The importance of understanding the relevant environment of business is described below:

(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 formulate strategies to capitalize on the opportunities at the earliest. For instance, if it is learnt that demand for mobike is going to increase, a mobike producing firm can take steps to increase production and introduce new models to lure new customers. By doing so, the firm will get the first mover advantage.

(ii)    Identification of Threats or Warning Signals: Environmental scanning helps to identify possible threats in future. For instance, if an India firm finds that an MNC is entering the Indian market with new substitutes. This should work as a warning signal for the Indian firm. Based on this information, the Indian firm can improve the quality its products, reduce cost of production, engage in aggressive advertisement etc.

(iii)    Sensitization of Management: A keen watch on the trends in environment would help to sensitize the firm’s management to the changing technology, competition, government policies and changing needs of the customers.

(iv)    Intellectual Stimulation: Analysis of environment is an intellectual exercise that can stimulate the managers in their decision-making. All strategic decisions are based on environmental analysis.

(v)    Formulation of Strategy: Environmental analysis helps in identifying threats and opportunities in the Market. These can serve as the basic of formulation of a strategy to counter threats and capitalize or opportunities in the market.

(vi)    Continuous Learning: Strategy formulation is a communions process that involves keeping in touch with the external environment. Thus, managers keep a watch on the environmental changes and act on the basis of such information. Search of alternative and choice of a strategy to deal with the environment are parts of the learning process.

(vii)    Image Building: If a firm is sensitive to the external environment, it will come out with new products and services to meet the requirements of the customers. This would the image or reputation of the firm in the eyes of the customers and the general public.

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