12

Entrepreneurship
Quarter 1 – Module 3:
The Environment of the
Entrepreneurial Venture
LEARNING COMPETENCY:

I. Recognize a Potential Market:

1.1. Analyze the market need

1.2. Determine the possible
product/s or service/s that
will meet the need
 LESSON 1: The Environment of the Entrepreneurial Venture
INTRODUCTION

If you want to be a successful entrepreneur in the future, you should

know how to analyze the market need. As business owner, gathering of market data
should be an ongoing process to be successful. Market situation changes from time
to time. Therefore, the need to know the entrepreneurial environment as a factor
influencing the opening of entrepreneurial venture will help.

In this module, you will learn the different factors and conditions before opening
a business after the opportunity has been identified. Are you ready for it? Then, let us
get started and enjoy in accomplishing the tasks given while learning.

LEARNING OUTCOMES

At the end of this lesson, the learner should be able to:

1. describe the physical environment of the venture;

2. identify the different forces composing the societal environment;
3. identify the different forces competing in the industry environment;
4. determine the possible product/s or service/s that will meet the
need; and
5. analyze the market need;

EXPLORE!

Instructions: Write TRUE if the statement is correct, otherwise write

FALSE.

_______1. Like all Filipinos, the entrepreneur is responsible for he misuse and
abuse of the environment.

_______2. The entrepreneur must take into serious consideration the location of the
proposed business, its climate, and the availability of material in the said location.

_______3. The entrepreneur can immediately open a new business once he/she has
identified a business opportunity to be exploited.

_______4. Any business can thrive in any environment.

______5. The presence and supply of raw materials in a certain locality affects the
cost of the products.
 Hi! I am Teacher Mae! I wish to congratulate you!

Please check your answers at the answer key section.

If you got a perfect score of 5, you may skip the module
but if you got 4 or lower, I suggest that you take the
learning module seriously. ☺

REVIEW

An entrepreneurial venture is created out of the business opportunities which

the entrepreneur should seek to exploit. These business opportunities emerge from
the entrepreneurial ideas that arise from the changes in the environment, government
policy, or technological advancements.

Creation of Identification
Opening of
Entrepreneurial of
entrepreneurial
ideas entrepreneurial
venture
opportunities

Figure 3.1.1. The Entrepreneurial Process of Creating a New Venture

The entrepreneur needs to possess the necessary entrepreneurial character

traits, skills, and competencies before exploiting the business opportunities.

Identification of
Entrepreneurial
Creation of Opening of
entrepreneurial character traits, entrepreneur
Entrepreneur
ial ideas opportunities skills, and ial venture
competencies

Figure 3.1.2. Entrepreneurial Character Traits, Skills, and Competencies

Influencing the Opening of Business
 ACTIVITY 1

Directions: Study the picture and answer the questions that follow.

This is the National

Shrine of St. Joseph
Parish located at
Centro, Mandaue City.
Beside the church is a
school (Academia de
San Jose) and across it
is the Mandaue City
Plaza.

http://www.peanutbrowas.com/blog/checking-the-life-size-last-supper-at-the-national-shrine-of-st-
joseph-parish

1. List down all the possible business opportunities that you can identify based
on the picture above. Write all the ideas that come into your head. There are
no right or wrong answers.

___________________________________________________________________
___________________________________________________________________

2. From the different possible business opportunities that you have identified,
pick out:
a. most creative, c. most costly, and
b. most difficult, d. most common.

___________________________________________________________________
___________________________________________________________________

KEEP THIS IN MIND

If a prospective entrepreneur possesses the necessary character traits,

skills, and competencies, should he/she immediately open a new business in order to
exploit the business opportunity?

The answer is “NO.” He/She must first evaluate and analyze first the business
environment. The environment where business venture will operate is an important
factor to consider in opening a new business.
 Entrepreneurial
characteristics, skills,
and competencies

Creation of Opening of
Identification of
Entrepreneurial entrepreneurial
Entrepreneurial
idea opportunities venture

Entrepreneurial
environment

Figure 3.1.3. Entrepreneurial Environment as Another Factor Influencing the

Opening of Business

Remember that the business does not operate in a test tube or a cylinder but
in an environment that consists of three layers:

1. Physical Environment
2. Societal Environment
3. Industry Environment

PHYSICAL ENVIRONMENT
The first layer of the environment is the physical or natural environment. It is
composed of the natural elements that are inherent in the Earth. It is divided into
climate, physical resources, and wildlife. These three natural elements of the physical
environment have significant contributions and effects to the business venture.
Prospective entrepreneurs should critically evaluate them before opening their
business.

The Physical
Environment

Physical New business Climate

Resources

Wildlife

Figure 3.1.4. The Physical or Natural Environment

Climate

The climatic condition in a particular region in the Philippines where the

business will be established must be evaluated. The normal weather condition in
Baguio City is definitely different from that of Mandaue City. Therefore, a business
may be feasible in Baguio City but not in Mandaue City.

There are areas in the Philippines where the effects of global warming are more
adverse compared to others. Some are frequently devastated by typhoons during the
year, while others experience long periods of drought.

The entrepreneur, therefore, must consider the prevalent climatic condition of

the area where he/she intends to open the business to determine whether it can
withstand or is it fit to the climatic condition in the local area.

Physical Resources

The availability of raw material is another major factor that can influence the
success or failure of the business venture. Although the climate of the place may be
conducive to the business, it may still fail if the resources are not available. The
availability of lack of raw materials will determine the cost of the products. Products
that are made from rare raw materials will definitely cost more than those that are
made from common ones.

The entrepreneur must critically assess the availability of raw materials in the
locality before opening a new business. He/She must evaluate if the available raw
materials to be used for the proposed business are sufficient for a long-term operation.

Wildlife

The wild plants and animals in the Philippine forests are continuously abused.
The trees cut for timber are not properly replaced. Wild animals are hunted and killed.
These abuses lead towards imbalance in the Philippine ecological system where wild
plants and animals are supposed to be interrelated.

In view of this, the entrepreneur must ensure that his/her business contributes
to the preservation and not the destruction of the ecological system of the local
community and our country in general. He/She must not open a business venture that
will destroy the wildlife reserve. After all, it is also an entrepreneur’s task to become a
model of social responsibility and environmental awareness.
 ACTIVITY 2

I. Enumerate and explain the elements of the physical

environment.
II. Perform the following:
1. Get a picture that generally describes your local community. It
may show a heap of garbage, a dirty canal, a busy city street,
rice paddies, farm animals, farmers, employees, and
buildings, among others, then paste it in a short bond paper.

2. List down all the possible business opportunities that you can
identify in your community based on the picture that you
provided. Write all the ideas that come into your head.

3. Form groups of five members each, preferably from the same

neighborhood. Observe the climatic conditions in your local
community for one week. Take note also of the raw materials
that are present in your locality. Based on your observations,
determine the most appropriate business venture to open in
your community. Explain your answer. (Note: The student may
opt to have it individually.)

EXPLORE!

Instructions: Write TRUE if the statement is correct, otherwise write

FALSE.

______1. The societal environment of the business includes the social, political,
cultural, economic, legal, and technological forces.

______2. The different forces in the external environment do not influence or relate
with each other.

______3. These forces have equal importance to all entrepreneurs.

______4. Environmental scanning is conducted only when a new business is

opened.

______5. Demographic, ethics, and even regulatory forces may be included in

looking into the societal environment.
 KEEP THIS IN MIND

Changes in the physical environment have a direct impact on societal

environment and the effect can be felt later in the industry environment.
According to Wheelen and Hunger (2010), the changes in the physical
environment have an impact on the societal environment first in terms of
resource availability and costs, and later, on the industry environment in terms
of growth or decline of particular industries. However, it is perceived that all the
changes that happen in the different layers of the environment surrounding the
enterprise directly affect the business.

Physical Societal Industry

Changes Changes Environment
Environment Environment

Business

Figure 3.2.1. Relationship between the Environment and the Business

SOCIETAL ENVIRONMENT
The societal environment is generally composed of social, political, cultural,
economic, legal, and technological forces. The critical evaluation and thorough study
of the environment where the business operates is technically called environmental
scanning.

Social Forces

Social forces are elements in society resulting from human interactions that can
influence the thoughts, behavior, attitude, actions, and even the beliefs and customs
of the people.

Social forces include the following:

1. Values 5. Time orientation
2. Traditions 6. Lifestyle patterns
3. Literacy level 7. Professional career roles
4. Consumer psychology
 Social forces are basically the products of the actions of the people on the
important events that happen at any give time. It is a must, therefore, for the
entrepreneur to critically evaluate the changes in the social forces that cause
substantial changes in the behavior, principles, beliefs, and practices of the people.

Political Forces

Political forces are the various elements usually comprising of the political
parties, political systems, and other related political groups that substantially influence
the political stability of a country. In the Philippines, the political forces of the macro-
environmental have major and essential influence on business. Even foreign investors
are very watchful of the political atmosphere in the country and the moves of the
Philippine government.

Political forces include the following:

1. Trade regulations 4. Unemployment
2. Taxation 5. Worker’s benefits
3. Government stability 6. Election practices

Future legislation may have adverse effects on the proposed business. For
example, the government’s move against smoking for health reasons may adversely
affect the tobacco industry.

Cultural Forces

Culture basically refers to the integrated characteristics of a group of people or

ethnic group in a particular society.

Cultural forces include the following:

1. Religion 4. Customs
2. Language 5. Education
3. Beliefs

In the Philippines, cultural forces have significant influence on any

entrepreneurial endeavor because of our cultural diversity. The presence of the
different ethnic groups with different languages in the various islands of the Philippines
is a clear manifestation of the existence of cultural diversity.

Economic Forces

Economic forces are factors which are primarily caused by changes or

movements in the Philippine economy that have direct or indirect effects on the
entrepreneurial venture.

Economic forces or factors include the following:

1. Interest rates 5. Income
2. Inflation rates 6. Exchange rates
3. Fiscal policies 7. Employment
 4. Monetary policies 8. Consumer confidence

Let us use interest rate to illustrate the relationship of economic forces to the
practice of entrepreneurship. Interest rate is the amount of interest that the lender
(e.g., banks, financial institutions, financial intermediaries) charges to the borrower for
certain amount within a specified period of time.

Legal Forces

Legal forces are the elements and bodies that are directly involved in the
legislation and interpretation of laws and ordinances directly affecting the business.

Legal forces include legislations on the following:

1. Product control, pricing, and labeling

2. Health and safety of the workers
3. Administration of election process
4. Advertising and promotion
5. Exercise of profession
6. Education administration and fees

In the Philippines, the legal system has been formally established in the
different levels of the government. The judiciary system in the Philippines starts
generally at the barangay level. The entrepreneur, therefore, must determine what is
legally permitted at the barangay level. Non-observance of the local and national
legislations may lead to a problematic business situation in the future.

Technological Forces

Technological forces basically refer to the trends and developments in

computer and information technology that have impact on business. These occur
almost every day.

Technological forces may include the following:

1. Internet 4. Technological movement
2. Social media 5. Technological infrastructure
3. E-commerce

The different technological inventions have dramatic effects on the demand for
the product and the existence of a particular business. A new product launched in the
market may become obsolete over a very short period, or the business may be phased
out unexpectedly once the rapid changes in computer and information technology are
not critically evaluated and addressed accordingly.
ENVIRONMENTAL SCANNING: DEFINITION AND SIGNIFICANCE

The different forces playing in the societal environment may have adverse
effects on the proposed or existing business if they are not properly addressed. Hence,
it is a primary task for the entrepreneur to constantly scan the environment.

Environmental scanning refers to the gathering, critical evaluation, and

utilization of information on events and activities and their relationships with the
physical, societal, and industry environments.

Environmental scanning is very important for the following reasons:

1. It clearly portrays the trends, activities, and developments happening in every

environmental layer including the interrelated relationships between the various
forces in the environment.
2. It identifies the expected threats and opportunities existing in the environment.
3. It points out the possible factors that will determine the success of the
entrepreneurial venture.
4. It helps define the future path of the business.
5. It assists in the formulation of the most appropriate entrepreneurial strategies.

ACTIVITY 3

Directions: Refer to Activity 2, no. 3, on the most appropriate business

venture you can have in your community and do the following:

1. Choose one business venture and describe the societal

environment of the business.
2. Define environmental scanning. Name some reasons why
environmental scanning is important.

EXPLORE!
Directions: Write TRUE if the statement is correct, otherwise write
FALSE.

______1. The business operates in the industry environment.

______2. Entrepreneurs need not observe and evaluate the priorities of the
government.
______3. The forces in the industry environment can be critically evaluated using the
forces of competition model.
______4. When the barriers to the competitive forces are high, the effect to the
growth of the business is likewise high.
______5. The total perspective of the different forces can be viewed through the
competitive forces matrix.
 KEEP THIS IN MIND

The next environmental layer of the business is the industry

environment. This is the environment where the business conducts its various
entrepreneurial activities. It is basically composed of an individual person, a company,
and a non-governmental organization or the government.

INDUSTRY ENVIRONMENT
The industry environment is the external environmental layer where the trends
and changes are easily and immediately felt by the business. The industry
environment is considered the immediate environment of the business where it
conducts its various operational activities.

Industry forces include the following:

1. Government 4. Competitors
2. Suppliers 5. Employees
3. Customers 6. Creditors

Government

Government refers to the system or institution that handles the affairs of a

particular country. Since the government has jurisdiction over the major activities
happening within its territory, including international trade relations, the type of
government system operating in a particular country highly influences the business.
There are different types and classifications of government. The Philippine
government is both presidential republican and democratic. It promotes
entrepreneurial ventures through its thrusts, programs, and priorities.

https://www.imoney.ph/articles/how-much-do-philippine-politicians-earn/
Suppliers

Suppliers refer to individual persons or companies that provide the required

materials, parts, or services to the business. They can adversely affect the production
process by delaying the delivery of the required raw materials and supplies or services,
or by providing defective materials or inefficient services.

https://www.sysaid.com/blog/entry/supplier-management-is-more-than-just-negotiating-contracts

Customers

The customers are the buyers of goods or services produced or rendered by

the business. The business realizes profit from its transactions with the customers. It
must constantly evaluate and study the behavior, tastes, preferences, inclinations, and
even future activities of customers. It must protect its customers in order to win their
loyalty, and to attract new patrons.

Competitors

The competitors are the forces existing in the industry environment that
produce, sell, or render products or services which are similar to those of the business.
Competitors can be classified as direct or indirect.

• Direct competitors produce and

sell similar products or services.
For example, Coca-Cola Bottling
Company is a direct competitor of
Pepsi Cola Philippines.
• Indirect competitors produce and
sell substitute products. For
example, companies that
manufacture and sell fruit juices https://youinc.com/content/leadership/gro
w-your-business-by-learning-from-your-
are indirect competitors of Coca-
competitors
Cola and Pepsi Cola.

The entrepreneur must critically evaluate and study, most especially the direct
competitors, and find strategic ways to surpass them in the production and delivery
of goods or services to the customers.
 Employees

The employees are the workers of the business who are highly responsible for
the production of goods and services to the customers. They help ensure the quality
and quantity of products or services provided to the customers. They are the backbone
of the business.

https://www.insperity.com/blog/your-employees-5-tips-for-handling-diverse-work-styles/

The employees are selected according to their educational background, character,

experience, skills, and competencies. Their aspirations and priorities must be in line
with those of the business. Their respective cultural and religious beliefs and practices
must be taken into consideration by the entrepreneur, who must ensure to minimize,
if not eliminate, conflicts and problems among the employees.

Creditors

The creditors refer to banks, financial

institutions, and financial intermediaries engaged in
the lending of money to the borrower usually for a
fee or charge in the form of interest. They are
likewise the regulatory arm for the flow of money in
the economy. In the Philippines, banks and other
types of financial institutions are highly regulated by
the national government.

http://jamaica-gleaner.com/article/business

The entrepreneurs must know the different financial services provided by banks and
other financial institutions. Maintaining favorable records and business image with
them provides favorable advantage to the entrepreneur in times of financial needs.

INDUSTRY ANALYSIS SCANNING TOOLS

The different forces in the industry environment must be properly evaluated and
analyzed. They can either act as the catalyst to the growth of the business or become
the primary cause of its failure. In view of this, there is a need for the entrepreneur to
scan the industry environment.

In scanning the industry environment, the entrepreneur can use the following
environmental scanning tools:
 1. SWOT model
2. Forces of competition model
3. Competitive forces matrix

Forces of Competition Model

The forces of competition model, otherwise known as the “five forces of

competition,” was popularized by Michael Porter, a prominent figure in competitive
strategy formulation. The industry environment is a competitive environment. The
business, therefore, cannot do nothing else but to compete.

The business must determine the intensity of competition within its industry
environment since the level of intensity is primarily dependent on the forces existing
within the industry. This long-term survival of the business is measured by its
successful efforts against competitive forces.

The five forces competing within the industry are as follows:

1. Potential new entrants 4. Supplier

2. Buyers 5. Rivalry among existing firms
3. Substitute products

Threats of
potential new
entrants

Bargaining Rivalry among Bargaining

power of existing firms power of
suppliers the buyer

Threats of
substitute
products

Figure 3.3.2. The Five Forces of Competition Model in the Industry Environment

The threats of substitute products should be considered. For example,

consumers consider margarine as a substitute for butter. In case the price of butter
increases because the cost raw materials increases, the consumers will gradually
switch to margarine. The presence of margarine as a substitute product for butter
poses a threat to the profitability of the latter.
Competitive Forces Matrix

After all the competitive forces have been identified, the entrepreneur can plot
them using the competitive forces matrix, by which the entrepreneur can view the total
perspective of the competition within the industry where the business operates. The
possible effects and the intensity of the threat of the competitive forces can be high,
moderate, or low.

The possible barriers to the competitive forces are the primary determining
factors that measure whether the degree of the threat is high or low. The relationship
between the possible barriers and the threats is inversely related. That is if the
potential barriers to the competitive forces are high, then the possible threats are
considered low. Thus, a weak competing forces in the industry may ot adversely affect
the business.

For example, one possible barrier to potential new entrants is the level of capital
requirements. If the nature of the business requires a huge capital base, new entrants
are discouraged to join. In this case the barrier, which is financial capital base, is
considered high. The threat the to the growth business is measured low. The
competitive forces matrix is shown in Table 3.3.2.
Barriers to the Five Forces of Competition

The five forces are considered threats to the entrepreneurial venture. Each
competing force has its own bargaining power in the industry environment. However,
the intensity of the threat of the five forces is highly influenced by the level or degree
of barriers affecting the particular force. The more barriers against the force, the lesser
the intensity of the threat of such force.

• Potential New Entrants

New entrant refers to one competitive force in the industry. The intensity of
its threat will be affected by the presence of the following barriers:
a. Strict government policy
b. Substantial capital requirement
c. Economics of sale
d. High cost of product differentiation
e. High switching cost
f. Difficulty in accessing distribution channel
• Buyers
The buyers has a strong and magnified bargaining power in the industry.
However, the threat of its bargaining power will be less if the following
factors exist:
a. The buyer has the potential for backward integration.
b. The cost of switching the supplier cost is minimal.
c. The buyer purchases large portions of the seller’s product or services.
d. There are several suppliers available in the market.
e. The product represents a high percentage of the buyer’s cost.

• Suppliers
The intensity of the threat of the suppliers is strong if the following factors
hold true:
a. The product or service is unique.
b. The switching cost is very high.
c. Suppliers in the industry are few, but sales volume is high.
d. Substitute products are not readily available in the market.
e. The supplier has the ability for forward integration.

• Rivalry among Existing Firms

The intensity of rivalry among existing firms in the industry is attributable to
the following factors:
a. Number of competing firms
b. Rate of industry growth
c. Characteristics of the products or services
d. Amount fixed cost
e. Increased capacity
f. Diversity of rivals

• Substitute Products
The substitute products can pose great threats in the industry environment
if the following factors are present:
a. The price of the substitute product is substantially lower.
b. Preferences and tastes of customers easily change.
c. The quality of substitute products dramatically improves.
d. Switching cost is low.
e. Product differentiation is hardly noticeable.
 Do the following
ACTIVITY 4 tasks:

1. Discuss the three environmental layers of the external or macro

environment of the entrepreneurial venture.
2. Identify the different forces existing in the industry environment.
3. Analyze and describe the industry environment using the forces
of competition model.

APPLICATION

I. Get a clean bond paper and divide it into two columns. Label the
left side as the “Primary Product” and the right side as the
“Substitute Product.” Think of two products that you consider
similar, one of which is the primary product and the other the
substitute product. Write the names of the products in their
respective columns. Then, describe and differentiate them.

Primary Product Substitute Product

(Name of Product) (Name of Product)

Describe the product. Why is it Describe the product. Why is it

considered a primary product? considered as a substitute
product?

II. From groups of five members each, preferably from the same
neighborhood. Select one existing business in your locality that
produces or manufactures a finished product. For example, it can
be a furniture shop, a toy shop, or a detergent soap manufacturer.
Make a simple industry analysis using the Competitive Forces
Matrix.
 ASSESSMENT

Instructions: Read each statement or question carefully and fill in the

blank(s) with the correct answer. Answers may be more than one word.

1. The entrepreneur needs to possess the necessary entrepreneurial character

traits, skills, and ___________ before exploiting the business opportunities.
2. The physical environment is divided into climate, __________, and wildlife.
3. The ________________ is generally composed of social, political, cultural,
economic, legal, and technological forces.
4. The critical evaluation and thorough study of the environment where the
business operates is technically called ____________________.
5. ________________ are the elements and bodies that are directly involved in
the legislation and interpretation of laws and ordinances directly affecting the
business.
6. The ___________________ is the external environmental layer where the
trends and changes are easily and immediately felt by the business.
7. The __________ are the buyers of goods or services produced or rendered
by the business.
8. The ____________ are the workers of the business who are highly
responsible for the production of goods and services to the customers.
9. The possible barriers to the competitive forces are the primary determining
factors that measure whether the degree of the _______ is high or low.
10. The __________ are the forces existing in the industry environment that
produce, sell, or render products or services which are similar to those of the
business.
11-15. The five forces competing within the industry are _________,
______________, ____________, ___________, and
________________.
 REFERENCES

Aduana, Nick L. 2016. Entrepreneurship in Philippine Setting for Senior High

School. Quezon City: C&E Publishing, Inc.

Sharma, Akshay. 2017. “LinkedIn.” 8 Impotant Needs and Importance of

Environmental Scanning. February 9. https://www.linkedin.com/pulse/8-important-needs-
importance-environmental-scanning-business-
sharma#:~:text=Environmental%20scanning%20is%20necessary%20because,strength%20weakness
%2C%20opportunities%20and%20threats.

Handlin, Amy. 2019. “bizfluent.” The Importance of the Target Market. July 30.
https://bizfluent.com/about-7369454-importance-target-market.html

DISCLAIMER

I do not own or license any copyright in the texts, images, photographs,

graphics, and other content provided in this module. This module is
solely for non- commercial, informational, and educational purposes.
There is no intention on my part to claim ownership as to the contents or
make profit out of this module.

Prepared by: Brenda S. Señara

Special Science Teacher I (SHS)
Mandaue City Comprehensive National High School