CHAPTER 4

Assessing Business
Environment

25/04/20 Assoc. Prof. Dr. Norahidah Hashim 1

 OBJECTIVES:
1. To identify the components of the
environment that influence
entrepreneurs.
2. To discuss the influence of external
environment (macro & micro) and
internal environment & the
importance of each components in
the environment to the business.
3. Define industry and competitor
analysis
4. Differentiate the five generic
competitive forces
5. Identify types and the opportunities
of competitor
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 Introduction
• From entrepreneurship perspectives,
environment refers to external &
internal conditions that effect the
business.
• Environment? “condition, situation,
or factors in the surrounding that
affect or influence entrepreneurs”
• Entrepreneurs need information from
the environments to make decisions.
• Entrepreneurs interact with
environment all the time.
Environment changes from time to
time, therefore environment is full of
uncertainties.
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 Introduction

• Environment provides opportunities

as well as threats to entrepreneur’s
business. So entrepreneurs must
always analyze & understand the
environment he/she is operating in.
• By analyzing & understanding
environment, entrepreneur will also
know his/her business’s strengths &
weaknesses.
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 Environment
• Environment can be divided into 2
parts;
• 1) EXTERNAL ENVIRONMENT
• 2) INTERNAL ENVIRONMENT

25/04/20 Assoc. Prof. Dr. Norahidah Hashim 5

 EXTERNAL ENVIRONMENT
MACRO ENVIRONMENT

MICRO Economic
Sociocultural
Factors ENVIRONMENT Factors

Suppliers

Governments & Financial

agencies
INTERNAL Institutions
ENVIRONMENT
ENVIRONMENT

Structure
Culture
Resources Competitors

Customers
NGOs
Political/Legal Technological
Factors Factors
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 External Environment
• Components outside the organizations but relevant to
the operation of a business.
• It can becomes the threat & opportunities to the
entrepreneur’s business.
• Can be divided into 2:
1) Macro - Indirectly influence the decision making of a
business.
Do not directly touch the short-run activities of the
organization but can, and often do, influence its long-
run decisions.
1) Example: current economic condition, social changes,
current political and legal issues and changes in level
of technology.
2) Micro - Includes the external elements that directly
affect entrepreneur’s business.
Directly influence the decision making process.
 Example: customers, suppliers, competitors, financial
institutions, Government agencies, NGOs.

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Macro Environment - Economic
Factor

 The economic factor plays a vital role &

indirectly influence the success of failure
of any new venture.
 A strong & stable economic situation in
the country encourage e/ship activities.
 In the era of globalizations, the influence
of global economy will & can affect
entrepreneurs & their businesses.
 Entrepreneur must analyze & assess
economic situation to avoid failure to his
business.
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Macro Environment -
Economic Factor
 Consider some of the economic signs
such as inflation rate, unemployment
rate, foreign currency rate, GDP and
etc. –the entrepreneurs must have
overall picture about the economic
climate.
 Questions in assessing economic factor:
 1.What is the current state of the economy?
 2. What is the condition of the labor market?
 3. Are the interest rates rising or stable?
 4. Do opportunities to serve foreign markets
exist as well?
 5. How much is the current foreign currencies
compared to RM?
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Macro Environment –
Political & Legal Factor
• Entrepreneurs are required to comply
the Govt policy, rules & regulations of
the country.
• Entrepreneur must acknowledged
different types of political & legal
system in one country to another.
• Business must be legally registered,
must get license & approval before
starting-up operation,
• If he is ignorance of the law, rules &
regulations, entrepreneur is advised to
refer to lawyers.
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 Macro Environment – Socio
Cultural factor
 2 aspects of socio-cultural factor: demographic &
cultural aspects.
 Socio-cultural analysis also include social values
and life styles of the people.
 Demographic: age, sex, race, will influence
entrepreneur on his decision about the biz esp in
making decision about the type of product that is
in line with the target market, and determining
the location.
 Demographic changes such as: changes in the
populations, ethnic groups, population structure,
geographic location, level of income & etc.
 These elements in socio-cultural factor change
the trend in demand, purchasing power of the
customers/people.

25/04/20 Assoc. Prof. Dr. Norahidah Hashim 11

 Macro Environment – Socio
Cultural factor
• Eg: increase in birth rate might open up
opportunity for entrepreneur to set up
nursery centres.
• Changes in life styles & social trends also
give rise to opportunities. The changes in
community life style that concern on
health - opportunity to open businesses
such as SPA, health equipment, beauty
center, gyms etc.
• Eg: Increase of working women; limited
time to fulfill their roles as housewives.
Create opportunity for entrepreneurs to
market electrical appliances: coffee
maker, automatic washing machine, fast-
food outlets etc.
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 Macro Environment – Technology
Factor
• Entrepreneur must keep-up with current
trend in technology & how it can help him
to gain competitive advantage.
• Technology also is required to increase
process efficiency, minimizing cost,
invention of new design, innovations &
effective use of resources.
• Eg: with ICT, entrepreneurs can have
access to new knowledge, new process
of production, new & faster info flow &
new strategy & better decision making.
Technology keep on changing & become
obsolete very fast.
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 Micro
Environment

25/04/20 Assoc. Prof. Dr. Norahidah Hashim 14

Introduction

 Micro environment consist of customers, suppliers, government

agencies, financial institutions, competitors and non-
governmental organisations (NGOs).
 Micro environment directly influence entrepreneur’s activities.
 Difficult for entrepreneur to influence the behaviour/actions of
these elements because they are the elements that comes from
outside the entrepreneur’s company.

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 Customers
 The main focus group in any business.
 Consumers are those who buy products offered by
entrepreneur.
 Customers can be individuals or group of people (govt
offices, schools, hospitals or companies that buy
entrepreneurs’ product/services.
 Also customers from industrial sector such as
manufacturers, suppliers, vendors etc.
 Customers are kings. Product/services offered by the
entrepreneur must in good quality. The profit of the
company will be effected if the customers are not
satisfied with the product/services.
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 Suppliers
• Those who provide inputs such as raw
materials, equipments, fuels,
machine, etc. to entrepreneurs.
• Entrepreneur should maintain mutual
trust & good relationships with the
suppliers.
• Good suppliers will provide longer
credit terms, on-time delivery, right
quantity, right quality & right price.

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 Government and its agencies
• Govt actions will directly influence e/ship
activities not only in terms of providing licenses
to entrepreneur but also legislating policy aimed
for the development of the country, provide
infrastructures & facilities, support services,
advices, financial support and so on through its
agencies.
• Most of the govt policies, directly & indirectly
help to create more entrepreneurs.
• Any changes to the policy or procedure, will
affect the entrepreneurship activities.
• Responsible in tax collection, import duty,
export duty, etc.

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Financial Institutions

• Important to entrepreneurs- Commercial banks,

insurance companies, finance companies, Venture
Capitalists.
• Provide capital, as financial resources in initiating the
operation of a business and to expand the business.
• Eg: Interest rate will affect cost & profit of a business.
(some banks higher rate some low)
• Difficulty in getting the financial support can distract
effort of expanding the business.
• Entrepreneurs must maintain good r/ships with financial
institutions.

25/04/20 Assoc. Prof. Dr. Norahidah Hashim

 Competitors
• Before starting the business, identify your close
competitors.
• Try to understand the activity of the competitors
and form effective business strategy.
• The strengths and weaknesses of the
competitors must be analyzed to grab the
opportunities.
• To gain competitive advantage from the
products manufactured, the entrepreneur
should produce better & quality products,
competitive price, extensive promotion &
efficient services.

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Non-Governmental Organizations
 Such as consumer associations,religious
associations & trade organizations,charity club/social
organizations, etc. have big influence to the
business.
 Positive or negative campaign on the entrepreneur’s
product-might disrupt or promote the sales of the
products in the market.
 Entrepreneur should be sensitive on the issues
relevant to society: environmental, health,
cleanliness, customers right, etc.
 NGOs may influence the govt. & customers to take
certain actions against the business.

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Internal Environment

• The closest elements to the entrepreneur.

Directly influence the entrepreneurs
activities.
• Consists of variables that are within the
organization itself . (strengths &
weaknesses)
• The components in Internal Environment
consist of:
• 1)Resources
• 2)Structure
• 3)Culture

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1) Structure

• The organization structure is the way an

organization is organized in terms of
communication, authority & work flow.
• Often referred to as the ‘chain of
command’ and is graphically described in
an ‘organizational chart’.
• Centralized & flat structure is more
appropriate for small businesses. (more
flexible & faster decision making).
• Bigger firms usually have decentralized & tall
structure (therefore quite bureaucratic & slow
in making decision).
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2) Culture

 The organization’s culture is the pattern of

beliefs, expectations & values shared by all
members of the organization.
 Organization has its own norms that is
“acceptable behavior of people from top
management down to the employees”
 Positive culture & values provide a good
working relationship & harmonious
environment among all the members.
 Different organization, different culture.
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 3) Resources
• Resources are assets needed in order
for the business/firm to produce its
products or to provide its services.
Based on resource-based theory by
Dollinger (1995), there are 6 types of
resources;
– Financial resources;
– Physical resources;
– Human resources;
– Technology resources;
– Reputation resources
– Organizational resources
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 a) Financial resources
• Refers to financial assets, money/cash at
hand, borrowed (loan), new equity (money
from s/holders or investors) & internal fund
generated (profit)
• Ability to get f. resources at the lowest cost
(co. will gain competitive advantage)
• Indicators of biz’s financial strength are its
ROI, debt to equity ratio, credit rating, current
asset, etc.
• F. resources are important, because failure to
get sufficient capital means failure to start-
up/develop/grow the biz.

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 b) Physical Resources
• Refers to tangible properties the firm
uses in production, operation &
administration of the biz.
• This includes the firm’s plant &
equipments, machineries, land, buildings
& premises, vehicles and the amenities
available at that location/office/factory.

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 c) Human Resources
• Include the knowledge, training, &
experience of the entrepreneur and
his/her team of employees & managers.
• Also include the judgment, insight,
creativity, vision, intelligence, networking
of the individual members of the
organization.
• Must provide good HRM – less staff
turnover, less mistake at production line,
pay good incentives, motivated & hard-
working employees.

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 d) Technological Resources
• Any process, system or physical transformation
which may involve labs, r&d facilities, testing &
quality control technologies.
• Patented findings or knowledge generated by r&d
are forms of technological resources/intangible
assets. (formula, licenses, trademarks &
copyrights, technological & processes secrets)
• Firm’s technological resources should be updated
to ensure the resources are ahead of competitors.
(employees must be creative & innovative).

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 e) Reputation Resources
• Are the perceptions by the firm’s environment towards
the company. Reputation can exist at the product level
(brand loyalty) or at the corporate level.
• Reputation could be long-lived & some of the firms
are able to maintain good reputation for longer period
of time.
• Entrepreneurs must develop good image so that
customers & others in the environment will have good
perceptions towards them & their companies (can gain
customers’ loyalty).

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 f) Organizational Resources
• Refers to systems used in the organization &
its daily routines. (reporting systems, its
information system, decision making systems,
and formal or informal planning systems).
• Good systems used & implemented in an
organization will make the firm more
competitive;
• eg; good systems - make fast decision,
innovative, acquire & distribute information
more quickly and more frequently, the firm
become more effective & efficient etc.

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Assessing the Economic
Environment

32
Understanding the Regulatory
Environment

33
Governmental Regulations Affect Smaller
Ventures in a Variety of Ways:

• Prices
• Cost inequities
• Competitive restriction
• Managerial restriction
• Mental burden

34
Examining the Industry
Environment

35
 Elements of Industry – Potter’s Five Forces Model

New
Entrants

Threat of New Entrants

Bargaining Industry Bargaining

Power of Competitors Power of
Suppliers Buyers
Suppliers Buyers

Intensity of
Rivalry

Threat of Substitutes

Substitutes
36
Common Industry Characteristics

• Technological Uncertainty
• Strategic Uncertainty
• First-Time Buyers
• Barriers to Entry
• Competitive Analysis

37
 Components of Competitive
Analysis
What the Competitor is Doing
What Drives the Competitor and Can Do
Future Goals Current Strategy

Competitor’s
Response Profile

Assumptions Capabilities
Held about itself and Both strengths and
the industry weaknesses
38
A Micro View: The Community Perspective

39
 Researching the Location

• Community Demographics
• Economic Base
• Population Trends
• Overall Business Climate

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