Why is it important for managers to understand the external environment?
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It is important for managers to understand this aspect of the business environment because it can affect their firm and how it should be run. No business is insulated from the outside environment. Things like political decisions, for example, can have a huge impact on a firm by changing tax laws or regulatory regimes. As another example, the managers must be aware of things like new competitors entering their market. Clearly, managers would need to be aware of these sorts of changes.
If managers are not aware of these aspects of the environment that are external to their own firm, they may well be caught unaware and unready for changes that affect their firms.
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