Importance of environment:
For example, Sony 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: By keeping in touch with the changes in the external environment, an enterprise 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: It helps in identifying threats and opportunities in the market. These can serve as the basis of formulation of strategies to counter threats and capitalise on opportunities in the market. For example, to understand new trends in the market.
(iii) Tapping useful resources: If the company has a thorough knowledge of the external environment, it can tap raw materials, technology and even financial resources from the market at economical prices at the right time. For example, resources or raw materials which can be obtained from different countries.
(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. For example, new entry of a competitor with advanced technological product.
(v) Sensitisation of entrepreneurs to cope up with rapid changes: A keen watch on the trends in environment would help to sensitise the entrepreneur to the changing technology, competition, government policies and changing needs of the customers. For example, changing trends in clothing.