Business enterprises cannot work in isolation. Therefore, a good understanding of environment not only helps the manager to deal with uncertain situations, but also helps enterprises to identify and benefit from opportunities that the environment offers. The following points highlight the importance of business environment:
1. It Enables the Firm to Identify Opportunities and Get the First Mover Advantage
Opportunities are the positive trends that help firms to grow. A good knowledge of business environment helps a manager to identify such opportunities earlier to take its benefit, rather than losing it to other competing enterprises. For example, Maruti Udyog was the first automobile company in India to recognise the opportunity to develop small cars, due to which, it is still one of the market leaders in that segment.
2. It Helps the Firm to Identify Threats and Early Warning Signals
Threats refer to the negative trends, which will hinder the performance of the enterprise. The businessmen, who are able to scan and understand the business environment on time get a warning signal to deal with such negative changes, e.g. due to entry of many automobile companies in India, Maruti Udyog had started paying attention towards making strategies to survive in the competition.
3. It Helps in Tapping Useful Resources
Environment is a source of various resources for business like finance,machinery, raw materials, etc. Contrary to this, business enterprise supplies goods and services to the society in the. form of taxes, products, return on investment, etc. A good understanding of environment helps the firm to convert such resources into output required by the environment and society.
4. It Helps in Coping With Rapid Changes
Business environment is fast changing due to turbulent market conditions, more demanding customers, changing technology and increasing global competition. In order to cope up with such changes and derive benefit from them, managers must examine their environment and develop suitable action.
5. It Assists in Planning and Helps in Policy Formulation
Since, business environment is a source of identifying both opportunities and threats, its proper analysis and understanding provides the base for planning and guides in framing policies. It helps an enterprise to decide future course of action and provides guidelines for decision-making.
6. It Helps in Improving Performance
An enterprise that monitors its environment continuously, is in a position to improve not only its present performance, but also improve its future performance. This ensures success of the business in the long-run.