CHAPTER 2: ENTREPRENEURSHIP AND ENVIRONMENT

2.1 The Business Environment

Business environment refers to the factors external/internal to a business enterprise which

influence its operations and determine its effectiveness. Business environment may be healthy or
unhealthy. A study of business environment offers the following benefits:

1) It provides information about environment which is essential for successful operation of

business firms.
2) It opens up fresh avenues for the expansion of new entrepreneurial operations.
3) Knowledge about changing environment enables businessmen to adopt a dynamic
approach and maintain harmony of business operations with the environment.
4) By studying the environment entrepreneurs can make it hospitable to the growth of
business and thereby earn popular support.

2.2 Phases of Business Environment

Business environment may be classified into two broad categories; namely external; and internal
environment. The external environment is further divided into macro-external and micro-external
environments.

I. The external environment

A. Macro-External Environment

It is the environment which is external to the business and hardly to influence independently.

PESTEL analysis is a strategic framework used to analyze the external macro-environmental

factors that affect an organization or industry. The acronym stands for Political, Economic,
Social, Technological, Environmental, and Legal factors. Let's break down each component:

1. Political: This refers to the influence of government and governmental actions on

businesses and industries. It includes factors such as government stability, taxation
policies, trade regulations, and political ideologies.
 2. Economic: Economic factors encompass the overall economic conditions of a country or
region, including indicators such as economic growth, inflation rates, exchange rates,
interest rates, and unemployment levels. These factors impact consumer purchasing
power, business costs, and investment decisions.

3. Social/cultural: Social factors relate to demographic trends, cultural norms, lifestyles,

and societal values that influence consumer behavior and preferences. Factors such as
population demographics, education levels, social attitudes, and health consciousness fall
under this category.

4. Technological: Technological factors involve advancements and innovations in

technology that can affect industries and businesses. This includes factors such as
automation, research and development (R&D), digitalization, technological obsolescence,
and intellectual property issues.

5. Environmental/ecological: Environmental factors pertain to ecological and

environmental issues that affect businesses and industries. This includes factors such as
climate change, environmental regulations, sustainability practices, natural disasters, and
resource scarcity.

6. Legal: Legal factors encompass the laws, regulations, and legal frameworks that
businesses must comply with in their operations. This includes areas such as employment
law, consumer protection regulations, competition law, health and safety regulations, and
industry-specific legislation.

7. Globalization: Trends in international trade, geopolitical tensions, global supply chains,

and emerging markets impact market expansion opportunities, competition, and risk
exposure.

B. Micro-External Environment

The micro-external environment refers to factors that are specific to the industry in which the
organization operates and directly impact its day-to-day operations and competitiveness. These
factors include:
 1. Customers: Their preferences, needs, behavior, and purchasing patterns significantly
affect demand for the organization's products or services.

2. Suppliers: Their reliability, pricing, and availability of inputs (raw materials,

components, etc.) can influence the organization's production costs and supply chain
efficiency.

3. Competitors: The actions, strategies, strengths, and weaknesses of rival firms within the
industry shape competitive dynamics and market positioning.

4. Distribution Channels: The channels through which products or services are delivered
to customers, such as retailers, wholesalers, e-commerce platforms, etc., impact reach,
accessibility, and sales.

5. Partnerships and Alliances: Collaborations with other firms, such as joint ventures,
strategic alliances, or supplier relationships, can provide access to resources, expertise, or
new markets.

6. Regulatory Environment: Government regulations, industry standards, and legal

requirements related to product safety, labor practices, environmental protection, etc.,
influence compliance costs and market entry barriers.

7. Stakeholders: Individuals or groups (e.g., shareholders, employees, communities) with a

vested interest in the organization's activities and performance, whose expectations and
perceptions must be managed.

II. The internal environment

The internal environment of an organization refers to the factors, resources, and conditions
within the organization that directly influence its operations, culture, and overall performance.
Key components of the internal environment include:

1. Organizational Structure: This refers to the framework of roles, responsibilities,

reporting relationships, and communication channels within the organization. A well-
designed organizational structure ensures clarity, accountability, and efficient
coordination of activities.
2. Organizational Culture: Culture encompasses the shared values, beliefs, norms, and
behaviors that define the organization's identity and guide employee interactions. A
positive organizational culture fosters employee engagement, teamwork, innovation, and
commitment to shared goals.

3. Leadership and Management: Effective leadership plays a critical role in setting the
vision, goals, and strategic direction of the organization. Strong leadership inspires and
motivates employees, fosters a culture of trust and collaboration, and drives
organizational performance.

4. Human Resources: The workforce is a fundamental asset of any organization. Human

resource management encompasses activities such as recruitment, training, performance
management, and employee development. A skilled, motivated, and diverse workforce is
essential for achieving organizational objectives.

5. Internal Processes and Systems: These include the various operational processes,
workflows, and systems that support the organization's core activities. Streamlining
internal processes, implementing efficient systems, and continuous improvement
initiatives enhance productivity, quality, and customer satisfaction.

6. Physical Resources: Effective management of physical resources ensures optimal

utilization, cost-efficiency, and support for organizational activities.

7. Financial Performance: Monitoring and managing financial performance are critical for
organizational sustainability and growth.

8. Innovation and Intellectual Property: Organizations need to foster a culture of

creativity, invest in research and development, and protect their innovations through
patents, copyrights, or trademarks.

9. Corporate Governance and Ethics: Strong corporate governance practices ensure

transparency, accountability, and compliance with laws and regulations. Upholding
ethical standards and values promotes trust among stakeholders and enhances the
organization's reputation.
 10. Strategic Planning and Decision-Making: Effective strategic planning involves setting
clear goals, identifying opportunities and risks, and formulating strategies to achieve
long-term success.

Some of the environmental factors which hinder entrepreneurial growth are given below:

a) Sudden changes in Government policy.

b) Sudden political upsurge.
c) Outbreak of war or regional conflicts.
d) Political instability or hostile Government attitude towards industry.
e) Excessive red-tapism and corruption among Government agencies.
f) Ideological and social conflicts.
g) Unreliable supply of power, materials, finance, labor and other inputs.
h) Rise in the cost of inputs.
i) Unfavorable market fluctuations.
j) Non-cooperative attitude of banks and financial institutions.

2.3. Creativity, Innovation and Entrepreneurship

Creativity, innovation and entrepreneurship, have been recognized as important contributors to a

nation’s economic growth. These three terminologies are chronologically interrelated and it is
very important to look in to them to get their full picture.

Creativity: Creativity is the ability to come up with new idea and to identify new and different
ways of looking at a problem and opportunities. Thus, creativity is the development of ideas
about products, practices, services, or procedures that are novel and potentially useful to the
organization.

 Steps in the Creative Process

1) Opportunity or problem Recognition: A person discovers that a new opportunity exists
or a problem needs resolution.
2) Immersion: the individual concentrates on the problem and becomes immersed in it. He
or she will recall and collect information that seems relevant, dreaming up alternatives
without refining or evaluating them.
 3) Incubation: the person keeps the assembled information in mind for a while. He or she
does not appear to be working on the problem actively; however, the subconscious mind
is still engaged. While the information is simmering it is being arranged into meaningful
new patterns.
4) Insight: the problem-conquering solution flashes into the person’s mind at an unexpected
time, such as on the verge of sleep, during a shower, or while running. Insight is also
called the Aha! Experience.
5) Verification and Application: the individual sets out to prove that the creative solution
has merit. Verification procedures include gathering supporting evidence, using logical
persuasion, and experimenting with new ideas.
Barriers to Creativity

Be aware that there are numerous barriers to creativity, including:

1. searching for the one ‘right’ answer

2. focusing on being logical
3. blindly following the rules
4. constantly being practical
5. viewing play as frivolous
6. becoming overly specialized
7. avoiding ambiguity
8. fearing looking foolish
9. fearing mistakes and failure
10. believing that ‘I’m not creative

Innovation: Innovation, on the other hand, involves implementing those creative ideas to
create tangible value. It's about transforming creative ideas into practical solutions, products, or
processes that offer new or improved benefits to individuals, organizations, or society as a
whole.

There are four distinct types of innovation, these are as follows:

1) Invention - described as the creation of a new product, service or process

2) Extension - the expansion of a product, service or process
 3) Duplication - defined as replication of an already existing product, service or process
4) Synthesis - the combination of existing concepts and factors into a new formulation
 The Innovation Process
1) Ideation: It entails coming up with a broad variety of concepts that might potentially
address issues, satisfy client wants, or open up new opportunities. Teams or individuals
utilize a variety of strategies at this phase to promote creativity and idea development,
including brainstorming sessions, mind mapping, or even taking inspiration from other
sectors.
2) Evaluation: The evaluation phase starts once there is a pool of ideas. The emphasis now
changes to evaluating each idea’s viability and potential. Discovering opportunities and
potential difficulties requires performing market research, researching client demands and
preferences, and assessing the competition environment.
3) Development: In the development stage, selected ideas are transformed into tangible
products, services, or processes. This often involves prototyping and testing to refine and
validate the idea. Prototyping allows for the creation of a simplified version of the
innovation, enabling stakeholders to gather feedback, identify improvements, and make
necessary adjustments before proceeding further.
4) Implementation: Once the concept has been created and improved, it is time to put it
into practice. Planning and resource allocation are required at this phase to sell the
invention or incorporate it into current systems and procedures. Production, marketing,
distribution, and training must all be carefully coordinated throughout the implementation
stage.
5) Review and Improvement: The final stage of the innovation process focuses on
reviewing the outcomes and identifying areas for improvement. Measuring the success
and performance of the innovation against predetermined criteria allows organizations to
gain insights into its impact and identify opportunities for further refinement and
enhancement.