Why it is important for business enterprises to understand their environment? Explain briefly.

Understanding of business environment is of vital importance for successful functioning of an organisation. Any organisation cannot function independently. It’s functioning and performance depends on several external forces as well. A continuous evaluation and understanding of the business environment helps a firm to take account of these forces in a better manner and thereby, improve its functioning. The following points highlight the importance of understanding of environment for business enterprises.

i. Identification of Opportunities: With a careful analysis of the business environment an enterprise can identify the positive opportunities for business. An early identification of the opportunities helps it in taking first hand advantage in competition.

ii. Identification of Threats: Besides positive opportunities, a study of business environment helps an enterprise in the identification of threats or negative signals that may adversely affects its functioning. Thereby, it enables it to take appropriate preventive measures.

iii. Accumulating Useful Resources: Environment provides a business various resources or inputs for its functioning such as raw material, machinery, labour, etc. On the other hand, enterprises provide the environment with output in the form of goods and services. That is, environment acts both as a source of resources as well as a source of demand for the products of the enterprises. Thus, it becomes logical for the enterprises to take up those resources from the environment that can be converted into the desired output. This is possible only if the enterprises have an understanding of what the environment desires and what it can offer.

iv. Adjusting to Changes: Business environment is dynamic in nature. Changes in technology, consumers taste and preference, government policies take place continuously. A careful analysis and understanding of the environment helps an enterprise in dealing with these changes in a better manner and thereby, take appropriate actions.

v. Formulating Plans and Policies: A continuous study of environment helps an organisation in the identification of the opportunities and threats. Thereby, it guides the organisation in framing suitable plans and policies in view of the current scenario.

vi. Improving Performance: A continuous analysis of the environment helps the enterprises in framing suitable policies and plans and thereby, improves their performance.

It is important for business organisations to understand their environment because of the following reasons. 

(i) It Enables the Firm to Identify Opportunities and Getting the First Mover Advantage: Environment provide numerous opportunities for business. Early identification of opportunities helps an enterprise to use it before instead of losing them to competitors. 

(ii) It Helps the Firm to Identify Threats and Early Warning Signals Environmental awareness can help managers to identify various threats on time and serve as an early warning signals. 

(iii) It Helps in Tapping Useful Resources: Environment is a source of various resources for running a business. To engage in any type of activity, a business enterprise assembles various resources called inputs. This can be done better by understanding what the environment has to offer. 

(iv) It Helps in Coping with Rapid Changes: All types of enterprises facing increasingly dynamic environment. In order to effectively cope with these significant changes, managers must understand and examine the environment and develop suitable courses of action. 

(v) It Helps in Assisting in Planning and Policy Formulation : Since environment is the source of opportunities and threats, its understanding and analysis becomes the base for various policies to be framed and strategies to be made. 

(vi) It Helps in Improving Performance: The enterprises that continuously monitor their environment and adopt suitable business practices are the ones, which not only improve their present performance but also continue to succeed in the market for a longer period.

It is important for business organisations to understand their environment because of the following reasons 

1. It enables the Firm to identify opportunities and getting the first Mover advantage: Environment provides numerous opportunities for business. Early identification of opportunities helps an enterprise to use it before instead of losing them to competitors.

2. It helps the Firm to identify threats and early Warning Signals. Environmental awareness can help managers to identify various threats on time and serve as an early warning signals. 

3. It helps in tapping useful Resources Environment is a source for the various resources for running a business. To engage in any type of activity, a business enterprise assembles various resources called inputs. This can be done better by understanding what the environment has to offer. 

4. It helps in coping with rapid changes. All types of enterprises are facing increasingly dynamic environment. In order to effectively cope with these significant changes, managers must understand and examine the environment and develop suitable courses of action. 

5. It helps in assisting in Planning and Policy formulation. Since environment is the source of opportunities and threats, it’s understanding and analysis becomes the base for various policies to be framed and strategies to be made. 

6. It helps in improving performance The enterprises that continuously monitor their environment and adopt suitable business practices are the ones which not only improve their present performance but also continue to succeed in the market for a longer period.