Why the environment matters

A firm that understands its environment can see changes early and act first.

Studying the environment closely is called environmental scanning. It is like a medical scan, which looks carefully inside the body, or like the India Meteorological Department (IMD), which studies winds and clouds to warn people before a storm. A firm scans its surroundings so that it is ready before a change arrives.

• Identify opportunities and get the first mover advantage: Maruti saw the need for small cars before its rivals, and led the market for years.
• Identify threats and early warning signals: if a multinational is about to launch a substitute product, the firm can improve quality, cut costs or advertise before it arrives.
• Tap useful resources: a firm takes its inputs from the environment (money from financiers, materials from suppliers, permissions from government) and sends its outputs back into it (products to customers, taxes to government, returns to investors).
• Cope with rapid changes: fragmented markets, more demanding customers, new technology and global competition.
• Help planning and policy formulation: the environment is a source of both opportunities and threats, so it guides plans.
• Improve performance: firms that watch their environment closely usually do better.