Environment of an Entrepreneurial Venture

Physical Environment

Ø  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. Prospective entrepreneurs should critically evaluate them before opening their business.

Ø  Furthermore, analyzing the physical environment involves the following elements:

a.     Climate – The entrepreneur must consider the prevalent climatic condition of the area where he or she intends to open the business to determine whether it can withstand or is fit to the climatic condition in the local area.

b.    Physical Resources – The availability of raw materials is another major factor that can influence the success or failure of the business venture. The availability or lack of raw materials will determine the cost of products.

c.     Wildlife – The entrepreneur must ensure that his or her business contributes to the preservation and not the destruction of the ecological system of the local community and our country in general.

Societal Environment

Ø  The societal environment is generally composed of social, political, cultural, economic, legal, and technological forces.

a.     Economic Forces – These are factors which are primarily caused by changes or movements in the Philippine economy that have direct or indirect effects on the entrepreneurial venture.

b.    Cultural Forces – Basically refers to the integrated characteristics of a group of people or ethnic group in a particular society.

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

d.    Political Forces – Elements usually comprising of the political parties, political systems and other related political groups that substantially influence the political stability of a country.

e.     Legal Forces – Elements and bodies that are directly involved in the legislation and interpretation of laws and ordinances directly affecting the business.

f.      Technological Forces – These refer to the trends and developments in computer and information technology that have impact on business.

Industry Environment

Ø  The external environment layer where the trends and changes are easily and immediately felt by the business.

Ø  The industry environment is considered the immediate environment of the business where it conducts its various operational activities.

a.     Government – The system or institution that handles the affairs of a particular country.

b.    Suppliers – Individual persons or companies that provide the required materials, parts, or services to the business.

c.     Customers – The buyers of goods or services produced or rendered by the business.

d.    Competitors – Forces that produce, sell or render products or services which are similar to those of the business.

e.     Employees – The workers of the business who are highly responsible for the production of goods or delivery of services to the consumers.

f.      Creditors – The 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.

Internal Environment

Ø  The other major division of the business environment is the internal or micro environment.

Ø  The internal environment in the entrepreneurial context simply refers to the environment within the business.

Ø  There are several forces operating within the internal environment. These are:

a.     Business Resources – These are assets or properties owned or controlled by the business. The resources can either be tangible or intangible.

1.     Tangible – such as bills and coins, building, machinery, equipment, office supplies, and human resources.

2.     Intangible – such as copyright, patents, formula, computer software, reputation, and goodwill.

b.     Business Culture – It is a collection of values, beliefs, principles and expectations learned shared by the employees, founders, stakeholders and members of the management.

c.     Business Structure – The formal organizational arrangement of the business in terms of hierarchy of positions, flow of communication, relationship of functional areas and production and marketing processes.

Ø  The harmonious coordination of competency in business resources, business structure, and business culture, forms the business core competency.

Environmental Scanning Approaches

Ø  The gathering, critical evaluation and utilization of information on events and activities and their relationships with the physical, societal and industry environment.

Significance of Environmental Scanning

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.

Physical Environment Scanning

A.    Historical Data Gathering

Ø  Collecting data about past events and circumstances pertaining to a particular subject through primary and secondary sources.

Societal Environment Scanning

A.    PESTEL Analysis

Ø  A tabular framework of the trends and developments in the different forces in the external environment.

B.    Environmental Forces Matrix

Ø  It classifies the various environmental forces into their frequency of occurrence and level of effect to the existing or proposed business.

Industrial Environment Scanning

A.    Forces of Competition Model

Ø  The industry is a competitive environment. The business, therefore, cannot do anything else but compete. The five forces competing within the industry are as follows:

1.     Potential new entrants

2.     Buyers

3.     Substitute Products

4.     Suppliers

5.     Rivalry among existing firms

B.    Competitive Forces Matrix

Ø  The competitive forces can be plotted using this matrix by which the entrepreneur can view the total perspective of the competition within the industry where the business operates.

Internal Environment Scanning

A.    SWOT Analysis

Ø  It is a popular tool to evaluate the internal environment.

Ø  SWOT stands for Strengths, Weaknesses, Opportunities, and Threats.

1.     Strengths – The strong attributes of the business that provide great advantage in exploiting the business opportunity.

2.     Weaknesses – Poor attributes or deficiencies that give disadvantages to the business.

3.     Opportunities – Business situations in the form of products or services that must be exploited because of their potential in terms of profit and growth.

4.     Threats – Possible external events in the environment that may provide harm to the business.

B.    BGC Analysis Matrix

Ø  An environmental scanning tool is most appropriate when there are several products or services that are produced or rendered by the business. 

Ø  It determines market growth and market share.

Ø  It consists of four elements: stars, question marks, cash cows, and dogs.

Nature and Type of Entrepreneurial Venture

Forms of Business Organization

1.     Sole Proprietorship

Ø  It is a type of business venture owned by one person only.

Ø  Often, businesses of this form have unlimited liability.

2.     Partnership

Ø  It is a type of business venture that is owned by two or more people.

Ø  Often, businesses of this form have unlimited liability.

Ø  However, it can easily be dissolved because of:

o    Death of one of the partners

o    Admission of a new partner in an existing partnership

o    Personal insolvency of one of the partners

o    Permanent withdrawal of the investment of a partner.

3.     Corporation

Ø  A corporation is an entrepreneurial venture formed by at least five but not more than fifteen people.

Ø  Often, businesses of this form have limited liability.

Ø  Furthermore, the following are the types of corporations:

a.     Stock corporation – is a for-profit corporation which has shareholders (stakeholders), each of whom receives a portion of the ownership of the corporation through shares of stock. Examples: Ayala, SM, San Miguel Corporation, Petron, URC, Security Bank

b.    Non-stock corporation – is one where no part of its income is distributable as dividends to its members or trustees.

c.     Domestic corporation – is a company that conducts its affairs in its home country.

d.    Foreign corporation – is a corporation that conducts business in a state or jurisdiction other than where it was originally incorporated.

Nature of Entrepreneurial Venture

Ø  An entrepreneurial venture may also be classified according to its nature. The term nature simply refers to whether the business is simply selling a product, manufacturing a business, or rendering a service to its customers.

Ø  The classifications of entrepreneurial venture according to its nature are as follows:

1.     Merchandising – a business engaged in the buying and selling of products or goods. It does not alter the appearance of the product purchased from the seller.

2.     Service – provides service to customers.

3.     Manufacturing – a business that produces goods or products. It is engaged in the buying of raw materials and supplies to be processed into finished products.

4.     Agriculture – a business engaged in the production of agricultural goods and animals. It may sell its products as raw materials or finished goods.

5.     Hybrid – a business that possesses the characteristics and nature of combined types

of business entities.

Market Identification

Ø  It is a strategic marketing approach and process that is intended to define the specific customer of the product.

Ø  There are three strategic marketing approaches that will assist the entrepreneur in defining the specific market of the product. These are:

Market Segmentation

Ø  It is an entrepreneurial marketing strategy designed primarily to divide the market into smaller segments of buyers with distinct need, characteristics, or behaviors so that they can be reached more efficiently and effectively and offered with products that match.

Ø  The commonly used methods for segmenting the market are the following:

1.     Geographic segmentation – the total market is divided according to geographical locations in the Philippines like provincial regions, cities, provinces, municipalities, and even barangay units.

2.     Demographic segmentation – The market is divided based on the demographic variables of the consumers.

3.     Psychological segmentation – The market is divided in terms of what the customers think and believe.

4.     Behavioral segmentation – The market is divided based on the perceptions, knowledge, reactions, benefits, loyalty, and responses to a business.

Market Targeting

Ø  Market Targeting is a stage in market identification process that aims to determine the set of buyers with common needs and characteristics. They are the market segment that the entrepreneurial venture intends to serve.

Ø  The entrepreneur, after segmenting the market, does not simply select any market segment to serve. He/she must consider the following:

o    Size of the segment and its expected growth

o    Existing and probable structure of the segment

o    Capability of the business

Ø  The following are entrepreneurial marketing strategies that fall under market targeting:

1.     Individual or one-on-one marketing – Products are tailored to the needs of the individual consumers.

2.     Segmentation marketing

a.     Differentiated marketing – Several segments are covered and products are designed to suit the specific needs of a particular segment.

b.    Concentrated or niche marketing – Only one or few segments are covered, but the product is designed for the majority of the consumers of the segment market.

3.     Mass or undifferentiated marketing - Products are mass produced for the whole market where consumers are not differentiated.

Market Positioning

Ø  Business positioning simply refers to the process of determining the place of the business in the industry.

Ø  Market positioning refers to the process of arranging a product to occupy a clear, distinct, and desirable place in relation to other competing products in the mindset of target consumers.

Ø  The following are steps in determining the market position:

1.     Differentiate market position

Ø  Unique Selling Proposition (USP) – what sets the product apart from its competitors? Why should the customers buy this instead of its competitors?

2.     Evaluating the benefit of every market position

Ø  The following criteria may be considered in identifying the attributes or benefits:

o    Identifiable

o    Beneficial

o    Distinctive advantage

o    Efficient and rewarding

3.     Deciding on the market position

Ø  There are two basic dimensions that must be seriously considered in deciding the market position of the product. These are price and quality.

Organization Plan

Ø  Is basically a to-do list for an organization.

Ø  Lists out the plan of work, programs and organizational growth over a period of time.

Ø  An organization plan helps to…

o    Set priorities for work

o    Make sure tasks get done on time.

o    Focus on one thing at a time.

o    Share work among staff, board members and volunteers.

o    Make goals clear to investors.

o    Get a handle on big projects by breaking them down.

o    See the bigger picture of what the organization is doing.

Ø  The organization plan provides a detailed description of the business in terms of the following:

Form of the Business Organization

Ø  As mentioned above, a business can come in three forms: sole proprietorship, partnership, and corporation.

Ø  The following are their differences:

Liability of the Owners

Ø  This section describes the extent of the owner’s financial obligations with creditors. The extent of liability can either be limited or unlimited.

1.     Limited Liability – means that in the case of business dissolution and there still remains unsettled financial obligations of the business, the creditor cannot go after the personal property of the business owner.

2.     Unlimited Liability – means that the creditors can run after the personal property of the owner in the event that the business fails to fully settle its financial obligation during business dissolution.

Organizational Structure

Ø  It shows and defines the hierarchy of the different positions in the organization and the interrelationships of the different offices or departments.

Ø  The following are commonly used organizational structures:

1.     Functional Structure

Ø  Under this structure, employees are grouped into the same departments based on similarity in their skill sets, tasks, and accountabilities.

Ø  This allows effective communications between people within a department and thus leads to an

efficient decision-making process.

Ø  Companies with departments such as IT and Accounting are good examples of a functional structure. 

2.     Divisional Structure

Ø  This structure organizes business activities into specific market, product, service, or customer groups.

Ø  The purpose of the divisional structure is to create work teams that can produce similar products matching the needs of individual groups.

Ø   A common example of the divisional structure is geographical structure, where regional divisions are built to provide products or service to specific locations.

3.     Matrix Structure

Ø  Matrix Structure is a combination of functional and divisional structures.

Ø  This structure allows decentralized decision making, greater autonomy, more inter-departmental interactions, and thus greater productivity and innovation.

Ø  Despite all the advantages, this structure incurs higher costs and may lead to conflicts between the vertical functions and horizontal product lines.

Roles and Responsibilities

Ø  It must be clearly defined in order to minimize and avoid misunderstanding of functions.

Ø  Educational requirements and experiences required of the workers must also be specified.

Ø  It consists of the following elements:

·         Role – list each of the key roles or groups (as appropriate) in turn

·         Identity – identify the person or people assigned to that role or group

·         Responsibilities

o    Primary – specify the one thing that this role must do, first and foremost.

o    Secondary – specify the other responsibilities that the role holder must discharge

·         Interfaces – identify the key people or groups that the role holder needs to interact with

Salary Requirements

Ø  The organizational plan must show the total estimated monthly and annual salary requirements of the business. All other mandatory benefits like the employer’s contributions to SSS, Pag-Ibig, and PhilHealth must likewise be specified.

Production Plan

Ø  Describes activities related to production of goods.

Ø  The result of industry analysis, particularly the study of supply and demand and consumer behavior.

Four Ms of Production

1.     Method – is the process or technique of converting raw materials to finished products.

a.     Batch method – production of items one after another.

b.    Job order method – production is completed by a single employee or a batch of employees.

c.     Project method – usually substantial in size

2.     Manpower – the human workforce involved in the manufacture of business.

3.     Machine – the manufacturing equipment used in the production of goods or delivery of services.

4.     Materials – the raw materials needed in the production of the product.

Ø  The business plan usually includes the following parts:

Production Schedule

Ø  The production schedule presents the total number of goods to be produced and the expected time to produce them.

Ø  The total number of units to produce, however, is usually affected by the following factors:

1.     Demand for the product

2.     Availability of resources

3.     Capacity of the plan

Production Process

Ø  The different processes or stages involved in the production of goods must be clearly spelled out in this section, as well as the description of the following:

1.     Exact processing procedure

2.     Materials, parts, or ingredients required

3.     Expected time to process the product

Ø  A schematic diagram showing the procedural steps in making the product will help clarify this section.

Processing Plant and Equipment

Ø  This section describes the manufacturing plant, the machinery and equipment, and the various tools to be used in the production of goods, including their respective estimated costs.

Ø  It also talks about the location of the processing plant and the reason for the selection of the site.

Ø  In the selection of the machinery and other equipment, the entrepreneur must consider the following factors:

1.     Capacity of the plant or machinery

2.     Model of the machinery or equipment

3.     Availability of spare parts

4.     Cost and terms of payment

Sources of Materials

Ø  The possible sources of raw materials and manufacturing supplies must be described in terms of the following:

1.     Proximity of the source to the processing plant

2.     Payment terms and conditions

3.     Discounts and damages

4.     Terms of shipment

Production Cost

Ø  This section of the plan must show the estimated cost of production. The three elements of cost, namely labor, direct materials, and factory overhead, must be properly described and accounted for.

Operation Plan

Ø  Outlines the various activities, from the acquisition of raw materials to the delivery of the products to the target consumers.

Ø  It provides a detailed description of the business in terms of the following:

Evaluation of Suppliers

Ø  Control starts with the suppliers of raw materials. The business must conduct a critical evaluation of the suppliers of raw materials and establish harmonious working relationships with them.

Materials Requisition and Receiving Procedures

Ø  The basis of the receiving report is the purchases order of the business.

Ø  Must be signed by authorized personnel.

Ø  The person receiving the materials usually prepares the receiving report.

Ø  The procedures in requisitioning raw materials and other manufacturing supplies and receiving them must be explained. This section covers the following areas:

1.     Basis of receiving the raw materials

2.     Comparison of the order and receipt

3.     Quality of materials received

Storage and Inventory Control System

Ø  The operation plan describes how the business stores the finished goods and protects its inventory against possible theft and losses.

Ø  This section deals with the following:

1.     Owning or renting a warehouse

2.     Management of the warehouse

3.     Procedures in the transfer of goods

4.     Control of inventory in the warehouse

Shipment System and Control

Ø  The basis of sales invoice and other shipment documents are the purchase order received from the customers.

Ø  This section covers the following:

1.     Approval of shipping and sales documents

2.     Terms of shipment

3.     Manner of shipping the product

4.     Other terms and conditions, like sales contract

Functions of Support Services

Ø  This defines and describes the functions of other support services relative to the acquisition, processing, and shipment of goods to the consumers.

Ø  Most businesses consist of three or four functional areas as follows:

1.     Finance

2.     Marketing

3.     Operation

4.     Human resources