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Chapter Three
Small Business Environment:
Managing External Relations

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 The Environment of Small Business

The environment is all of the forces outside the firm or the entrepreneur.
• Setting up a boundary within that environment gives the firm an
organizational identity.
A key element of its organizational identity is its organizational culture.
• A set of shared beliefs or basic assumptions that demonstrate how
things are done.
• Organizational culture also includes common, accepted ways of
dealing with problems and challenges.
Bootstrapping techniques are generally part of a start-up’s culture and
used when resources are in short supply.
The environment is also at the core of exchange in the BRIE model –
buying, selling, and trading across the firm’s boundary.

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 Figure 3.1: The Organization’s Environment

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Sources: Adapted from Angelo Kinicki and Brian K. Williams, Management: A Practical Introduction (New York: McGraw-Hill, 2009), p. 73; Brad Feld, Startup Communities: Building an Entrepreneurial
© McGraw-Hill Education Ecosystem in Your City (Hoboken, NJ: Wiley, 2012). 3
 Elements of the Small Business Environment

The external environment is everything outside the firm’s boundary.

• Components that directly relate to your firm performing its basic
business tasks are called the task environment.
The even larger part of the environment is the general environment and
consists of seven sectors, such as the economic sector.

The internal environment are those directly If a group becomes

involved in the organization. too familiar, you
• Owner, employees, and board of directors. may miss trends.
Some groups may be considered internal or If so, look to
external, depending on the entrepreneur. professional and
• The entrepreneurial ecosystem is an trade magazines
important, helpful group for the entrepreneur. for your industry.

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 Environmental Scanning for Small Businesses
Low-cost, fast ways to monitor the
environment include:
• Using trade press for trends.
• Asking customers, suppliers,
and other groups for their
thoughts on future trends.
• Keeping note of things that
bother you about how work is
done and look to improve.
• Use a custom feed of news.
Use a “real options” approach
and establish benchmarks,
timetables, and a formal review
process for decisions.
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Another key scanning ability is to
find the six types of resources.
• Property/physical.
• Relational – social capital.
• Organizational.
• Financial.
• Intellectual, or Human.
• Technological.
A successful start-up needs some
of each type of resource.
• Determine what you have.
• Look for what you lack.
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 Skills for Managing Relations with the Environment

After gathering knowledge of the environment, scanning and analyzing,

apply that knowledge to help launch and grow your small business.
• Two approaches to managing relations with the environment, what is
called external relations:
• Building legitimacy.
• Developing your networks.

The goal is to manage external relations in order to create social capital,

the major component of “goodwill.”

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 Building Legitimacy

Building legitimacy is
Legitimacy lies in the Gaining legitimacy is a major goal of an
impressions/opinions challenging for a new
existing business
of customers, small business, but
that has gone
suppliers, investors, or very difficult for those
competitors. seen as “different.”
through significant
change.
Achieving legitimacy Three forms of
means building trust legitimacy: based on
among customers people, based on
and other key product, and based
groups. on your organization.

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 Table 3.1: People-Based Legitimacy Indicators

Remember, the
owner is the business
and the most
important element of
social capital.

Make sure your

employees work in
the best, friendliest,
and most
professional way to
help build the
business.

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 Table 3.2: Product-Based Legitimacy Indicators

Many owners think the

most important source
of legitimacy comes
from understanding the
product/service.
If customers do not
understand it, the
company is unlikely to
succeed.
The goal is making
sure the customer
knows about the details
of the product and has
company assurance to
back it up.

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 Table 3.3: Organization-Based Legitimacy Indicators

Whatever gives customers

confidence in the quality and
survivability of the firm helps
sales and increases trust.
Good codes of ethics reflect
the owner’s passion, the
culture of the firm, and three
classes of ethical standards:
• Employees should be
dependable citizens.
• Do not do anything that will
harm the organization.
• Be good to customers.

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 Developing Your Networks

Your personal network are people you encounter in your everyday life,
while your social network are people you know online.
• Knowing how to grow and sustain each is a key skill.
• Both forms are a way to work trust, reciprocity, and long-term
relationships into your daily business operations.
• They help build your company’s expertise.
• The key is building a network of people who trust each other and
reciprocate help and advice.
• In both types, you seek to build your reputation.

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 Developing Your Personal Networks

Sources for network connections include: family, friends and neighbors,

kids, your bank, customer contacts, school, hobbies, business
associations, other organizations (religious, civic, community, political),
work, and small business support organizations.
• Not all contacts are equal.
• The PSED shows information is the leading type of help requested.
• The most powerful connections are face-to-face meetings.
• Mutuality is the idea and action of each person helping the other.
• Building social capital is called personal networking.
• You can use your contacts list or a customer relationship
management (CRM) software to organize your contacts.
• The goal is to make sure you keep track of your social and business
contacts to keep relationships fresh.

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 Developing Your Social Networks
Social networking expands the
personal network.
• The challenge is deciding
which platforms and strategy to
use.
• The key is realizing where your
target customers already are.
• A B2C firm may use
Facebook, YouTube, or
Instagram, among others.
• For a B2B firm, LinkedIn is
the top platform.
• Many owners have their
business on multiple platforms.
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Regardless of the site or sites you
use, there are four best practices.
• Make it easy for people to
contact you.
• Take the initiative to ask others
on the network to link with you
and then help them out online.
• Find and link up with network
mavens then help out when
you can.
• Keep at it – successful online
networking requires consistent
involvement.
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 Skills for Making the Right Decision

The entrepreneur will make all sorts of decisions, now and in the future.
• Thinking ahead of time about some decisions and situations can help
you prepare yourself, and your firm, for the future.
• There are three areas where this is particularly important.

Handling a crisis.

Achieving sustainability.

Making ethical decisions.

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 Handling a Crisis
1. Quickly admit you’re in
trouble.
2. Get to the scene as soon as
possible – show accountability.
3. Communicate facts you know
to employees, customers, and
suppliers.
4. Have one person as the
spokesperson – best if owner.
5. Separate crisis management
from everyday management.
6. Deal with the crisis quickly.
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Managing crisis is a difficult but
necessary skill – the SBA advises:
• Plan to stay in business – use
a disaster plan.
• Talk to your people.
• Protect your investment.
The best way to manage a crisis
is to plan ahead.
In the middle of a crisis, stay calm,
take care of the people involved,
and keep people informed.
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 Achieving Sustainability
Sustainable entrepreneurship
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 achieves any combination
of these outcomes.
Sometimes called green
entrepreneurship.
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Entrepreneurs can manage a
firm’s impact on the environment.
• Recycle everything you can.
• Perform a “green audit,” which
is needed to obtain ISO 14001
certification.
• Consider specializing in LEED
certified construction if you are
in the construction industry.
• Similarly, green retailing is a
growing segment.
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 Making Ethical Decisions

We consider ethics
in whether a decision
is good or bad.
An ethical dilemma
occurs when
personal values
conflict.
When defining the
moral problem,
consider: who will be
hurt, who will benefit,
what do you owe
others, and what do
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others owe you.

© McGraw-Hill Education Source: Adapted from LaRue T. Hosmer, The Ethics of Management, 6th ed. (Boston: McGraw-Hill/Irwin, 2008). 17
 Making Ethical Decisions – Implementing and Monitoring

If you have to negotiate, be ready to talk about your BATNA.

Remember, there are costs to unethical behaviors.

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© McGraw-Hill Education Source: T. Thomas, J. Schermerhorn Jr., and J. Dienhart, “Strategic Leadership of Ethical Behavior in Business,” Academy of Management Executive (May 2004), p. 58. 18
 Making Ethical Decision – Integrating Lessons

An entrepreneur can integrate these lessons into their business structure.

• Craft codes for legitimacy, networking, customer service,
sustainability, crisis management, and ethical decision making.
• Discuss expectations when hiring employees, subcontractors, or
service providers.
• When external relations lapses occur, if not a major offense, use it as
a learning experience and again bring up your expectations.
• When counseling about external relations issues, do not get
emotional, be specific and consistent.
• Remember, you are a role model.

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