Study Guide in Entrepreneurial Management FM-AA-CIA-15 Rev.

0 10-July-2020

FM Elec 103: Entrepreneurial Management Module No. 3

STUDY GUIDE FOR MODULE NO. 3

MODULE OVERVIEW

The environment is at the core of exchange in the BRIE model, since exchange is literally the firm or entrepreneur
dealing with the environment—buying, selling, or trading across the boundary of the firm. In the end, entrepreneurs
carve a firm out of the environment by gathering resources, setting them up inside a boundary and trading or
exchanging them across the boundary. In short, almost everything a firm does involves the environment. This
chapter will help you understand more about the environment and its components, and how you can organize
yourself and your firm to manage its relations with the environment.

MODULE LEARNING OBJECTIVES

At the end of this chapter, students must be able to:

1. Discover the elements that make up small business environment;
2. Develop ability to scan the small business environment;
3. Learn the techniques of building legitimacy for your organization;
4. Explore the techniques of social networking;
5. Learn the basic skills for handling crisis;
6. Gain insight into how small business can achieve sustainability;
7. Identify the major steps in making ethical decisions in small business.

LEARNING CONTENTS

THE ENVIRONMENT OF SMALL BUSINESS

Following the BRIE model in starting a business, the entrepreneur creates a boundary within the environment,
setting his or her firm apart from the rest of the environment. Environment is the sum of all the forces outside the
firm or entrepreneur. In doing this, the entrepreneur gives the firm an organizational identity. Organizational identity
is not just the name of a firm, but its basic description—what it does and where it does this. It can include formal
elements like a registration with the state, or a website or email account with the firm’s name on it, or a telephone
number in the firm’s name.
In creating a firm using the BRIE model, the entrepreneur gathers resources from the environment. These can
include information on how to do the business or whom to sell to, funding to run the business, space for the
business, and raw materials for the business to use to make goods or deliver services. If the environment is rich
with resources as it is during economic boom times, it can be easy to gather what is needed. In tougher times,
such as during economic recessions, gathering resources can be harder. As entrepreneurs face resource
constraints, they often learn to get by with less, or substitute a more readily obtained resource, or ask to borrow,
rent, or trade for the resource. These techniques are called bootstrapping and are part of the culture of most
successful start-up.

THE ELEMENTS OF THE SMALL BUSINESS ENVIRONMENT

Environment is a difficult concept to consider because it is so big. It literally includes the entire world outside
yourself and your business. As an entrepreneur, or entrepreneur-to-be, how do you go about understanding it,
much less using it to help focus and operate your business? The key is to have a model of the environment in mind,
which can help you focus on a part of the world at a time.

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1. The Internal Environment of a firm consists of those people inside the boundary—the owner, any
employees, and any other owners or board members of the firm. As every company matures, it adds to
its organizational culture a set of shared beliefs or basic assumptions that demonstrate how things get
done. Organizational culture also includes common, accepted ways of dealing with problems and
challenges within a company.
2. The External Environment consists of everything outside the firm’s boundary. When businesspeople talk
about “the environment” and they are not talking about air, land, or water, this is the environment they are
discussing. The easiest way to think about this very large entity is to break it into two parts.
a. Task Environment. A part of the external environment made up of those components that the firm
deals with directly such as customers, suppliers, consultants, media, interest groups, and the like.
b. General Environment. A part of the external environment made up of sectors of major forces that
shape the people and institutions of the task and internal environments, such as the economic
sector or the demographic sector.

ENVIRONMENTAL SCANNING FOR SMALL BUSINESSES

Big corporations have whole departments focused on scanning the environment and the firm’s competitors. Most
small businesses cannot afford to try that approach, but they can benefit tremendously from even a small amount
of environmental scanning.
There are several low-cost and relatively fast ways to monitor the environment. They include:
● Looking for trends and future-looking articles in the trade and professional press of your industry or those
of members of your task environment.
● Asking your customers, suppliers, banker, attorney, and accountants what they see on the horizon for
business in general, for business in your community in general, or for your industry or line of business in
particular.

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FM Elec 103: Entrepreneurial Management Module No. 3

● Keeping notes on the things that bother you about the way work is done now, or what bothers you about
how something has changed (whether a product, service, or process you deal with), and periodically do
some fast research (typically searching on the web) on what causes it and how others feel about it.
● Subscribing to a couple of magazines or newsletters (online or hard copy) or online newsfeeds or blogs
outside your area of business
Beyond trend-spotting, the other key scanning ability is to find the resources you need from the environment to
build your business. The key to identifying resources comes from the acronym PROFIT, which stands for the six
types of resources:
1. Property/Physical: Buildings, land, equipment, raw materials
2. Relational: Customers, networks, distributors, social capital
3. Organizational: Systems, structures, operational procedures
4. Financial: Money, lines of credit, crowdfunding, bartering
5. Intellectual (also known as Human): Employees, contractors, advisers, consultants, and the skills the
business needs or has
6. Technological: Patents, trademarks, ideas, copyrights, licenses, access to technology or expertise
networks

FIVE SKILLS FOR MANAGING RELATIONS WITH THE ENVIRONMENT

Building Legitimacy
Legitimacy means that a firm is worthy of consideration or doing business with because of the impressions or
opinions of customers, suppliers, investors, or competitors. Gaining legitimacy is one of the top challenges facing
new small businesses, but it can be especially difficult for entrepreneurs seen as “different”—women, minorities,
home-based businesses, businesses started by young people, entrepreneurs introducing a new technology, or
people new to the area or industry.
There are three general forms of legitimacy that you can develop:
1. Based on your people. Remember that often the owner is the business in many people's minds. So, he or
she is the most important element of social capital to customers and supporters of a business, such as
bankers, lawyers, and suppliers. Having people in the organization—an owner, employees, or even media
spokespeople—whom customers know and respect increases the firm’s legitimacy. Making sure the
people of your business always work in the best, friendliest, and most professional way also helps build
the business.
2. Based on your product. The goal is to make sure the customer knows about the details of the product—its
high quality and environmental friendliness, its competitive advantage, how to use it—and has the
assurance that it will be backed up by the firm.
3. Based on your organization. the final key legitimacy factor is promoting knowledge about the organization
itself. This might focus on telling about the history or visibility the firm already enjoys. It might come from
published information that makes sure your firm looks like a substantial and professional business.
Whatever gives customers confidence in the quality and survivability of the firm helps the selling process
and in turn increases the all-important trust factor.

Developing a Social Network

Another basis for building social capital is through building a social network. A social network is the entrepreneur’s
relationships and contacts with others. Social networking is a way to work trust, reciprocity, and long-term
relationships into your day-to-day business operations. It’s a way to build your company’s expertise by convincing
others to share their skills and knowledge with your firm. The most successful owners are those who recognize
that others have the expertise needed and establish relationships that give them the benefits of that expertise.
Reputation has a positive community impact; it increases trust and creates a culture that enables people to make
good decisions. Social networking helps all those aspects of small business by building your reputation as giving
the most expert business goods or services and as being an important community resource. Social networking can
help your long-term reputation as a business owner by showing others who you are18—a consistently top-notch
community player.
Remember, social networking makes a difference in how you’ll conduct business every day. It means asking for
help when you need it, respecting the other person’s time and expertise, and most importantly being willing to
reciprocate if asked. Mutuality is the idea and action of each person helping the other.
Building social capital through social networking involves giving information, letting people know they belong, and
providing social support and approval. You have to take the time to build and keep up your relationships with
others in your network. This is called networking, which means small business owners interacting with others in
order to build relationships useful to the business.

Handling a Crisis

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While some challenges come slowly and give the small business owner a chance to think about how to choose,
all businesses sooner or later face some sort of crisis. A crisis is a situation that poses a major problem for the
business or its people, in which the survival of the business is at stake, and immediate action is necessary. For
owners, knowing what to do during a crisis is a very specialized and emotionally demanding form of decision
making. Small business owners are optimists about their businesses, and it can be wrenching when something
goes wrong.
Although originally given for large businesses, the six steps to follow can be readily adapted to small ones. The
steps are:
1. Admit you’re in trouble—quickly. It is better to say, “If there is a problem, I will find it and fix it,” than to
delay an admission until fact-finding is done.
2. Get to the scene as soon as possible. Your job? Show caring and accountability.
3. Communicate facts you know (and those you don’t) to employees, customers, and suppliers.
4. Have one person serve as the firm’s spokesperson. It is best if it can be the owner, but an articulate
employee, family member, or outside professional (e.g., lawyer) can stand in.
5. Separate crisis management from the everyday management of the firm. If you are doing both, try to
take time to do each separately. Delegate as much as possible of the everyday management to employees
or family while you concentrate on dealing with the crisis.
6. Deal with the crisis quickly. Take steps to solve the problem, and make the process of dealing with the
problem as open as possible.

Achieving Sustainability
If you look at a management, entrepreneurship, or small business text from 10 years ago, you would be hard-
pressed to see anything related to sustainability or green business. Those elements we called corporeal forces in
the general environment were taken for granted. Today, however, some of the negative effects of industrialization
on the earth and the living species inhabiting earth are becoming apparent. Sustainable entrepreneurship is an
approach to the operation of the firm, the line of business of the firm, or both, which identifies or creates and then
exploits opportunities to make a profit in a manner that minimizes the depletion of natural resources, maximizes
the use of recycled material, improves the environment, or any combination of these outcomes. Positive outcomes
along these lines are described as “greener,” so the approach is also sometimes called green entrepreneurship.

Making Ethical Decisions

Ethics comprise a system of values people use to determine whether actions are right or wrong. We consider
ethics in determining whether a decision we are about to make is good or bad. And, we make judgments about
actions—something is good or bad; someone is right or wrong— based upon our own personal ethics. An ethical
dilemma occurs when a person’s values are in conflict, making it unclear whether a decision we’re thinking about
making is right or not. An ethical dilemma also occurs when there are several different options for a decision we
have to make and the best choice isn’t clear. Of the five environment managing techniques discussed in this section,
making ethical decisions is undoubtedly the hardest. Part of it is because the ethical problems that keep
entrepreneurs up at night are ones where there is not a satisfying yes or no answer.
LaRue Hosmer was initially a professor of entrepreneurship who came from a family logging business. He later
turned his eye toward the challenge of making ethical decisions in business. He came up with a model widely used
today, but it is focused more on big business than small ones. Adapting his approach30 to small business, making
ethical decisions involves three steps:
1. Define: Define the moral problem.
2. Generate: Generate alternatives that could meet the ethical, legal, and economic goals every business
must balance.
3. Implement: Pick the best alternative you and your business can live with and implement it.

Caveat Emptor
You can still see an occasional entrepreneur, corporate magnate, or economic pundit invoke the old Latin phrase
caveat emptor, let the buyer beware. It gets repeated because it has popped up in legal cases, and the Latin makes
it sound impressive, but as a legal principle, it has been routinely discredited. Caveat emptor is often the first line
of defense by rip-off artists, frauds, and producers of shoddy merchandise. Using it as a defense puts the
entrepreneur who uses it, and, usually by association, the whole small business community, in a negative light.
Assuming you realize the caveat emptor approach is not the way to go, you may still need to make a decision you
believe is ethical. Here are four proven philosophies to try when you are thinking through alternatives to help you
determine how ethical the choices are.
1. Am I treating others the way I would want to be treated? You’ve probably heard of this one before. It’s
the Golden Rule, and almost every major religious tradition in the world has some version of it
2. Is my solution the best thing for the most people over the long term? You may have heard of an idea called
utilitarianism. Basically, it means that the action resulting in the greatest good for the greatest number of
people is the right action to take.

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3. What if everyone did what I want to do? What kind of world would it be? Those questions in a nutshell
are the idea of universalism, a code of right and wrong that everyone can see and follow.
4. What if my decision were advertised on a billboard? If you have tried ways to think this through and still
can’t decide whether what you plan to do is ethical, try the billboard principle. As the name implies, this
asks whether you’d be comfortable having your decision (with your name, of course) advertised on a
billboard for everyone you know to see.

LEARNING ACTIVITIES

Activity Number 4
Here are a set of challenging situations small business owners might find themselves facing. How would you handle
them?
a. You own a dress shop specializing in prom dresses. A customer brings back a prom dress the week after
her high school’s prom. She swears she never wore the dress, but it seems to you that there were places
where the dress shows wear or spots having been cleaned off. You have a “No Return” policy on the
receipts and posted on the wall, but the customer says she will tell all her friends you were unfair if you
do not refund her money.
b. Last week one of your best employees asked to leave an hour early to take her spouse to the doctor. You
said it was okay. Now another employee, who is an average but not great worker, is citing what happened
last week and asking to be let go an hour early to go to “an appointment.” The employee will not tell you
what it is for.

SUMMARY

Our goal in this section of the chapter is to give you some tools you can use to examine your problems and come
to decisions you can be proud of. To accomplish that we have looked at the environment in which business
operates, what makes it up, and how to analyze it and manage your external relations with it. The environment is
critical to business—every business depends on the environment and a workable set of environmental conditions
to get started, and from then on, many of the challenges, crises, and opportunities a firm faces come from the
environment. But the lesson of this chapter is that while no one can really control the environment, it is possible
to become better able to understand it. And through efforts such as developing social capital and planning ahead
of time, small business owners can give themselves and their firms an edge when dealing with external
environment.

REFERENCES

● Hisrich, Deters, Shephered. ENTREPRENEURSHIP, McGraw-Hill Education, 2020

● Burton, ENTREPRENEURSHIP: Starting and Operating a Business, Larsen and Keller Education, 2020

● Katz, Green. ENTREPRENEURIAL SMALL BUSINESS, Fifth Edition, McGraw-Hill Irwin, 2018

● Azarcon, Ernie Roy S., et al. ENTREPRENEURSHIP Principles and Practices Baguio City: Valencia
Educational Supply, 2008.

● Camposado, Jorge A. ENTREPRENEURSHIP FOR MODERN BUSINESS Mandaluyong City: National

Bookstore, Inc., 2008.

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