppliers, regulators and strategic allies. These elements directly affect the activities of an organization.
a. Competitors: Competition is very important element of task environment. It directly affects organizations. Organizations should analyze competition to form clear strategy for giving satisfaction and expansion of market share. The competitors of an organization are other organizations which compare for resources.
b. Suppliers: Suppliers are those organizations which provide resources to business organizations. It is good for any organization to keep long term relationship with suppliers for quality, effective and prompt delivery of resources. Suppliers may be of different types. They are raw material supplier, machinery supplier, human resource supplier, financial resource suppler etc.
c. Customer: Those who purchase the products or services of an organization are called customers. Customer may be individuals or organization. Schools, hospitals, government agencies, whole sellers, retailers, producer etc. are the organizations which are the customers of other organizations. Organizations develop different programs to satisfy their customers.
d. Regulators: Regulator controls the policy and behavior of an organization. So the organization is affected by his activities. The regulators are also of two types. They are Regulatory Agencies and Interest groups. Regulatory agency is a unit formed by government which provides protection to people an organization by curbing unfair business practices. It protects consumer rights. Interest groups are formed to influence an organization. Such groups works for the interest of its members or group.
e. Strategic allies: when two or more companies work together as join venture, it is called strategic allies. Such allies are formed for doing important works. One company / organization can learn special skill and knowledge from other. Along with this, risk is shared among companies. Ford and Mazda Company have jointly established Probe Automobile. This is called as strategic allies.