THE ENTREPRENEURIAL ENVIRONMENT

Business opportunities are like buses, there is always another one coming.Richard Branson
Learning objectives
By the end of the chapter the reader should be able to:
i.
ii.
iii.

Understand the components of the environment

Recognize the importance of analyzing each of those components of the environment
Analyze the elements of entrepreneurship culture and the cultural habits that promote

iv.
v.
vi.

entrepreneurship development
Analyze the five forces model of Michael Porter
Discuss common reasons why small businesses fails
Outline the common activities involved the comprehensive feasibility evaluation

Introduction
Business environment can be defined as the surrounding of a business. It includes all those things
that lie outside the business but can greatly affect its operations and peoples decision to buy or
not to buy products.
For an enterprise to be competitive every entrepreneur need to prepare his/her potential venture
in the light of all the forces surrounding it. Therefore the entrepreneur must formulate and
eventually implement a value creating strategy. This value must be determined in consideration
of the external environment in which the new venture will exist. In order for a new venture to
survive it must pursue a course that leads to a sustainable competitive advantage. This is when a
venture has implemented a strategy that other companies simply cannot duplicate or find it too
costly to compete with that particular element. However, every sustainable competitive
advantage can only be maintained for a certain amount of time depending upon the speed with
which competitors are able to duplicate or substitute.
The three key environments that influence the development of an organization include:i.
ii.
iii.

The macro environment

The micro environment
The organizations immediate environment

The Macro Environment

Consist of the larger societal forces that affect the whole micro environment. These include
political, economic, social-cultural, technological, ecological/ethical and legal factors (PESTEL).
Legal environment

It comprises of laws used by the government to regulate the business activities and behavior as
well as the process by which the laws are enforced. The law of the country regulates the business
practice in a country, the manner in which business transactions are executed and regulations
involved in any between parties.
Element of legal environment
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.

The law of contracts

The law of employment
The law f property rights .e.g. intellectual property
The permit to trade in particular business
The building laws
Reporting requirement related to taxation
The local government policies and by-laws
The companys act
The co-operatives act

The dynamic nature of the legal environment

The legal environment keeps on coming up with different laws that govern the conduct of the
business. The government has come up with single business permit instead of many licenses.
Problems on laws and regulations affecting the MSE
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.

Discriminatory regulations
Too many regulations to observe
Harassment by local officials and regulations enforces
Too many licenses
Regulations impose excessive paper work
Enforces and entrepreneurs not knowledgeable on applicable regulations
Business contracts cannot be enforced
Many fees and taxes to pay
It gets too long to get the registration and licenses to operate

Coping with legal environment

i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.

The entrepreneurs have formed their own their own associations to lobby to the
government in order to address their problems
Attending workshops and seminars to familiarize both the laws and regulations
Some entrepreneurs comply
Evading taxes and licenses
They charge high prices for their products
Others can sell low quality products
They engage in unethical practices
Others engage in corruption
Some entrepreneurs buy in large quantities from the manufacturer in order to reduce costs
Employment of child labor in their business

Ethical environment

Ethics is considered with the moral principles and values which govern out beliefs, actions and
decisions.
Manifestations of ethical behavior
i.
ii.
iii.
iv.
v.

High stand of integrity

Highest stand of confidence
Confidentially and accuracy of the information
Modest hospitality
The business gift taken/given should be of small value for example calendars , pens, diary

vi.
vii.

e.t.c
Selling of quality product
Concern of the environment

Benefits of ethical business conduct

i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.

Maintain or retail customers

Improvement of the image of the business
Reputation is enhanced
Consumers get quality products consistently
It gives a business a competitive edge over the competitors
Affirm is able to comply with the laws of the country
This leads to proper use of resources
There is a sure continuity of the business because the business follows the laws
Increases in the sales and growth of the enterprise

Economic environment
Consists of factors that affects consumers purchasing power and spending patterns
Elements of economic environment
i.

Inflation means an increase in prices of goods and services without a corresponding

ii.
iii.
iv.

increase in output
Money supply quantity of money in circulation which is controlled by central bank
Interests rates the rate charged by commercial banks on the money that it lends
Exchange rates and controls concerned with the exchange of ones countrys currency

v.
vi.

with another. Determined by supply and demand for currency

Import and export control
Taxes and subsidies a tax is a compulsory payment by individuals to the state so that

vii.
viii.

the state can provide the necessary services

Subsidies incentives which are given to encourage production of a good or a service
Gross Domestic Product (GDP) total value of goods and services produced in a

ix.

country in one year

Income levels per capital income and the distribution. Spending habits of the people.

Factors influencing economic environment

i.
ii.

State of economy
Government policies

iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
xii.

Climatic condition good weather may lead to good harvest hence economic growth
Good infrastructure development good infrastructure attracts foreign and local
investment
Good laws and regulations
Distribution of income in the country
Government incentives, those given to entrepreneurs
Taste and preferences
Political stability
Security
Income of the people they affect the purchasing power
Social cultural factors

Measures to cope with economic environment (strategies)

i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.

Looking for new markets

Entrepreneurs forming cartels
Form trade associations for example jua Cali association
Reducing cost of raw materials by sourcing from cheaper sources
Employ technology in production, distribution and marketing
To lobby the government to reduce some of the controls to streamline the business
environment
Producing as per the taste of the people
Maximize wastages
Merger of companies
Laying off employees

Social cultural environment

The cultural environment is made up of institutions and other forces that affect a societys basic
values, perceptions, preferences and behaviors. People grow up in a particular society that shapes
their basic beliefs and values. They observe a world view that defines their relationship with
others.
Elements of social cultural environment
i.
ii.
iii.

Social factors e.g. family, religion, social roles and status, reference groups
Cultural factors, like values ,beliefs, customs, lifestyle
Social-class, the class that one belongs to

Importance of social cultural environment

i.
ii.

To determine the needs of customers

Determine whether one will set up a permanent or temporary business depending on the

iii.
iv.
v.

lifestyle of the people

Change in lifestyle determines customer lifestyle or needs
The social roles and status affects ones behavior
The entrepreneurs need to know who makes the buying decision within the family so as

vi.
vii.

to target that person with marketing efforts

The status of people will determine the type of enterprise to start
The status of the people will affect the pricing strategies

Entrepreneurship culture
Culture is defined as a set of values, perceptions, attitudes, beliefs, customs and behaviors shared
by members of a group or society.
It has also been defined as a collective programming of the mind which distinguish the member
of one group or category of people from another

Definition of entrepreneurial culture

This is a way of embracing the concept of finding new opportunities in business and gathering
the necessary resources to fill the opportunity
Why an enterprise culture
i.
ii.
iii.
iv.

It enhances economic growth and building of social capital

It enhances job creation
It acts as primary source of innovation
It has a direct influence on internalization in terms of technology, human resources,
capital and information flow

Cultural habits that promote entrepreneurial development

1. Money orientation
A person who is money oriented is the one who knows the value of money and has an
infection of making it. A person who is money oriented can use the need for money as a
motivating factor. He knows where he can get money to provide for his capital if he gets
involved in entrepreneurship activity, he will make more capital
2. Future orientation
A society that has foresight to know about future business environment is likely to have
more entrepreneurs. This is because the entrepreneur will learn to visualize the likely
changes to take place in market, consumer attitude, technological developments etc and
take actions accordingly. Thus entrepreneurs are future oriented and usually belong to
cultures that appreciate the value of foregoing immediate profit or satisfaction in favor of
large future awards. Cultures which tend to view the present in terms of the future are
conducive to the growth of the entrepreneurial spirit
3. Time consciousness
This is the knowledge that time exists and its importance. Knowing the right time to start
an entrepreneurial activity is very important. Time is a resource and should be utilized
well. An aspiring entrepreneur should group the market conditions and wait for the
correct time to establish his/her enterprise.
4. Work ethics

Another very important cultural source of entrepreneurship is work ethics. The culture
that looks at work as a duty and it must value honest, productive labor while punishing
laziness promotes entrepreneurship. Trust and honesty is very important in
entrepreneurship. Consumers will buy an entrepreneur products or services because of the
trust that they have with their products. Entrepreneurs should reciprocate this trust by
ensuring that they maintain honesty to their consumers through maintaining the standards
of their products at all times.
5. Hard work
Willingness to work hard distinguishes a successful entrepreneurial even activity when
other people who do not think they can achieve much.
6. Social status
A culture that promotes entrepreneurship is one that confers social ranks in terms of
actual achievement rather than circumstances of birth. The caste system of India, where
people are divided into distinct classes such as the priests, the landowners, the traders, the
farmers, the craftsmen and the untouchable, is an example of a culture that emphasizes
birth rather than achievement. In such a system, one who is born into a farmer case holds
the status whether or not he is a good farmer. No one moves from one rank to another. On
the other hand, in a culture that encourages entrepreneurship, a person can move up or
down the ladders of the society depending upon his accomplishments. One can get rich
by honest; hard work even if he was born to be a beggar.
7. Ideals of competition
Entrepreneurship flourishes under a climate of competition that stimulates the competing
parties to find ways of using and managing their resources more efficiently and more
productively rather than one that encourages unfair trade practices like under pricing, low
quality products, etc.
8. Reward
A culture thats desires to develop more entrepreneurs must reward people who try to
earn money from these humble ventures like peddlers and vendors. This is because
studies have shown that many of the current successful businessmen started as vendors.
Thus, such trade practices should be viewed with admiration and praise.

Cultural factors inhibiting entrepreneurial development

1. Religion it plays a major role in limiting the entrepreneurial development. Religious
beliefs are regarded by others and the society as control of behavior. For example strong
Christian believers will not engage in an entrepreneurial activity that is against their
beliefs for example setting of a night club or a bar. this limits entrepreneurial
development because even if an opportunity arises and they have resources, they will not
establish the business, they will not dare do so because of their Christian faith
2. Language A business enterprise in an area where he sees an opportunity to do so but,
he may not have the knowledge of the people in that particular area. Communication will

therefore be a barrier. People also tend to appreciate or to identify people who speak their
language and therefore this will deny the entrepreneur the opportunity to establish a
relationship with his/her customer.
3. Personal personal relationships also play a major role in limiting the development of
entrepreneurship. Married people for example will not want to get involved in business
activities that will not spare them time to be with their families even if opportunities
arises. A person who has effective interpersonal relationship skills is likely to be
successful entrepreneur.
4. Attitude towards innovation innovations are necessary for entrepreneurial growth;
many cultural practices are opposed to innovations. People are not aware of the
importance of innovation towards development. People will always resist change because
it is new and they fear that new things will interfere with their beliefs and customs. When
people have poor attitudes towards innovations, then development of entrepreneurship
becomes difficult.
5. Networks this is a way through which a person is able to meet people and get
information concerning the available business opportunities. Establishing good networks
(people who can give information) is very important entrepreneur without proper
information one cannot establish a business enterprise.
6. Technology the advances that have taken place in the society and business can be
attributed to acquired technology. Technology. Limits entrepreneurship development
because many people have not acquired technical skills and knowledge required.
7. Beliefs beliefs in the existence of all powerful forces that control destines tend to hinder
entrepreneurship development.
8. Mentality the mentality we have that anything imported is better. this kills the
creativity of our entrepreneurs and also reduces the market for the locally produced goods
9. Extended family issue this is where the extended family may want to be given free
things, unlimited credit. This makes them lazy and hinders their entrepreneurial
initiatives.
10. Child rearing practices the traditional child rearing practices may inhibit the
development of an independent spirit. If parents insists on traditional, authoritative way
of bringing up children, they are discouraged from:
Taking initiatives
Exploring their surroundings
Asking questions
Such upbringing kills the independent spirit which is the first mark of a successful
entrepreneur
Ways of managing factors that inhibit the development of entrepreneurial culture.
i).

Working development of entrepreneurial culture the necessary skills required before one
starts his own business.

ii).

Setting policies that ensure that entrepreneurship training is established in the school

iii).

syllabus.
Young people to be encouraged to read articles from newspaper, television,
documentaries and also gets various business contacts to enable them select products

iv).

which are demanded

Aspiring entrepreneurs should seek guidance in selection of machinery and facilities

v).

from those already in business

Youth as well as aspiring adults entrepreneurs should be encouraged to get better and
faster access to knowledge, information related to business, competition and internet and
other information providing gadgets

Technological environment
Technology is found in its various forms in small and large businesses, the service sector, state
institutions, manufacturing companies, educational establishments, multinational organization.
i).
ii).

Technology is the ways and means of production

Application of scientific knowledge in production

Trends of technology
Small businesses are adopting/using technology in carrying out their own business
Impacts of technological environment
Positive effects
i).
ii).
iii).
iv).
v).
vi).
vii).
viii).
ix).
x).
xi).
xii).

Assist in marketing
Using in pricing
Used in selling or buying the product
Reduction of workforce
People can buy products at their own convenient time
Make firms to be innovative and to be able to use better strategies
Reduction of transport costs
Faster production
Reduced working requirement
Reduced fixed capital and requirements
Improved product consistency and liability
Better packing technology

Negative effects
i).
ii).
iii).
iv).

Selling of inferior products or low quality

Use of genetically modified products(GMO)
Retrenchment of employees
Increased of piracy in music

Strategies to cope with technology environment

i).
ii).
iii).
iv).
v).
vi).

Selling the inferior products at lower prices

The mergers and takeovers
Reduction of labor force
Reduction of capital investment
Employment of skilled labor
Training of employees in emerging technology

Political environment
Political environment is concerned with the policies pursued by the government
Components of political environment
1) Political stability
2) Political system e.g. the capitalism, socialist and market economy.
i).
Capitalism is whereby the means of production are owned by individuals.
ii).
Socialist means of production are owned by the government.
iii).
Market economy where the means of production are owned by the government
and individuals.
3) Political climate being favorable
4) Policies pursued by the government.
i).
Changes in monetary and fiscal policy.
ii).
Policies concerning price and wage control.
iii).
Policies concerning nationalization.
iv).
Trade union being legalized.
5) Political risk which assess the instability of political regimes
6) The act of parliament and by laws.
Significance of political environment to a business
i).

Can determine whether to locate a permanent business or whether to sell through the

ii).

agent in a given country.

The financial assistance that is given to entrepreneurs will be determined by political

iii).
iv).

environment.
Good political environment will lead to more investment in the country
Trade unions can influence government policies, terms and conditions of employment,

v).

wages, and salaries

Can influence taste and preferences of people for instance on the importation of certain

vi).

products.
Political stability may lead to increased production and the GDP of the country will

vii).

increase.
Restrictions of importation for some goods may reduce competition in the local market
hence local enterprises are able to get