Points that would help us to understand the importance of business environment are: 1. Enabling the identification of opportunities and getting the first mover advantage 2. Helping in the identification of threats and early warning signals or Radar effect 3. Tapping useful resources 4. Coping with the rapid changes 5. Assisting in planning and policy formulation 6. Improvement in performance 7. Image building.

Each business firm has to exist, survive and grow in relation to the various forces of the business environment. Since business firms have no control on these forces, it has to adapt itself according to these forces.

1. Enabling the identification of opportunities and getting the first mover advantage:


Business environment provides many opportunities to the firms to improve their performance. The firms which are able to scan these opportunities at an early stage get maximum benefit and can leave their competitors behind.

For example, scientific research has come out with an energy efficient light bulb which lasts at least 20 times more than a normal bulb. General Electric and Phillips had identified this discovery and are coming up with their new bulbs.

2. Helping in the identification of threats and early warning signals or Radar effect:

Environment understanding helps an enterprise to recognize qualitative information in advance, which can be used to prepare it for facing likely challenges.


For example, if any new multinational company is entering the Indian market, the manager of an Indian firm dealing with same product as that of the multinational company, should take it as a warning signal. He should handle this threat proactively & well ahead of the launch of MNC’s product, take measures like improving the quality of his product, heavy advertisement etc.

3. Tapping useful resources:

Business requires many resources like raw materials, tools, equipments, finance, labour etc. for performing business activities. These resources are known as inputs. Business environment provides all these inputs to the business firms for carrying out their activities and also expects something in return.

The firms supply their output to the environment, for example goods and services to the customer, payment to investors on account of money invested by them, payment of wages to the workers and so on. Thus, we can say that business firms depend fully on the environment, for supplying inputs and for receiving their outputs.


4. Coping with the rapid changes:

Business environment is very dynamic. One can see changes like new technologies, fragmented markets, more demanding customers, heavy global competition and so on. Thus, in order to efficiently cope with these changes, managers must understand the environment and should adopt appropriate courses of action at the right time. It helps management become more sensitive to ever changing needs of customers. As a result, they are able to respond to such changes effectively.

5. Assisting in planning and policy formulation:

Business environment brings both threats and opportunities to a business. Hence, understanding of environment helps the management in future planning and decision making. For example, competition increases with the entry of new firms in the market.


The management has to draft new plans and policies to deal with new competitors. Environmental awareness provides intellectual stimulation to planners in their decision making. They can make changes in their plans efficiently and effectively.

6. Improvement in performance:

Environmental awareness provides a continuing, broad based education for management. Objective qualitative information generated by such understanding provides a strong basis for strategic thinking. The enterprises that monitor their environment closely can adopt suitable business practices not only to improve their performance but also to become leaders in the industry.

7. Image building:


Environmental understanding generates a feeling among public that business is sensitive and responsive to its environment. This helps in building the image or reputation of the firms.

The understanding of its business environment helps an organization to make realistic plans and ensure their effective implementation. It also helps the business enterprise in identification of opportunities and threats. Consequently, such an enterprise is likely to succeed in achieving its goals smoothly & consistently.