The primary purpose of Group Policy is to apply policy settings to computers and users in an Active Directory domain to enable IT administrators to automate one-to-many management of users and computers. This simplifies administrative tasks and reduces IT costs. Administrators can efficiently implement security settings, enforce IT policies, and distribute software consistently across a given site, domain, or range of organizational units.
The Group Policy engine is the infrastructure that processes Group Policy components including server-side snap-in extensions and client-side extensions. It is a framework that handles client-side extension (CSE) processing and interacts with other elements of Group Policy. The Group Policy engine is contained within userenv.dll which runs inside winlogon.exe. So let's take a quick look at the Group Policy architecture:
When a client logs in to the Active Directory, it processes the appropriate group policies based on its membership within the domain, within a specific group, or within an organizational unit. For example, if your machine is a member of an AD domain, then there will be a set of domain-wide policies that are applied to the machine when it is booted up. There may also be policies applied based on where the machine is located geographically, or based on which business unit the machine belongs to. The same principle applies to users.
The Group Policy Objects themselves are located on the SYSVOL share of the domain controllers within the AD. Once the policies are brought down to the client, the individual client-side extensions (CSE) will apply the policies to the appropriate areas.