Importance of Environment: Sensitivity to environmental factors is crucial for an entrepreneur. If a company is able to adapt to its environment, it would succeed in the long run. For example, Sony is failing to understand the changing trends in mobile phones and therefore losing its market share. The benefits of understanding the relevant environment of business are:
(i)Identification of opportunities to get first mover advantage: An entrepreneur must be keen and alert and must be aware of all the changes in the external environment, so that he can identify opportunities and find strategies to capitalise on the opportunities at the earliest. For example, Volvo, the Swedish brand, has 74% share in the luxury bus segment as it had entered India earlier.
(ii)Formulation of strategies and policies: An entrepreneur must be capable of formulation of strategies and policies which is really going to help in identifying threats and opportunities in the market.
(iii)Tapping useful resources: If an entrepreneur has complete and a thorough knowledge of the external environment, then easily he can tap raw materials, technology and even financial resources from the market at economical prices, at the right time.
(iv)Better performance: Proper understanding of the various elements of the external environment is necessary to take timely action to deal with threats and avail opportunities for the purpose of improvement in the performance of the firm.
(v)Sensitisation of entrepreneurs to cope up with rapid changes: A keen watch on the trends in the environment would help sensitise the entrepreneur to changing technology, competition, government policies and changing needs and taste of the customers. For example, trends in clothing, outdoor celebration of family events. Showing more interest in fast food, changing fitness trend.
(vi)Image building: If a company is sensitive to the external environment, it will come out with new products and services to meet the requirements of the customers. This would build the image or reputation of the firm in the eyes of the general public. For example, call-radio taxis with additional features like GPS systems, online booking, etc.