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Chapter Three
Small Business Environment:
Managing External Relations

Copyright 2021 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
 Because learning changes everything. ®

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education
 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
organization
al identity.

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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). 4
 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 Another key scanning ability is to

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

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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 Regardless of the site or sites you

personal network. use, there are four best practices.
• The challenge is deciding • Make it easy for people to
which platforms and strategy to contact you.
use. • Take the initiative to ask others
• The key is realizing where your on the network to link with you
target customers already are. and then help them out online.

• A B2C firm may use • Find and link up with network

Facebook, YouTube, or mavens then help out when
Instagram, among others. you can.
• Keep at it – successful online
• For a B2B firm, LinkedIn is networking requires consistent
the top platform. involvement.
• Many owners have their
business on multiple platforms.

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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

Managing crisis is a difficult but
trouble.
necessary skill – the SBA advises:
2. Get to the scene as soon as
• Plan to stay in business – use
possible – show accountability.
a disaster plan.
3. Communicate facts you know
• Talk to your people.
to employees, customers, and
suppliers. • Protect your investment.
4. Have one person as the The best way to manage a crisis
spokesperson – best if owner. is to plan ahead.
5. Separate crisis management In the middle of a crisis, stay calm,
from everyday management. take care of the people involved,
and keep people informed.
6. Deal with the crisis quickly.

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 Achieving Sustainability

Sustainable entrepreneurship Entrepreneurs can manage a

identifies (or creates) and then firm’s impact on the environment.
exploits opportunities to make a • Recycle everything you can.
profit in a manner that:
• Perform a “green audit,” which
• Minimizes the depletion of is needed to obtain ISO 14001
natural resources. certification.
• Maximizes the use of recycled • Consider specializing in LEED
material. certified construction if you are
• Improves the environment. in the construction industry.
• Or achieves any combination • Similarly, green retailing is a
of these outcomes. growing segment.
Sometimes called green
entrepreneurship.

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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). 18