Pub - Strategic Entrepreneurship 4th Edition PDF - PDFCOFFEE.COM (2024)

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Laura Wilson, University of Portsmouth

The fourth edition of Strategic Entrepreneurship addresses these issues with an up-to-date, accessible and rigorous examination of the theory, research and practice of entrepreneurship in all types and sizes of organisations. It includes coverage on contemporary topics such as: • • • • •

Intrapreneurship and corporate entrepreneurship; Social, not-for-profit and public enterprise; Entrepreneurship and its role in economic development; Research Themes & Key Readings to encourage further study; Recent articles from the Financial Times.

Strategic Entrepreneurship has been written for those studying entrepreneurship as part of any degree or management course. The book presents a clear style, logical organisation of themes, and a critical discussion of key ideas. Philip A Wickham is Research Fellow at Leeds University Business School. He is also the author of two other Financial Times Prentice Hall textbooks: Management Consulting ISBN 0-273-70642-X (2004) and the Financial Times Corporate Strategy Casebook (2000).

An imprint of

9 780273 706427 www.pearson-books.com

STRATEGIC ENTREPRENEURSHIP

How do you define entrepreneurship? When and where can you identify and benefit from entrepreneurial behaviour and management style? What contribution does entrepreneurship make to economic development and social responsibility?

STRATEGIC ENTREPRENEURSHIP FOURTH EDITION

Roberto Flören, Nyenrode University

COVER IMAGE: STUART M C CLYMONT / GETTY IMAGES

STRATEGIC ENTREPRENEURSHIP FOURTH EDITION

‘This is a great book. It really is one of the best entrepreneurship books I have seen. A great deal of useful information is covered and the cases and the discussion points are particularly valuable.’

FOURTH EDITION PHILIP A WICKHAM

‘Strategic Entrepreneurship is very clearly written, covers all the important ground, and suggests excellent supporting material in the further reading bibliographies.’ Pegram Harrison, Regents College, London

WICKHAM

‘Wickham’s real strength is in offering balanced and clear introductions to a wide range of topics – the text covers more areas than I think any other entrepreneurship text at this level.’

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STRATEGIC ENTREPRENEURSHIP

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We work with leading authors to develop the strongest educational materials in business, bringing cutting-edge thinking and best learning practice to a global market. Under a range of well-known imprints, including Financial Times Prentice Hall, we craft high quality print and electronic publications which help readers to understand and apply their content, whether studying or at work. To find out more about the complete range of our publishing, please visit us on the World Wide Web at: www.pearsoned.co.uk

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STRATEGIC ENTREPRENEURSHIP FOURTH EDITION PHILIP A. WICKHAM

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For John

Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk First published in Great Britain in 1998 Second edition published in 2001 Third edition published in 2004 Fourth edition published in 2006 © Philip Wickham 1998 © Pearson Education Limited 2001, 2004, 2006 The right of Philip A. Wickham to be identified as author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London W1T 4LP. All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsem*nt of this book by such owners. ISBN-13: 978-0-273-70642-7 ISBN-10: 0-273-70642-X British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record for this book is available from the Library of Congress 10 9 8 7 6 5 4 3 2 1 10 09 08 07 06 Typeset in Sabon by 35 Printed and bound by Ashford Colour Press, Gosport The publisher’s policy is to use paper manufactured from sustainable forests.

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Brief Contents

Preface to the fourth edition Acknowledgements Guided tour Prologue: entrepreneurship in the modern world Part 1 The entrepreneur as an individual 1 The nature of entrepreneurship 2 Types of entrepreneur 3 The entrepreneurial personality 4 Entrepreneurship, cognition and decision making 5 Taking the entrepreneurial option

xxiv xxvii xxix xxxi 1 3 34 50 71 94

Part 2 The entrepreneur in the macroeconomic environment 6 The economic function of the entrepreneur 7 Entrepreneurship and economic development 8 Not-for-profit and public entrepreneurship 9 Success, stakeholders and social responsibility

121 123 159 180 192

Part 3 The entrepreneurial process and new venture creation 10 The entrepreneurial process 11 The nature of business opportunity 12 Resources in the entrepreneurial venture 13 The entrepreneurial venture and the entrepreneurial organisation 14 Intrapreneurship 15 The changing role of the entrepreneur in the consolidated organisation

219 221 235 255 273 293

Part 4 Choosing a direction 16 Entrepreneurial vision 17 The entrepreneurial mission 18 The strategy for the venture 19 The business plan: an entrepreneurial tool 20 Gaining financial support: issues and approaches

319 321 334 349 374 398

Part 5 Initiating and developing the new venture 21 The strategic window: identifying and analysing the gap for the new business 22 Seeing the window: scanning for opportunity 23 Locating and measuring the window: positioning the new venture 24 Opening the window: gaining commitment

427

304

429 441 458 475

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Brief Contents

25 26 27 28

Closing the window: sustaining competitiveness The dimensions of business growth Consolidating the venture Making your contribution: researching entrepreneurship

Index

493 514 554 566 586

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Contents

Preface to the fourth edition Acknowledgements Guided tour Prologue: entrepreneurship in the modern world

xxiv xxvii xxix xxxi

Part 1 The entrepreneur as an individual

1

Chapter 1 The nature of entrepreneurship

3

1.1 1.2

1.3

1.4

1.5

1.6

What is entrepreneurship? The entrepreneur’s tasks Owning organisations Founding new organisations Bringing innovations to market Identification of market opportunity Application of expertise Provision of leadership The entrepreneur as manager The role of the entrepreneur Combination of economic factors Providing market efficiency Accepting risk Maximising investors’ returns Processing of market information The entrepreneur as a person The ‘great person’ Social misfit Personality type Personality trait Social development approaches Cognitive approaches Entrepreneurship: a style of management A focus on change A focus on opportunity Organisation-wide management Entrepreneurial managers as venturers The human dimension: leadership, power and motivation Power Motivation

3 5 5 6 7 7 8 8 9 9 9 10 10 11 11 12 12 12 13 13 14 15 15 16 16 16 17 17 19 20

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Summary of key ideas Research themes Key readings Suggestions for further reading Selected case material Discussion points

23 24 25 25 28 33

Chapter 2 Types of entrepreneur

34

2.1 2.2 2.3

Classifying entrepreneurs Serial and portfolio entrepreneurship Entrepreneurship and small business management: a distinction Innovation Potential for growth Strategic objectives Summary of key ideas Research themes Key readings Suggestions for further reading Selected case material Discussion point

34 38 39 41 41 41 43 43 45 45 47 49

Chapter 3 The entrepreneurial personality

50

3.1

50 51 51 52 52 53 54 55 55 56 56 57 57 58 59 59 62 62 64 64 68 70

Personality and entrepreneurship: some theoretical issues Instrumentalisation of the concept of entrepreneurship Instrumentalisation of personality Ontology of personality Theoretical pragmatics 3.2 Schools of thinking on personality Psychodynamic approaches Dispositional approaches Biological approaches Evolutionary psychological approaches Phenomenological approaches Behavioural approaches Social-cognitive learning approaches Attribution-based approaches The limitations of personality models 3.3 Entrepreneurship and psychometric testing Summary of key ideas Research themes Key readings Suggestions for further reading Selected case material Discussion point

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71

4.1 4.2

Cognitive aspects of entrepreneurship Entrepreneurship and human decision making Anchoring bias Availability bias Represtativeness bias and base-rate neglect 4.3 Entrepreneurial confidence and overconfidence 4.4 Entrepreneurs and the human response to risk Prospect theory Summary of key ideas Research themes Key readings Suggestions for further reading Selected case material Discussion point

71 74 75 75 75 77 78 78 81 83 83 84 87 93

Chapter 5 Taking the entrepreneurial option

94

5.1

5.2

5.3 5.4 5.5

5.6

Who becomes an entrepreneur? The inventor The unfulfilled manager The displaced manager The young professional The excluded Characteristics of the successful entrepreneur Hard work Self-starting Setting of personal goals Resilience Confidence Receptiveness to new ideas Assertiveness Information seeking Eager to learn Attuned to opportunity Receptive to change Committment to others Comfort with power Entrepreneurial skills The supply of entrepreneurs Influences on the move to entrepreneurship Knowledge Possibility Risk Valence The initiation decision

Contents

Chapter 4 Entrepreneurship, cognition and decision making

94 94 95 95 96 96 97 98 98 98 98 98 98 99 99 99 99 99 99 99 100 102 104 106 106 107 107 108

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Contents

5.7 The initiation process Summary of key ideas Research themes Key readings Suggestions for further reading Selected case material Discussion point

109 110 110 112 112 115 119

Part 2 The entrepreneur in the macroeconomic environment

121

Chapter 6 The economic function of the entrepreneur

123

6.1

The entrepreneur in economic theory The neo-classical school Austrian School economics Heterogeneous demand theory Differential advantage theory Industrial organisation economics Resource-based theory Competence-based theory Transaction cost economics Evolutionary economics Economic sociology 6.2 Entrepreneurship: wealth, utility and welfare Entrepreneurs, wealth creation and distribution Entrepreneurs and social welfare The determinacy of entrepreneurial behaviour Moral judgements about entrepreneurs 6.3 Entrepreneurship and information Types of informational asymmetry Contracts under informational asymmetry Summary of key ideas Research themes Key readings Suggestions for further reading Selected case material Discussion point

124 124 126 127 128 129 130 131 132 134 137 138 138 140 141 142 143 144 147 149 150 151 151 155 158

Chapter 7 Entrepreneurship and economic development

159

7.1 7.2

159 161 162 162 162

Entrepreneurship, economic performance and economic growth National governance and entrepreneurship Legalising entrepreneurship Size of the public sector Tariffs and trade barriers

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162 163 164 164 164 164 165 165 167 167 168 168 169 169 170 171 171 175 179

Chapter 8 Not-for-profit and public entrepreneurship

180

8.1 The conceptual challenge of social entrepreneurship 8.2 Is the social entrepreneur really an entrepreneur? 8.3 Distinguishing the social entrepreneur from the classical entrepreneur Summary of key ideas Research themes Key readings Suggestions for further reading Selected case material Discussion points

180 182 183 185 186 186 186 188 191

Chapter 9 Success, stakeholders and social responsibility

192

9.1 9.2

192 194 195 195 195 195 195 196 196 196 196

Defining success Success factors for the new venture The venture exploits a significant opportunity The opportunity the venture aims to exploit is well defined The innovation on which the venture is based is valuable The entrepreneur brings the rights skills to the venture The business has the right people The organisation has a learning culture and its people a positive attitude Effective use of the network Financial resources are available The venture has clear goals and its expectations are understood

Contents

Taxation policies Inward investment policies Finance supply Legislative environment Customs and excise policy Ethnic and religious discrimination Corruption 7.3 National culture and entrepreneurial inclination Language Religious beliefs Personal relationships Attitude towards innovation Networks Summary of key ideas Research themes Key readings Suggestions for further reading Selected case material Discussion points

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9.3 9.4

Measuring success and setting objectives Success and social responsibility The first dimension: the people to whom the venture has a social responsibility The second dimension: the levels of social responsibility accepted The third dimension: the issues that form part of the venture’s social responsibility The fourth dimension: the venture’s approach to its social responsibility 9.5 Social responsibility and business performance 9.6 Understanding failure 1 The business continues to exist as a legal entity under the control of the entrepreneur 2 The business continues to exist as an independent entity but the entrepreneur loses control 3 The business does not continue to exist as an independent entity Managing failure Summary of key ideas Research themes Key readings Suggestions for further reading Selected case material Discussion points

207 207 208 209 209 210 210 213 217

Part 3 The entrepreneurial process and new venture creation

219

Chapter 10 The entrepreneurial process

221

10.1

221 221 222 222 223 223 223 224 225 225 226 226 227 227 228 229 229 229 230 234

Making a difference: entrepreneurship and the drive for change The financial dimension: the potential to create new value The personal dimension: the potential to achieve personal goals The social dimension: the potential for structural change 10.2 The entrepreneurial process opportunity, organisation and resources The entrepreneur Opportunity Organisation Resources 10.3 The entrepreneurial process: action and the dynamics of success Opportunity–organisation fit Resource–organisation configuration Resource–opportunity focus Learning organisations Summary of key ideas Research themes Key readings Suggestions for further reading Selected case material Discussion point

197 198 199 201 202 202 204 205 206

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235

11.1 11.2

The landscape of business opportunity Innovation and the exploitation of opportunity New products New services New production techniques New operating pratices New ways of delivering the product or service to the customer New means of informing the customer about the product New ways of managing relationships within the organisation New ways of managing relationships between organisations Multiple innovation 11.3 High- and low-innovation entrepreneurship 11.4 Opportunity and entrepreneurial motivation Entrepreneurs are attuned to opportunity Opportunity must take priority over innovation Identifying real opportunities demands knowledge 11.5 The opportunity to create wealth Reinvestment Rewarding stakeholders Investment in other ventures Personal reward Keeping the score 11.6 The opportunity to distribute wealth Employees Investors Suppliers Customers The local community Government Distribution of rewards 11.7 Entrepreneurship: risk, ambiguity and uncertainty Summary of key ideas Research themes Key readings Suggestions for further reading Selected case material Discussion point

235 236 237 237 238 238 238 238 239 239 239 240 240 240 242 242 243 243 243 243 244 244 244 244 245 245 245 246 246 246 247 249 249 249 250 251 254

Chapter 12 Resources in the entrepreneurial venture

255

12.1 12.2 12.3 12.4 12.5

255 256 258 259 260

Resources available to the entrepreneur Financial resources Operating resources Human resources Organisational process and learning as resources

Contents

Chapter 11 The nature of business opportunity

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12.6 Resources, investment and risk 12.7 Stretch and leverage of entrepreneurial resources Summary of key ideas Research themes Key readings Suggestions for further reading Selected case material Discussion points

262 264 266 266 267 268 269 272

Chapter 13 The entrepreneurial venture and the entrepreneurial organisation

273

13.1

The concept of organisation The organisation as co-ordinator of actions The organisation as an independent agent The organisation as a network of contracts The organisation as a collection of resources The organisation as a system The organisation as a processor of information 13.2 Organisation and the control of resources Directed action Routines and procedures Organisational strategy Organisational culture Communicated vision The hierarchy of resource control devices 13.3 Markets and hierarchies 13.4 Networks 13.5 The extended organisation and the hollow organisation The extended organisation The hollow organisation Factors affecting the choice of organisational form Summary of key ideas Research themes Key readings Suggestions for further reading Selected case material Discussion point

273 274 274 275 275 275 276 276 277 278 278 278 278 279 279 281 282 283 284 285 287 287 287 288 289 292

Chapter 14 Intrapreneurship

293

14.1 14.2

293 295 295 295 295 295 296

The nature of intrapreneurship The challenges to intrapreneurship Existing managers’ comfort Decision-making control Internal politics Rewards for the entrepreneur Summary of key ideas

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296 297 297 298 303

Chapter 15 The changing role of the entrepreneur in the consolidated organisation

304

15.1

The entrepreneur versus the chief executive Internal co-ordination versus external promotion Managing continuity versus driving change Management by ‘right’ versus management by appointment 15.2 The dangers of entrepreneurial control in the mature organisation 15.3 The role of the founding entrepreneur in the mature organisation Chief executive Visionary leader Manager of business development Technical specialist Promoter of the venture Entrepreneur in an alternative venture 15.4 Succession in the entrepreneurial business The need for continuity . . . Choosing a successor Mentoring Remember the business Summary of key ideas Research themes Key readings Suggestions for further reading Selected case material Discussion points

304 304 305 305 306 308 308 309 309 309 310 310 310 310 311 311 312 312 313 313 313 314 317

Part 4 Choosing a direction

319

Chapter 16 Entrepreneurial vision

321

16.1 16.2 16.3

321 322 323 324 324 324 325 325 325 326

What is entrepreneurial vision? Developing and shaping vision Communicating and sharing vision ‘I have a dream . . .’ Talking specific goals Talking strategy Story-telling Why things can be better What’s in it for you Selecting a communication strategy

Contents

Research themes Key readings Suggestions for further reading Selected case material Discussion points

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16.4 Entrepreneurship and strategic foresight Summary of key ideas Research themes Key readings Suggestions for further reading Selected case material Discussion points

326 327 328 328 328 330 333

Chapter 17 The entrepreneurial mission

334

17.1

Why a well-defined mission can help the venture It articulates the entrepreneur’s vision It encourages analysis of the venture It defines the scope of the business It provides a guide for setting objectives It clarifies strategic options It facilitates communication about the venture to potential investors It draws together disparate internal stakeholder groups It provides a constant point of reference during periods of change It acts as an aide-mémoire for customers and suppliers Key features of the mission 17.2 What a mission statement should include 17.3 Developing the mission statement Development through consensus Development by imposition Choice of approach 17.4 Articulating the mission statement Summary of key ideas Research themes Key readings Suggestions for further reading Selected case material Discussion points

334 334 334 335 335 335 335 335 336 336 336 337 338 339 340 340 340 341 341 342 342 343 348

Chapter 18 The strategy for the venture

349

18.1

349 349 352

18.2

18.3

What is a business strategy? Strategy content Strategy process in the entrepreneurial business The link between existing strategy content and the strategy content achieved in the future The link between existing strategy content and desired strategy content The link between desired strategy content and achieved strategy content Controlling strategy process in the venture Decisions relating to the development of the mission Decisions relating to the development of strategy

354 355 356 357 357 357

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358 358 358 359 360 361 362 363 363 364 366 367 367 368 369 373

Chapter 19 The business plan: an entrepreneurial tool

374

19.1 19.2

374 375 376 376 376 376 377 379 380 381 381 382 382 382 389 389 389 389 389 390 390 391 391 392 393 397

Planning and performance The role of the business plan As a tool for analysis As a tool for synthesis As a tool for communication As a call to action 19.3 What a business plan should include 19.4 Business planning: analysis and synthesis 19.5 Business planning: action and communication Investors Employees Important customers Major suppliers 19.6 Structuring and articulating the business plan: the Pyramid Principle 19.7 Strategy, planning and flexibility Focus on ends rather than means Challenge assumptions Model scenarios Create strategic flexibility Leave space to learn Summary of key ideas Research themes Key readings Suggestions for further reading Selected case material Discussion points

Contents

Decisions relating to the control of resources Decisions relating to the way objectives will be set, monitored and rewarded 18.4 Why a well-defined strategy can help the venture A strategy . . . Vision, mission and strategy in the entrepreneurial process 18.5 An overview of entrepreneurial entry strategies Product–market domain Competitive approach Choice of entry strategy 18.6 Talking strategy: entrepreneurial strategic heuristics Summary of key ideas Research themes Key readings Suggestions for further reading Selected case material Discussion points

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Contents

Chapter 20 Gaining financial support: issues and approaches

398

20.1

398 399 399 399 399 400 400 400 400 401 401 401 402 402 402 404 404 405 405 405 406 407 407 407 408 408 408 408 408 409 409 409 409

Sources and types of financial investment Entrepreneur’s own capital Informal investors Internal capital networks Retained capital Business angels Retail banking Corporate banking Venture capital Public flotation Government Commercial partnerships Micro-finance Choice of capital supply 20.2 How backers select investment opportunities Stage 1: Deal origination Stage 2: Deal screening Stage 3: Deal evaluation Stage 4: Deal structuring Stage 5: Post-investment activity 20.3 The questions that investors need answering Is the venture of the right type? How much investment is required? What return is likely? What is the growth stage of the venture? What projects will the capital be used for? What is the potential for the venture? What are the risks for the venture? How does the investor get in? How does the investor get out? What post-investment monitoring procedures will be in place? What control mechanisms will be available? Communication skills 20.4 Playing the game: game-theoretical ideas on the entrepreneur–investor relationship Practical resolution of the dilemma Summary of key ideas Research themes Key readings Suggestions for further reading Selected case material Discussion points

410 415 417 418 419 419 422 425

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427

Chapter 21 The strategic window: identifying and analysing the gap for the new business

429

21.1

Why existing businesses leave gaps in the market Established businesses fail to see new opportunities New opportunities are thought to be too small Technological inertia Cultural inertia Internal politics Anti-trust actions by government Government intervention to support the new entrant Economic perspectives on entrepreneurial gaps A word of warning 21.2 The strategic window: a visual metaphor Seeing the window: scanning for new opportunities Locating the window: positioning the new venture Measuring the window Opening the window: gaining commitment Closing the window: sustaining competitiveness Summary of key ideas Research themes Key readings Suggestions for further reading Selected case material Discussion points

429 429 430 430 430 431 431 431 431 433 433 434 434 435 435 435 435 436 436 436 437 440

Chapter 22 Seeing the window: scanning for opportunity

441

22.1

441 441 441 442 442 442 442 443 443 443 444 444 445 445 445 445

22.2

Types of opportunity available The new product The new service New means of production New distribution route Improved service Relationship building Methods of spotting opportunities Heuristics Problem analysis Customer proposals Creative groups Market mapping Features stretching Features blending The combined approach

Contents

Part 5 Initiating and developing the new venture

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22.3

Screening and selecting opportunities How large is the opportunity What investment will be necessary? What is the likely return? What are the risks? 22.4 Entrepreneurial innovation Summary of key ideas Research themes Key readings Suggestions for further reading Selected case material Discussion point

446 446 446 446 446 447 450 450 451 451 452 457

Chapter 23 Locating and measuring the window: positioning the new venture

458

23.1 23.2

The idea of positioning Stategic positioning Stage in value addition Customer segments addressed Customer needs addressed Means of addressing needs 23.3 Market positioning 23.4 The need for information 23.5 Analysing the market and identifying key issues 23.6 Analysing the opportunity 23.7 Analysis and planning formality Summary of key ideas Research themes Key readings Suggestions for further reading Selected case material Discussion points

458 459 459 460 461 461 462 464 465 466 466 468 468 471 471 472 474

Chapter 24 Opening the window: gaining commitment

475

24.1

475 476 476 476 477 478 478 479 479 479 480

24.2

Entering the network Relationship with investors Relationship with suppliers Relationship with employees Relationship with customers Gaining financial investment: key issues What level of investment is required? Where is the investment to come from? What is the capital structure of the investment to be? How will the investors be approached? What proposition is to be made to the investors?

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Gaining human commitment What human skills are required? Where will those skills be obtained from? What will be offered to attract those who have the skills? How will potential employees be contacted? How will potential employees be evaluated? Should a skill be in-house or should it be hired when necessary? Leadership and motivation strategy 24.4 Establishing a presence with distributors Summary of key ideas Research themes Key readings Suggestions for further reading Selected case material Discussion points

480 481 481 481 481 482 482 483 483 485 485 486 486 487 492

Chapter 25 Closing the window: sustaining competitiveness

493

25.1

Long-term success and sustainable competitive advantage Competitive advantage The sources of competitive advantage 25.2 How competitive advantage is established Considerations in relation to cost advantages Considerations in relation to knowledge advantages Considerations in relation to relationship advantages Considerations in relation to structural advantages 25.3 Maintaining competitive advantage Sustaining cost advantages Sustaining knowledge advantages Sustaining relationship advantages Sustaining structural advantages Summary of key ideas Research themes Key readings Suggestions for further reading Selected case material Discussion points

493 494 494 499 500 501 502 502 503 503 504 505 506 507 508 508 508 510 513

Chapter 26 The dimensions of business growth

514

26.1

514 514 515 515 516 517 519

26.2 26.3

Growth as an objective for the venture Growth and strategy Growth and resources Growth and risk The process of growth Financial evaluation of growth The balance sheet

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24.3

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The profit and loss account Ratio analysis 26.4 Financial growth The underlying performance (return on investment) of the venture The growth in value of the venture The trend in the risk of the venture The dividends yielded by the venture 26.5 Strategic growth Growth and cost advantages Growth and knowledge advantages Growth and relationship advantages Growth and structural advantages 26.6 Structural growth Organisation size Operational technology Organisation strategy The organisation’s environment Power, control and organisational politics 26.7 Organisational growth The resource requirement approach The resource acquisition approach 26.8 Controlling and planning for growth 26.9 The venture as a theatre for human growth 26.10 Conceptualising growth and organisational change Life cycle Evolution The dialectic The trialectic Teleology Chaos Summary of key ideas Research themes Key readings Suggestions for further reading Selected case material Discussion points

519 520 521 521 521 522 523 523 524 528 528 530 530 531 532 532 533 533 533 535 536 538 539 540 540 541 542 543 544 544 546 546 548 548 549 553

Chapter 27 Consolidating the venture

554

27.1 27.2 27.3

554 555 557 558 559 559 559

What consolidation means Building success into consolidation Encouraging intrapreneurship Entrepreneur’s comfort Decision-making control Internal politics Rewards for the intrapreneur

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560 560 561 561 562 565

Chapter 28 Making your contribution: researching entrepreneurship

566

28.1 28.2

Entrepreneurship: an adolescent discipline Entrepreneurship: the research field The Low and MacMillan classification scheme The Ucbasaran et al. classification scheme The Meyer et al. classification scheme 28.3 Research paradigms in entrepreneurship 28.4 Research methodology in entrepreneurship Deductive–inductive theorising Survey methods Delphi analysis Econometrics Experimentation Content analysis Discourse analysis Cognitive mapping Case study construction and analysis Ethnomethodology and hermeneutics Summary of key ideas Research themes Key readings Suggestions for further reading

566 569 570 571 572 575 578 578 578 579 579 579 579 580 580 580 581 582 582 583 583

Index

586

Contents

Summary of key ideas Research themes Key readings Suggestions for further reading Selected case material Discussion point

Supporting resources Visit www.pearsoned.co.uk/wickham to find valuable online resources For instructors • Complete, downloadable Instructor’s Manual • PowerPoint slides that can be downloaded and used for presentations For more information please contact your local Pearson Education sales representative or visit www.pearsoned.co.uk/wickham

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Preface to the fourth edition

When the first edition of Strategic Entrepreneurship was conceived, entrepreneurship was only just beginning to properly establish itself as a distinct and free-standing field within organisational and management studies. In its early days, while exciting, the field had a tendency to be a bit of a magpie: it would ‘steal’ the bright shiny bits of other management disciplines. So we had ‘entrepreneurial’ marketing, ‘entrepreneurial’ finance, ‘entrepreneurial’ strategy and so on. This is not to be critical. Entrepreneurs did all these things (though they might not always have compartmentalised their activities in the same way as business schools organise learning), and it was important that the burgeoning field of entrepreneurship looked at the way entrepreneurs undertook them – not least because they were often very successful at doing them. Nonetheless, as it matures, the field of entrepreneurship is developing its own content, agenda and concerns. The fourth edition of Strategic Entrepreneurship aims to reflect these in a more focused way. A number of changes have been made. While the book still retains the ‘strategic window’ metaphor as its core organising principle, some new material has been added, some old material withdrawn and the resulting content reorganised. New material first. This falls into three main areas. First, interest in social or public entrepreneurship is growing rapidly, not least as the boundaries between the private and the public, and the self-interested and the charitable break down. Strategic Entrepreneurship has always taken the stance that entrepreneurship is a style of management, and this seems an ideal platform from which to take the lessons of forprofit entrepreneurship into not-for-profit entrepreneurship. Second, as the pace of globalisation builds, it is increasingly necessary that the student of entrepreneurship should have at least some insight into the role of entrepreneurship in global economic development and the debate this engenders. Finally, while the notion of the ‘entrepreneurial personality’ seems to be waning as a conceptual approach and research platform, the notion of entrepreneurial cognition is waxing to fill the space. The application of insights from cognitive psychology to developing understanding of the entrepreneur and the entrepreneurial process offers great promise and, again, the student of entrepreneurship should at least be aware of the issues and the agenda. Introducing some ideas on entrepreneurial cognition also allows a particular lacuna in the book to be addressed. While dismissing the notion of the entrepreneur as a risk taker from an economic perspective is, I still feel, quite proper, this does not exhaust the notion of risk from a cognitive, psychological or social viewpoint, and the entrepreneur engages with the concept at these levels as much as, if not more than, simply at the economic. In this edition I take the chance to address this lacuna. Each of these three additions is represented by its own chapter, but all inspire new ideas to be drawn in throughout the text. Space is limited. New additions mean some material has to be lost. I have concentrated on those areas where it is only right the magpie gives back some of its shiny toys; especially those areas that are receiving less

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Preface to the fourth edition

emphasis in modern courses in entrepreneurship as many traditional subject areas take a greater interest in their entrepreneurial aspects. As a result, they can be dealt with far more effectively in dedicated textbooks. In the main, these are topics such as general strategy, organisational development, marketing and finance. The reorganisation is aimed at making the book a better tool for course design and support. It is not, I hope, so radical that traditional users of Strategic Entrepreneurship will not be able to find their way around the text. Previous users of the book will still recognise chapter titles. Those chapters that have been removed from this edition are still available on the text’s dedicated website. The book now has a five-part structure. Part 1: The entrepreneur as an individual (Chapters 1 to 5) addresses fundamental ideas on the definition and classification of entrepreneurs and psychological approaches to their characterisation. It also considers the growth in cognitive approaches to understanding entrepreneurship and brings in introductory ideas on the economic psychology of risk behaviour. Part 2: The entrepreneur in the macroeconomic environment (Chapters 6 to 9) develops a largely economic perspective on the entrepreneur, considering different perspectives on the entrepreneur’s function within the broader economic system. A new chapter on the role of entrepreneurship on economic development is now included. This new edition also introduces ideas on social entrepreneurship – entrepreneurial management outside the for-profit sector. The social responsibility of the entrepreneur to immediate stakeholders and the wider community is also considered. Part 3: The entrepreneurial process and new venture creation (Chapters 10 to 15) focuses on the entrepreneurial process, in particular the identification of new opportunities, planning resource requirements and the initiation of the venture. The potential and limitations of intrapreneurship – entrepreneurship within the established organisation – are reflected upon. Part 4: Choosing a direction (Chapters 16 to 20) brings some material forward (now ahead of the strategic window), as many students (quite properly) enter entrepreneurship through the portal of inventive creativity. The roles of entrepreneurial vision and mission in providing direction for the venture are considered. Part 5: Initiating and developing the new venture (Chapters 21 to 28) is now dedicated to the strategic window metaphor, which is structured as it has been in all editions. The strategic window metaphor now acts as a template to integrate, and add to, ideas developed in the previous chapters. The chapter on researching entrepreneurship has been moved to the end of the book so as not to disturb the main flow of ideas. There is a deeper discussion of the methodologies adopted for researching entrepreneurship. This should support the research themes section at the end of each chapter. Other changes are relatively minor. One aspect of the book that many have found useful is the fulsome list of suggestions for further reading (updated in this edition – it is hard to keep up in this fast-growing field). These are particularly useful for students undertaking projects in entrepreneurship. However, the number of citations can lead to a feeling of ‘where do I start?’ So I have highlighted two (occasionally

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three, if short) papers as key readings that I feel provide a strong introduction to the issues raised in the chapter. These would make excellent tutorial reading at both undergraduate and postgraduate level. To maintain focus, I have also removed some of the older and less immediately relevant references from the suggestions for further reading. The full list of references can be found on the text’s dedicated website. The research themes have proved to be a well-received pedagogical extra, not just as inspiration for active research projects but also as tutorial discussion points. They have been retained and enhanced. Also to support tutorial activity, new and up-todate selected readings based on Financial Times articles, with suggested discussion points, are included. The tutor will find a guide to using these articles in teaching in an Instructor’s Manual on the website. These changes do, I feel, reflect the very positive maturing of entrepreneurship as an independent discipline. As noted above, historical chapter titles have been retained so that those using the book on an established course that they wish to retain will still be able to guide students to the appropriate material. I hope the changes will meet with approval. If you encounter any problems, let me know. Once again, my sincerest thanks to Matthew Walker and his team at Pearson, who have made the project both enlightening and enjoyable. Thanks also to the reviewers of the fourth edition and their positive, focused and illuminating comments: Mary Deuchar, Hertfordshire (UK); Laura Wilson, Southampton (UK); Doug Engelbrecht, Durban (South Africa); Louis Edwards, Glamorgan (UK); Pegram Harrison, Regents (UK); Roberto Floren, Nyenrode (Netherlands); Per Blenker, Econ (Denmark); and Anders Bordum, CBS (Denmark). My personal thanks to David Allison, Ted Fuller, John Mark, John Wilson and colleagues too numerous to mention. Philip A. Wickham January 2006

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We are grateful to the Financial Times Limited for permission to reprint the following material: Page 47: Jonathan Guthrie ‘Why is it better to be bootstrapped than well heeled’, © Financial Times, 7 December 2005; 49: Jon Boone ‘Jaeger owner sets up fund to support fashion students’, © Financial Times, 26 January 2006; 68: Jean Eaglesham ‘Dyson seeks to brush up industry’s image’, © Financial Times, 19 November 2005; 69: Andrew Baxter, FT report ‘Saïd MBA was “best year of my life”’, © Financial Times, 30 January 2006; 115: Jonathan Guthrie ‘Why buy-out terms mean you should watch your back’, © Financial Times, 1 February 2006; 117: Andrew Ward: ‘A venture born of ignorance’, © Financial Times, 21 December 2005; 155: Kevin Allison ‘An alternative energy supply swimming against the tide’, © Financial Times, 21 December 2005; 175: Jonathan Moules ‘How start-ups are helping countries to catch up’, © Financial Times, 18 January 2006; 188: Nicholas Timmins ‘Private providers offered fresh opportunities in health shake-up’, © Financial Times, 31 January 2006; 189: Andrew Baxter ‘Course choices that help MBAs make the world a better place’, © Financial Times, 30 January 2006; 213: Fiona Harvey and Richard McGregor ‘The polluter pays: how environmental disaster is straining China’s social fabric’, © Financial Times, 27 January 2006; 216: Stefan Wagstyl ‘New Bosnia chief makes boosting economy priority’, © Financial Times, 31 January 2006; 230: Andy Webb-Vidal ‘A shot of rum turns crisis into opportunity’, © Financial Times, 25 January 2006; 233: Jonathan Moules ‘The driving workforce behind a successful food distribution group’, © Financial Times, 21 January 2006; 253: Jonathan Guthrie ‘The geeks have inherited the earth – and it is hell for efficiency’, © Financial Times, 25 January 2006; 269: Andrew Jack ‘When language gives an industry the edge’, © Financial Times, 26 January 2006; 271: Peter Marsh ‘Entrepreneur fires broad attack on manufacturers’, © Financial Times, 17 January 2006; 289: Paul Tyrell ‘The security of mutual support’, © Financial Times, 25 January 2006; Andrew Bolger ‘Biotechnology chief lauds Scottish skills’, © Financial Times, 6 February 2006; 298: Paul Tyrell ‘Smart companies take on “intrapreneurial’ spirit”, © Financial Times, 25 July 2005; 301: Julian Birkinshaw and Andrew Campbell ‘Know the limits of corporate venturing’, © Financial Times, 9 August 2004; 314: Peter Marsh ‘An ambitious man of steel’, © Financial Times, 4 February 2006; 316: Michiyo Nakamoto and David Pilling with additional reporting by Barney Johnson ‘Rakuten head hits out over accounting rules’, © Financial Times, 23 February 2005; 330: William Hall ‘Expansion boosts area’s prosperity’, © Financial Times, 23 February 2005; 332: Adrian Michaels ‘Breaking with tradition in Italian business’, © Financial Times, 28 February 2005; 343: Jon Boone ‘Traditionalist embraces change’, © Financial Times, 23 February 2005; 346: Deborah Brewster ‘The chief executive who saved the best for last, © Financial Times, 25 July 2005; 369: Peter Marsh ‘Dumpy bottles for baby prove a world beater’, © Financial Times, 28 July 2005; 370: Tim Burt ‘A business groomed for success’, © Financial Times, 19 July 2005; 393: Ben King ‘The entrepreneur who wants to give it all away’, © Financial Times, 20 January 2006; 396: Adrian Michaels ‘Mediobanca to target perceptions’, © Financial Times, 15 September 2005; 422: Jonathan Moules

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‘Inventor taps into funding support’, © Financial Times, 17 December 2005; 423: Alexander Jolliffe ‘I am sceptical about people who are too smooth’, © Financial Times, 22 January 2005; 437: Virginia Marsh ‘The merino makes a break from the flock for a life of luxury’, © Financial Times, 17 August 2005; 439: Jim Pickard ‘As new investors rush in, old hands look further afield’, © Financial Times, 17 August 2005; 452: Alicia Clegg ‘Tricks of the truckers’ trade’, © Financial Times, 14 December 2005; 454: Chris Nuttall ‘Way of the web: start-ups map the route as big rivals get Microsoft in their sights’, © Financial Times, 17 November 2005; 472: Miranda Green ‘College Friends with designs on selling arts and craft’, © Financial Times, 16 January 2006; 473: Neil Buckley and Sarah Laitner ‘Heineken increases Russian Portfolio with sixth buy in 12 months’, © Financial Times, 18 August 2005; 510: Bertrand Benoit ‘How the Mittelstand found its champion’, © Financial Times, 23 March 2005; 513: Tim Johnston ‘Rank to buy control of CCH Wood Products’, © Financial Times, 18 August 2005; 549: Martin Arnold and Andrew Jack ‘Ban the bureaucracy and bring in the bulldozers’, © Financial Times, 17 October 2005; 551: Geoff Dyer ‘South Beauty’s chic chow plans to win the West, © Financial Times, 1 February 2006; 564: Neil Buckley ‘The calm reinventor: man in the news A.G. Lafley’, © Financial Times, 29 January 2005. We are grateful to the following for permission to use copyright material: Page 28: Syl Tang ‘Football set to score stylishly’ from the Financial Times, 21 January 2006, © Syl Tang; 30: Amy Raphael ‘Clothes maketh the man’ from the Financial Times, 14 January 2006, © Amy Raphael; 87: Stephen Overell ‘Management training for the young’ from the Financial Times, 7 November 2005, © Stephen Overell; 89: Emma Crichton-Miller ‘TBA’ from the Financial Times, 28 January 2006, © Emma Crichton-Miller; 157: Laura Cohn ‘Breaking the mould in Notting Hill and beyond’ from the Financial Times, 4 February 2006, © Laura Cohn; 177: Yasheng Huang ‘What China could learn from India’s slow and quiet rise’ first published in the Financial Times, 24 January 2006, © Yasheng Huang; 251: Michael Schrage ‘How and Why giveaways are changing the rules of business’ from the Financial Times, 7 February 2006, © Michael Schrage; 487: Edi Smockum ‘The personal touch’ from the Financial Times, 17 September 2005, © Edi Smockum; 490: Dalia Fahmy ‘Candy-coloured “blobjects” for all’ from the Financial Times, 17 September 2005, © Dalia Fahmy; 563: Frank Partnoy ‘When Disney wishes upon a Pixar’ from the Financial Times, 25 January 2006, © Frank Partnoy.

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Guided tour

Chapter overview and Key learning outcome – identify the key learning points at the start of the chapter and at point of entry in the text. CHAPTER 4

Entrepreneurship, cognition and decision making Chapter overview Cognitive psychology is providing new and profound insights into the thinking of entrepreneurs and how they engage with the entrepreneurial process. This chapter considers the key elements of cognitive psychology with a focus on the agenda for entrepreneurship. Two specific aspects of entrepreneurial cognition are considered: decision making (drawing a distinction between normative, descriptive and prescriptive accounts), and perception of and response to risk (drawing a distinction between rational and natural responses).

4.1 Cognitive aspects of entrepreneurship

Key learning outcome

• • • • •

Cognitive psychology is a relatively new but increasingly important avenue of psychological explanation and research. Cognitive psychology deals with the way in which humans obtain, store, process and use information about the world. So it is interested in:

Part 2 The entrepreneur in the macroeconomic environment

An appreciation of the cognitive approach to understanding entrepreneurial behaviour and the significance of individual cognitive style and strategy in entrepreneurial decision making.

• attention and perception, the initial processing of raw sensual experiences; • storage of information in memory systems – both working memory and long-term memory; • the way in which knowledge is stored, accessed and created, induction and deduction processes; • judgement and decision making – the use of processed information to choose particular course of action; thinking and problem solving; learning, skill and expertise development; language, use, acquisition and comprehension; creativity and inventiveness; the way in which information is manipulated by mental routines to drive decision making.

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Research themes Growth in interest in social entrepreneurship Using an internet search engine, assess by year (say starting in 1990) how many articles include the term ‘social entrepreneur’ (in the article title as well as the text). Break your analysis down into different sources, say: newspapers, general magazines, business magazines and academic articles. Sample some (you will not be able to do them all, I promise!). Think about your sampling regime. Analyse your findings. What is the pattern of growth? Who is driving the debate about social entrepreneurship– and in what terms?

Review and commentary Undertake a review of the academic literature on social entrepreneurship. The readings suggested below are an excellent start. Develop a commentary on the theme: ‘Strategic management techniques developed for commercial entrepreneurs are concerned primarily with generating profits and so are not effective for guiding the social entrepreneur’. Develop arguments to support and/or criticise this proposition. An alternative project would be to organise a tutorial group into two groups, one briefed to support the argument, the other to challenge it and organise a debate. Deliver a summarising commentary of your own at the end. (You may even wish to video the debate as a formal project submission.)

Key readings Two readings that explore the meaning of the term ‘social entrepreneur’ and its relationship to conventional ‘for-profit’ entrepreneurship. Both consider future developments and possible research agendas. Mort, G.S., Weerawardena, J. and Carnegie, K. (2003) ‘Social entrepreneurship: towards conceptualisation’, International Journal of Non-profit and Voluntary Sector Marketing, Vol. 8, No. 1, pp. 76–88. Roberts, D. and Woods, C. (2005) ‘Changing the world on a shoestring: the concept of social entrepreneurship’, University of Auckland Business Review, Autumn, pp. 45–51.

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Suggestions for further reading

Selected case material CASE 3.1

19 November 2005

Barendsen, L. and Gardner, H. (2004) ‘Is the social entrepreneur a new type of leader?’, Leader to Leader, No. 34, pp. 43–50.

FT

Boyett, I. (1977) ‘The public sector entrepreneur – a definition’, International Journal of Entrepreneurial Behaviour and Research, Vol. 3, No. 2, pp. 77–92.

Dyson seeks to brush up industry’s image JEAN EAGLESHAM The ‘you’re fired!’ ethos of The Apprentice television show has been criticised by a leading entrepreneur, who warns that the cutthroat portrayal of business risks perpetuating the historic British aversion to working in industry. In an interview with the Financial Times, James Dyson praised Dragons’ Den, the BBC 2 show where budding entrepreneurs compete for investment, as a ‘great help’ to efforts to attract graduates to manufacturing. In contrast, the format for BBC 2’s The Apprentice, where Sir Alan Sugar eliminates would-be Amstrad protégés ruthlessly, was a ‘bit unfortunate’, said Mr. Dyson. ‘Alan Sugar’s a great entrepreneur but it’s a pity that firing people is the catchphrase.’ He warned that television tended to reinforce people’s impression of industry, underscoring bleak images assimilated over the decades from the dark satanic mills of Victorian literature through to the mass strikes of the 1970s. Citing a recent show featuring an unethical executive, Mr. Dyson protested: ‘I don’t think businessmen cheat any more than anyone else.’ The criticism matters because of Mr. Dyson’s rare position among business leaders, as an inventor who has developed a good idea into a global brand. The seemingly unstoppable success of his eponymous vacuum cleaners – which overtook Hoover in the US this year, becoming the biggest selling brand by value – has made him a fortune estimated at £800m. It has also given him considerable influence as a voice on government policy.

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Ministers appear to worship at the Dyson shrine. Alan Johnson, the trade and industry secretary, marked Enterprise Week on Tuesday by lauding the Norfolk inventor as one of two British entrepreneurs – along with Richard Branson – who epitomised the spirit of risktaking and determination the government hoped to foster. He told delegates entrepreneurs were ‘essential to our wealth, health and happiness’. Unfortunately for the government, this admiration is not reciprocated by the entrepreneur. Mr. Dyson might have acted as a government adviser but he is no fan of officialdom. Asked if he had become disillusioned with Tony Blair, he said: ‘I don’t think I was expecting an awful lot in the first place. Nothing’s really been done to help industry for the past 50 years.’ This low level of expectation does not prevent Mr. Dyson from fulminating about the perceived failure of the government to give sufficient backing to innovation. He lauds Gordon Brown’s decision to allow 120 per cent tax relief on research and development as a ‘good move – it’s a pity it came so late, but at least he did it.’ But Mr. Dyson wants the chancellor to go further in next month’s pre-Budget report, by expanding the R&D tax credit to offer 160 per cent relief. The cost would be rewarded over time, Mr. Dyson argues, saying the ‘government should take a long-term view, if a government ever will do that’. This scepticism about ministerial willingness to give sufficient fiscal incentives for

Research themes – identify topical areas for students to pursue in their research or project work.

Selected case material – recent articles from the Financial Times illustrate entrepreneurship in the real-life context of business and are followed by discussion questions.

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Prologue: entrepreneurship in the modern world

Of all those who feature in the management of the modern world economy, it is entrepreneurs who most attract our attention. We all take some view of them. We may see entrepreneurs as heroes: as self-starting individuals who take great personal risk in order to bring the benefits of new products to wider world markets. We may express concern at the pace of economic and social change entrepreneurs bring and of the uncertainty they create. We may admire their talents, or we may question the rewards they get for their efforts. Whatever our instinctive reaction to them, we cannot ignore the impact entrepreneurs have on our world and our personal experience of it. The modern world is characterised by change. Every day we hear of shifts in political orders, developments in economic relationships and new technological advancements. These changes feed off each other and, increasingly, they are global. Developments in information technology allow capital to seek new business investment opportunities ever more efficiently. Success is sought out more quickly; failure punished more ruthlessly. Customers expect continuous improvement in the products and services they consume. Some have argued that the rate of change in the modern world is no different from, or even less than, what it has been in the past. This is probably true. But we do seem to be more acutely aware of change and consider it to be an issue more than past generations. One of the key changes in the modern world is that businesses are having to become more responsive. In order to keep their place in their markets, they are having to innovate more quickly. In order to compete, they are having to become more agile. This is an issue not just for profit-making organisations but for all corporate bodies. The boundary between the world of the ‘market’ and the public domain is being pushed back and blurred. Consequently, the world is demanding both more entrepreneurs and more of entrepreneurs. In the mature economies of the western world they provide economic dynamism. The fast-growing businesses they create are now the main source of new job opportunities. The post-war growth economies of the Pacific Rim (albeit with a recent stall) are driven by the successes of thousands of new ventures. It is individual entrepreneurs who must restructure the post-communist countries of eastern and central Europe and provide them with vibrant market economies (Benacek, 1995; Luthens et al., 2000; Fogel, 2001; Peng, 2001; Puffer et al., 2001; McMillan and Woodruff, 2002). Looking back over the fifteen or so years since the collapse of communism in the west, it seems this is proving to be a difficult challenge. In the developing world, entrepreneurs are increasingly meeting the challenge of creating new wealth and making its distribution more equitable (Ahwireng-Obeng and Piaray, 1999; Zapalska and Edwards, 2001; Trulsson, 2002).

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Change presents both opportunities and problems. The opportunities come in the shape of new possibilities, and the chance of a better future. The problems lie in managing the uncertainty these possibilities create. By way of a response to this challenge, entrepreneurs must aim to take advantage of the opportunities while controlling and responding to the uncertainties. This response must be reflected in the way that organisations are managed. As we shall see, this is the fundamental responsibility of entrepreneurs. To make sense of this responsibility, and how it is managed, we must understand entrepreneurship in all its aspects. This book aims to provide an insight into entrepreneurship that will be valuable to practising managers, to students of management (who will become the entrepreneurial managers of the future) and to those who research and investigate entrepreneurship. It is for those who want not only to be more informed about entrepreneuriship but also to be more entrepreneurial. It does this by taking a particular perspective on entrepreneurship. This perspective is readily summarised as follows:

• Entrepreneurship is a style of management. • Entrepreneurial management aims at pursuing opportunity and driving change. • Entrepreneurial management is strategic management, that is, management of the whole organisation, in a competitive environment.

• Entrepreneurism is an approach to management that can be learnt. As we will discover, it is not easy to define, exactly, what an entrepreneur is, or is not. This book takes a straightforward view. It contends that entrepreneurs are just managers who make entrepreneurial decisions. This book explores these decisions, what they are, what they involve, and the actions necessary to see them through. Understanding is as much about recognising our misconceptions as it is about gaining knowledge. To a greater extent than other economic actors – managers, investors, bureaucrats – the entrepreneur is a somewhat mythical figure. If we are to get to grips with entrepreneurship and recognise the potential to be entrepreneurial, the myths that surround the entrepreneur must be dispelled. For example, this book rejects the notion that the entrepreneur is someone who is ‘born’ to achieve greatness. It also dismisses (with some important qualifications) the idea that entrepreneurs are behaviourally ‘determined’ by psychological forces beyond their control, or that the entrepreneur must have a particular type of personality to be successful. Rather, we will regard the entrepreneur simply as a manager who knows how to make entrepreneurial decisions and how to follow them through. Discussion will not be limited to the issues of owning businesses or starting new ones. These issues may be an important part of entrepreneurship but they are not its entirety. Nor are they an essential component of entrepreneurship: what makes someone an entrepreneur is not their historical or legal relationship to an organisation but the changes they create both with it and within it. In addition to exploring entrepreneurial management, this book also intends to ‘demystify’ the entrepreneur. This is not an attempt to devalue them or the work they do. In fact, the opposite is intended. It recognises entrepreneurial success as the result of personal application, hard work and learning, not as some innate imperative. What this book does aim to

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Key readings Two papers that succinctly summarise the philosophy of a strategic approach entrepreneurship, a philosophy espoused by this book are: Sandberg, W.R. (1992) ‘Strategic management’s potential contributions to a theory of entrepreneurship’, Entrepreneurship Theory and Practice, Spring, pp. 73–90. Thompson, J.L. (1999) ‘A strategic perspective of entrepreneurship’, International Journal of Entrepreneurial Behaviour and Research, Vol. 5, No. 6, pp. 279–96.

Prologue: entrepreneurship in the modern world

do, above all else, is make entrepreneurship accessible by demonstrating that good entrepreneurship is based on management skill, and that the entrepreneurial path can be opened by managers who wish to follow it, and recognise that success follows from personal effort, knowledge and practice, rather than a pre-ordained destiny.

Both make good preparatory reading.

Suggestions for further reading Ahwireng-Obeng, F. and Piaray, D. (1999) ‘Institutional obstacles to South African entrepreneurship’, South African Journal of Business Management, Vol. 30, No. 3, pp. 78–85. Benacek, V. (1995) ‘Small business and private entrepreneurship during transition: the case of the Czech Republic’, Eastern European Economics, Vol. 33, No. 2, pp. 38–73. Bettis, R.A. and Hitt, M.A. (1995) ‘The new competitive landscape’, Strategic Management Journal, Vol. 16, pp. 7–19. Carroll, G.R. (1994) ‘Organizations . . . the smaller they get’, California Management Review, Vol. 37, No. 1, pp. 28–41. Duane, I.R., Hitt, M.A. and Simon, D.G. (2003) ‘A model of strategic entrepreneurship: The construct and its dimensions’, Journal of Management, Vol. 29, No. 6, pp. 963–89. Fogel, G. (2001) ‘An analysis of entrepreneurial environment and enterprise devevelopment in Hungary’, Journal of Small Business Management, Vol. 39, No. 1, pp. 102–9. Luthens, F., Stajkovic, A.D. and Ibrayeva, E. (2000) ‘Environmental and psychological challenges facing entrepreneurial development in transitional economies’, Journal of World Business, Vol. 35, No. 1, pp. 95–110. McMillan, J. and Woodruff, C. (2002) ‘The central role of entrepreneurs in transition economies’, Journal of Economic Perspectives, Vol. 16, No. 3, pp. 153–70. Messeghem, K. (2003) ‘Strategic entrepreneurship and managerial activity in SMEs’, International Small Business Journal, Vol. 21, No. 2, pp. 197–200. Moore, J.F. (1993) ‘Predators and pray: a new ecology of competition’, Harvard Business Review, May/June, pp. 75–86.

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Peng, M.W. (2001) ‘How entrepreneurs create wealth in transition economies’, Academy of Management Executive, Vol. 15, No. 1, pp. 95–110. Puffer, S.M., McCarthy, D.J. and Peterson, O.C. (2001) ‘Navigating the hostile maze: a framework for Russian entrepreneurship’, Academy of Management Executive, Vol. 15, No. 4, pp. 24–36. Trulsson, P. (2002) ‘Constraints on growth-orientated enterprises in the southern and eastern African region’, Journal of Developmental Entrepreneurship, Vol. 7, No. 3, pp. 331–9. Zapalska, A.M. and Edwards, W. (2001) ‘Chinese entrepreneurship in a cultural and economic perspective’, Journal of Small Business Management, Vol. 39, No. 3, pp. 286–92.

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CHAPTER 1

The nature of entrepreneurship Chapter overview This chapter is concerned with developing an overarching and integrated perspective of the entrepreneur and entrepreneurship. It reviews the great variety of approaches that have been taken to characterise the entrepreneur, highlighting the lack of agreement on a fundamental definition. Three broad approaches are considered. The first defines the entrepreneur as a manager undertaking particular tasks. The second regards the entrepreneur in economic terms and concentrates on the function they have in facilitating economic processes. The third regards the entrepreneur in psychological terms as an individual with a particular personality. The conclusions of the chapter are that the entrepreneur is best regarded as a manager and that entrepreneurship is a style of management.

1.1 What is entrepreneurship? The word ‘entrepreneur’ is widely used, both in everyday conversation and as a technical term in management and economics. Its origin lies in seventeenth-century France, where an ‘entrepreneur’ was an individual commissioned to undertake a particular commercial project by someone with money to invest. In its earliest stages this usually meant an overseas trading project. Key learning outcome Such projects were risky, both for the investor (who could lose An understanding of the main money) and for the navigator-entrepreneur (who could lose a lot approaches to understanding more!). The intertwining of the notions of entrepreneur, investor the nature of entrepreneurship. and risk is evident from the start. A number of concepts have been In particular, the distinction derived from the idea of the entrepreneur such as entrepreneurial, between the entrepreneur as a entrepreneurship and entrepreneurial process. The idea that the performer of managerial tasks, entrepreneur is someone who undertakes certain projects offers as an agent of economic an opening to developing an understanding of the nature of change and as a personality. entrepreneurship. Undertaking particular projects demands that particular tasks be engaged in with the objective of achieving

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specific outcomes and that an individual take charge of the project. Entrepreneurship is, then, what the entrepreneur does. Entrepreneurial is an adjective describing how the entrepreneur undertakes what they do. The fact that we use the adjective suggests that there is a particular style to what entrepreneurs do. The entrepreneurial process in which the entrepreneur engages is the means through which new value is created as a result of the project: the entrepreneurial venture. But this is very general. Offering a specific and unambiguous definition of the entrepreneur presents a challenge. This is not because definitions are not available, but because there are so many: the management and economics literature is well served with suggested definitions for the term ‘entrepreneur’. The problem arises because these definitions rarely agree with each other on the essential characteristics of the entrepreneur. Economists have long recognised the importance of the entrepreneur. But even in this discipline, known for its rigour, the entrepreneur remains an illusive beast. The difficulty lies not so much in giving entrepreneurs a role, but in giving them a role that is distinct from that of ‘conventional’ employed managers. Clearly, this is a distinction that is important but the difficulty is a longstanding one. Reviews of the issue by Arthur Cole, William Baumol, Harvey Leibenstein and James Soltow (all 1968) are still pertinent today and highlight issues still not fully resolved. William Gartner (1990) undertook a detailed investigation of this matter. He surveyed academics, business leaders and politicians, asking what they felt was a good definition of entrepreneurship. From the responses he summarised ninety different attributes associated with the entrepreneur. These were not just variations on a theme. Many pairs of definitions shared no common attributes at all. This suggested that the quest for a universal definition had not moved on since 1971 when Peter Kilby noted that the entrepreneur had a lot in common with the ‘Heffalump’, a character in A.A. Milne’s Winnie-the-Pooh, described as: a rather large and important animal. He has been hunted by many individuals using various trapping devices, but no one so far has succeeded in capturing him. All who claim to have caught sight of him report that that he is enormous, but disagree on his particulars. Gartner (1985) is led to conclude that ‘Differences among entrepreneurs and among their ventures are as great as the variations between entrepreneurs and non-entrepreneurs and between new and established firms’. While many definitions of the entrepreneur, or entrepreneurship, might be offered, any one definition is likely to result, in some cases at least, in a mismatch with our expectations. Intuitively, we know, or feel we know, who is, or is not, an entrepreneur. A particular definition will sometimes exclude those we feel from our experience are entrepreneurs or it will include those we do not think are entrepreneurs. This will be illustrated if we consider some of the attributes associated with the entrepreneur. For example, the notion of risk is one that is often associated with the entrepreneur. But this fails to distinguish between entrepreneurs who progress ventures and the investors who accept financial risk in backing those ventures. Actually founding a new business has been suggested as a defining characteristic (by Gartner himself). However, many well-known entrepreneurs have revitalised an existing organisation rather than building a new one from scratch. Some definitions emphasise the importance of entrepreneurship in providing the economic efficiency that maximises investors’ returns. Rewarding investors is important, but it is not the only objective that entrepreneurs pursue. Effective entrepreneurs work to reward

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all the stakeholders in their ventures, not just investors. Some actively seek profit-limiting social responsibilities. Innovation has also been suggested as a critical characteristic. However, innovation is an important factor in the success of all business ventures, not just the entrepreneurial. These points will be expanded upon in the discussion that follows. We should not be disheartened by this apparent failure. Entrepreneurship is a rich and complex phenomenon. We should not expect, or even desire, that it be pinned down by a single, universal definition. Its variety presents endless possibilities and offers meaning to specific ventures. It is this that makes it so useful and inviting an idea. In any case, being able to define something is not the same as understanding it. This book will not offer a concrete definition of entrepreneurship as a starting point. A better approach is to develop a broad picture of the entrepreneur, to characterise entrepreneurs and explore the process they engage in and then move on to create an understanding of how entrepreneurship provides a route to new wealth creation. As well as a managerial phenomenon, entrepreneurship has economic and social dimensions. The entrepreneur is an individual who lives and functions within a social setting. Entrepreneurs are not characterised by every action they take, but by a particular set of actions aimed at the creation of new wealth with their ventures. Wealth creation is a general managerial activity. Entrepreneurship is characterised by a particular approach to wealth creation. Recognising this gives us three directions from which we can develop an understanding. The entrepreneur can be considered as: • a manager undertaking an activity – i.e. in terms of the particular tasks they perform and the way they undertake them; • an agent of economic change – i.e. in terms of the effects they have on economic systems and the changes they drive; and as • an individual – i.e. in terms of their psychology, personality and personal characteristics (including peculiarities in cognitive strategy and style) . Each of these three aspects is reflected in the variety of definitions offered for entrepreneurship. The function of each perspective is not merely to characterise entrepreneurs but also to distinguish them from other types of people involved in the generation of wealth, such as investors and ‘ordinary’ managers. The next three sections explore each of these perspectives in more detail.

1.2 The entrepreneur’s tasks

Key

We recognise entrepreneurs, in the first instant, by what they actually do – by the tasks they undertake. This aspect provides one avenue for approaching entrepreneurs and the way in which they are different from other types of manager. A number of tasks have been associated with the learning outcome entrepreneur. Some of the more important are discussed below.

An understanding of the tasks that are undertaken by, and which characterise the work of, the entrepreneur.

Owning organisations Most people would be able to give an example of an entrepreneur and would probably claim to be able to recognise an

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entrepreneur ‘if they saw one’. A key element in this common perception is ownership of the organisation. While many entrepreneurs do indeed own their own organisations, using ownership as a defining feature of entrepreneurship can be very restricting. Modern market economies are characterised by a differentiation between the ownership and the running of organisations. Ownership lies with those who invest in the business and own its stock – the principals – whereas the actual running is delegated to professional managers or agents. These two roles are quite distinct. Therefore if an entrepreneur actually owns the business then he or she is in fact undertaking two roles at the same time: that of an investor and that of a manager. This is a distinction noticed as far back as 1803 by the classical French economist J.B. Say (Say, 1964 reprint). So, we recognise many people as entrepreneurs even if they do not own the venture they are managing. In developed economies, sophisticated markets exist to give investors access to new ventures and most entrepreneurs are active in taking advantage of these to attract investors. For example, when Frederick Smith started the distribution company Federal Express he put in only around 10 per cent of the initial capital. Institutional investors provided the rest. Do we think less of him as an entrepreneur because he diluted his ownership in this way? In fact, most would regard the ability to present the venture and to attract the support of investors as an important entrepreneurial skill. It should also be noted that ‘ordinary’ managers (whatever that means) are increasingly being given a means of owning part of their companies through share option schemes which are often linked to the company’s performance. While this may encourage them to be more entrepreneurial it does not, in itself, make them into entrepreneurs.

Founding new organisations The idea that the entrepreneur is someone who has established a new business organisation is one which would fit in with most people’s notion of an entrepreneur. The entrepreneur is recognised as the person who undertakes the task of bringing together the different elements of the organisation (people, property, productive resources and so forth) and giving them a separate legal identity. Many thinkers regard this as an essential characteristic of the entrepreneur (for example, Bygrave and Hofer, 1991). The Indian academic R.A. Sharma (1980) sees it as particularly important for entrepreneurship in developing economies. However, such a basis for defining the entrepreneur is sensitive to what we mean by ‘organisation’ and what we would consider to constitute a ‘new’ organisation. Many people we recognise as entrepreneurs ‘buy into’ organisations that have already been founded and then extend them (as Ray Kroc did with McDonald’s), develop them (as George and Liz Davis did with Hepworth’s, converting it into Next) or absorb them into existing organisations (as Alan Sugar did with Sinclair Scientific). Increasingly, management buyouts of parts of existing organisations are providing a vehicle for ordinary managers to exhibit their entrepreneurial talent. A more meaningful, though less precise, idea is that entrepreneurs make major changes in their organisational world. Making a major change is a broad notion. It is too ill-defined and subjective to be the basis for a rigorous definition. But it does go beyond merely founding the organisation, and it differentiates the entrepreneur from the manager who manages within existing organisational structures or makes only minor or incremental changes to them.

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Innovation is a crucial part of the entrepreneurial process. J.A. Schumpeter, the Austrian School economist (so called because he was one of a number of radical economists working in Vienna in the first half of the twentieth century), saw innovation as fundamental to the entrepreneurial process of wealth creation. A concise summary of his ideas can be found in a paper he wrote for the Economic Journal in 1928. Schumpeter saw entrepreneurs not so much as the lubricant that oiled the wheels of an economy, but as self-interested individuals who sought short-term monopolies based on some innovation. Once an entrepreneurial monopoly was established, a new generation of entrepreneurs came along with more innovations that aimed to supersede that monopoly in a process Schumpeter called ‘creative destruction’. Peter Drucker proposed that innovation is the central task for the entrepreneurmanager in his seminal book Innovation and Entrepreneurship (1985). Entrepreneurs must do something new or there would be no point in their entering a market. However, we must be careful here with the idea of innovation. Innovation, in a business sense, can mean a lot more than merely developing a new product or technology. The idea of innovation encompasses any new way of doing something so that value is created. Innovation can mean a new product or service, but it can also include a new way of delivering an existing product or service (so that it is cheaper or more convenient for the user, for example), new methods of informing the consumer about a product and promoting it to them, new ways of organising the company, or even new approaches to managing relationships with other organisations. These are all sources of innovation which have been successfully exploited by entrepreneurs. In short, innovation is simply doing something in a way which is new, different and better. The entrepreneur’s task goes beyond simply inventing something new. It also includes bringing that innovation to the marketplace and using it to deliver value to consumers. The innovated product or service must be produced profitably, in addition to being distributed, marketed and defended from the attentions of competitors, by a well-run and well-led organisation. No matter how important innovation might be to the entrepreneurial process, it is not unique to it. Most managers are encouraged to be innovative in some way or other. Being successful at developing and launching new products and services is not something that is witnessed only in entrepreneurial organisations. The difference between entrepreneurial innovation and ‘ordinary innovation’ is, at best, one of degree, not substance.

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Bringing innovations to market

Identification of market opportunity An opportunity is a gap in a market where the potential exists to do something better and thereby to create value. New opportunities exist all the time, but they do not necessarily present themselves. If they are to be exploited, they must be actively sought out. The identification of new opportunities is one of the key tasks of entrepreneurs. They must constantly scan the business landscape watching for the gaps left by existing players (including themselves) in the marketplace. Opportunity is the ‘other side of the coin’ as far as innovation is concerned. An innovation (a new way of doing something) is an innovation only if it meets with an opportunity (a demand for a new way of doing something). As with innovation, no matter how important identifying opportunity is to the entrepreneurial process, it cannot be all that there is to it, nor can it characterise it uniquely.

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The entrepreneur cannot stop at simply identifying opportunities. Having identified them, the entrepreneur must pursue them with a suitable innovation. An opportunity is simply the ‘mould’ against which the market tests new ideas. In fact, actually spotting the opportunity may be delegated to specialist market researchers. The real value is created when that opportunity is exploited by something new which fills the market gap. All organisations are active, to some degree or other, in spotting opportunities. They may call upon specialist managers to do this, or they may encourage everyone in the organisation to be on the lookout for new possibilities. Like innovation, entrepreneurial opportunity scanning differs from that of ordinary managers in degree, not substance.

Application of expertise It has been suggested that entrepreneurs are characterised by the way that they bring some sort of expertise to their jobs. As discussed above, this expertise may be thought to lie in their ability to innovate or to spot new opportunities. A slightly more technical notion is that they have a special ability in deciding how to allocate scarce resources in situations where information is limited. It is their expertise in doing this that makes entrepreneurs valuable to investors. While investors will certainly look for evidence of an ability to make proper business decisions and will judge entrepreneurs on their record in doing so, the idea that the entrepreneur is an ‘expert’ in this respect raises a question, namely whether the entrepreneur has a skill as an entrepreneur rather than just as a particularly skilful and effective manager in their own particular area. Does, for example, Rupert Murdoch have a knowledge of how to make investment decisions which is distinct from his intimate and detailed knowledge of the media industry, backed up by good management and attributes such as confidence, decisiveness and leadership? Is it meaningful to imagine someone developing a skill in (rather than just knowing the principles of) ‘resource allocation decision making’ other than it being demonstrated in relation to some specific area of business activity? It is not clear whether such a disembodied skill exists separately from conventional management skills. In any case, such a skill could not be unique to the entrepreneur. Many managers, most of whom would not be called entrepreneurial, make decisions about resource allocation every day.

Provision of leadership One special skill that entrepreneurs would seem to contribute to their ventures is leadership. Leadership is increasingly recognised as a critical part of managerial success. Entrepreneurs can rarely drive their innovation to market on their own. They need the support of other people, both from within their organisations and from people outside such as investors, customers and suppliers. If all these people are to pull in the same direction, to be focused on the task in hand and to be motivated, then they must be supported and directed. This is a task that falls squarely on the shoulders of the entrepreneur. And if the task is to be performed effectively, then the entrepreneur must show leadership. In an important sense, performing this task well is leadership.

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The entrepreneur as manager What can we make of all this? It would seem that the entrepreneur takes on no task that is fundamentally different (though it may be different in degree) from the tasks performed by ordinary managers at some time or other. We should not be surprised by this. After all, the entrepreneur is a manager. We may wish to draw a distinction between an entrepreneur and an ‘ordinary’ manager, but if we do so it must be in terms of what the entrepreneur manages, how they manage, their effectiveness and the effect they have as a manager, not the particular tasks they undertake.

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Leadership is an important factor in entrepreneurial success and it is often a skill that is exhibited particularly well by the entrepreneur, but it is a general management skill rather than one which is specific to the entrepreneur. That said, an entrepreneurial path may give the manager a particularly rich opportunity to develop and express leadership skills.

1.3 The role of the entrepreneur Entrepreneurs are significant because they have an important effect on world economies. They play a critical role in maintaining Key learning outcome and developing the economic order we live under. We have already An understanding of the noted that entrepreneurs create new value. Understanding how economic effects of they do this is of central importance if we are to draw general conentrepreneurial activity. clusions about entrepreneurship. This section is a preamble that outlines some key effects of entrepreneurial activity that are drawn into definitions of the entrepreneur. This is self-contained, but Chapter 6 will consider the role of the entrepreneur in more depth from the perspective of different schools of economic thinking.

Combination of economic factors Economists generally recognise three primary economic factors: the raw materials that nature offers up, the physical and mental labour that people provide, and capital (money). All the products (and services) bought and sold in an economy are a mix of these three things. Value is created by combining these three things in a way which satisfies human needs. Factors do not combine themselves, however. They have to be brought together by individuals working together and undertaking different tasks. The co-ordination of these tasks takes place within organisations. Some economists regard entrepreneurship as a kind of fourth factor which acts on the other three to combine them in productive ways. In this view, innovation is simply finding new combinations of economic factors. Other economists object to this view, arguing that it does not distinguish entrepreneurship sufficiently from any other form of economic activity. While entrepreneurs do affect the combination of productive factors, so does everyone who is active in an economy. It is not clear in this view why entrepreneurship is a special form of economic activity.

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Providing market efficiency Economic theory suggests that the most efficient economic system is one in which unimpeded markets determine the price at which goods are bought and sold. Here, efficient means that resources are distributed in an optimal way, that is the satisfaction that people can (collectively) gain from them is maximised. An economic system can only reach this state if there is competition among different suppliers. Entrepreneurs provide that efficiency. A supplier that is not facing competition will tend to demand profits in excess of what the market would allow and so reduce the overall efficiency of the system. Entrepreneurs, so the theory goes, are on the lookout for such excess profits. Being willing to accept a lower profit themselves (one nearer the true market rate), they will enter the market and offer the goods at a lower price. By so doing, entrepreneurs ensure that markets are efficient and that prices are kept at their lowest possible level. Classical economics provides a good starting point for understanding the effects that entrepreneurs have on an economic system. However, business life is generally much more complex than this simple picture gives it credit for. Firms compete on more than price, for example. Chapter 6 will consider the way that different schools of economic thought view the role of the entrepreneur. And, as we shall discover in Chapter 18, when the strategies that entrepreneurs adopt are considered, the most successful entrepreneurs are often those who avoid competition (at least direct competition) with established suppliers.

Accepting risk We do not know what the future will bring. This lack of knowledge we call uncertainty. No matter how well we plan, there is always the possibility that some chance event will result in outcomes we neither expected nor wanted. If we know the likelihood (probability) of various possibilities then uncertainty becomes risk. Some economists have suggested that the primary function of the entrepreneur is to accept risk on behalf of other people. There is, in this view, a market for risk. Risk is something that people, generally, want to avoid (individuals are risk averse), so they are willing to pay to have it taken away. Entrepreneurs provide a service by taking this risk off people’s hands. They are willing to buy it. An example should make this clear. We may all appreciate the benefits that a new technology, for example the digital recording of television images, can bring. However, there is a risk in developing this new technology. Financial investment in its development is very high. There is also a great deal of uncertainty. Competition between different suppliers’ formats is intense. There is no guarantee that the investment will be returned. We now enjoy the benefits of digital technology and yet we, as consumers, have not, personally, had to face the risks inherent in creating it. In effect, we have delegated that risk to the entrepreneurs who were active in developing the technology. Of course, entrepreneurs expect that in return for taking the risk they will be rewarded. This reward, the profit stream from their ventures, is the price that customers have ‘agreed’ to pay (not explicitly, but by being willing to pay an addition cost for the goods provided) so that they can have the benefits of the product and yet not face the risk of developing it. The idea that entrepreneurs are risk takers is one which reflects their popular image. The idea of accepting risk was important to the conception of entrepreneurship developed by the classical English economist John Stuart Mill in 1848. However, we must be very careful

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to distinguish between personal risk and economic risk. We may face personal risk by exposing ourselves to dangerous situations, climbing mountains for example, but this is not risk as an economist usually understands it. To an economist, risk results from making an investment. Risk is the possibility that the return from an investment may be less than expected. Or, to be exact, might be less (or more) than could have been obtained from an alternative investment that was available. As was pointed out in section 1.2, the role of the entrepreneur who manages the venture and that of the investor who puts their money into it are quite distinct. So, acceptance of risk is actually something that investors, not entrepreneurs, do. However, the popular impression that the entrepreneur is a risk taker is not completely inappropriate. It recognises that entrepreneurs are good at managing in situations where risk is high; that is, when faced with a situation of high uncertainty they are able to keep their heads, to continue to communicate effectively and to carry on making effective decisions. In this sense, entrepreneurs do not accept risk as such, they convert uncertainty into risk (by quantifying it) on behalf of investors. The relationship between entrepreneurs and risk is quite subtle and will be explored further in section 11.7.

Maximising investors’ returns Some commentators have suggested that the primary role of an entrepreneur is one of maximising the returns that shareholders get from their investments. In effect, the suggestion is that they create and run organisations which generate long-term profits on behalf of the investors that are higher than would otherwise have been the case. This is another aspect of the entrepreneur’s role in generating overall economic efficiency. Investors will certainly look around for entrepreneurs who create successful and profitable ventures, although the view that entrepreneurs in the real world act simply to maximise shareholders’ returns is questionable. Entrepreneurship, like all management activity, takes into account the interests of a wide variety of stakeholder groups, not just those of investors. Nor is it evident that investors demand that a firm maximise their returns whatever the social cost might be. Whereas Lord Hanson openly placed maximising shareholder returns at the top of his agenda, Anita Roddick would argue for a much broader range of concerns for The Body Shop.

Processing of market information Classical economics makes the assumption that all the relevant information about a market is available to and is used by producers and consumers. However, human beings are not perfect information processors. In practice, markets work without all possible information being made available or being used (this is a theme that will be developed in section 6.3). One view of entrepreneurs is that they keep an eye out for information that is not being exploited. By taking advantage of this information, they make markets more efficient and are rewarded out of the revenues generated. This information is information about opportunities. The idea that entrepreneurs are information processors is in essence a sophisticated version of the idea that entrepreneurs pursue opportunities and provide competitive efficiency. One of the ways in which smaller organisations may be more successful than larger competitors is that they may be more adept at spotting and taking advantage of unexploited information (an issue to be considered further in section 21.1).

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In summary, entrepreneurs clearly play an important economic function. It is difficult, though, to reduce this to a single economic process in which the entrepreneur’s role is different from that of other economic actors.

1.4 The entrepreneur as a person

Key learning outcome An understanding of how different views of the nature of individual personality have been introduced into definitions of and understanding of the entrepreneur.

We are all different, not only in the way we look but also in the way we act and in the way we react to different situations. We talk of people having consistent personalities. Psychologists have long had an interest in personality and have developed a number of conceptual schemes and exploratory devices to investigate it. Some of these, and how they influence thinking about entrepreneurs, will be discussed in more depth in Chapter 3. This section sets the scene by considering six broad approaches to defining the entrepreneur as a person.

The ‘great person’ An immediate reaction when faced with an entrepreneur, or indeed anyone with influence and social prominence such as a leading statesman, an important scientist or a successful artist, is to regard them simply as being special: as a ‘great person’ who is destined by virtue of his or her ‘nature’ to rise above the crowd. Such people are born to be great and will achieve greatness, one way or another. The ‘great person’ view can often be found in biographies (and not a few autobiographies) of entrepreneurs. It is a nice narrative and an inviting angle biographically or journalistically. Entrepreneurs can certainly be inspiring, and may provide motivating role models. Generally though, the ‘great person’ view, however passionate, is not particularly useful. For a start it is self-justifying. If an entrepreneur achieves success, it is because they are great; if they fail then they are not. It is tautological. Further, it is not predictive. It can only tell us who will become an entrepreneur after they have done so (and achieved success). There is no test for greatness other than its expression. Furthermore, it assumes entrepreneurship is entirely innate. It sees no role for the wider world in influencing the initiation or progression of the entrepreneur’s path. Most damaging, however, is the way it denies the possibility of entrepreneurial success to those who are not (or are not seen or do not feel themselves to be) born to be great persons.

Social misfit Another view which forms a marked contrast to the great person view but which also has a great deal of currency is the idea that entrepreneurs are social misfits at heart. In this view someone is an entrepreneur for an essentially negative reason: they are unable to fit into existing social situations. As a result the entrepreneur is driven to create his or her own situation. It is this that provides the motivation to innovate and build new organisations. Advocates of this view look towards both anecdotal and psychological evidence for support. Many entrepreneurs achieve success after comparatively unhappy and lacklustre

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careers working as professional managers. Often they relate their inability to fit into the established firm as a factor in driving them to start their own venture. Some researchers who have studied the childhood and family backgrounds of entrepreneurs have noted that they are often characterised by privation and hardship which left the person with a lack of self-esteem, a feeling of insecurity and a repressed desire for control. This leads to rebellious and ‘deviant’ behaviour which limits the person’s ability to fit into established organisations. Entrepreneurial activity, it is concluded, is a way of coming to terms with this. It provides not only a means of economic survival but also an activity which enables a reaction against anxiety left by psychological scars. If, as Schumpeter suggests, entrepreneurship is creative destruction, then the social misfit view certainly emphasises the entrepreneur as a creative destroyer. While the idea of the social misfit may provide insights into the motivations of some entrepreneurs, any generalisation of this sort is dangerous. For every entrepreneur whose childhood was unhappy and involved privation, another can be found who was quite comfortable and happy. Many successful entrepreneurs recall being dissatisfied when working within established organisations. However, this is not necessarily because they are misfits in a negative sense. Rather, it may be because the organisation did not provide sufficient scope for their abilities and ambitions. This in itself may be demotivating and therefore managerial performance in an established firm is not necessarily a good indicator of how someone will perform later as an entrepreneur.

Personality type The conceptual basis for the personality type view of entrepreneurship is that the way people act in a given situation can be categorised into one of a relatively limited number of responses. As a result, individuals can be grouped into a small number of categories based on this response. For example, we may classify people as extrovert or introvert, aggressive or passive, spontaneous or reserved, internally or externally orientated, etc. Each of these types represents a fixed category (there is more on such categorisation in section 4.1). There is a common impression that entrepreneurs tend to be flamboyant extroverts who are spontaneous in their approach and rely on instinct rather than calculation. Certainly, they are often depicted this way in literature and on film. Detailed studies, however, have shown that all types of personality perform equally well as entrepreneurs. Personality type, as measured by personality tests (more on this in section 3.2) does not correlate strongly with entrepreneurial performance and success. For example, introverts are just as likely to be entrepreneurs as are extroverts.

Personality trait The idea of personality trait is different from that of personality type. While a personality may be of a particular type, it has a trait. Whereas types are distinct categories, traits occur in continuously variable dimensions. Psychologists distinguish three types of trait that are relevant to understanding personality. • Ability traits relate to specific abilities such as problem solving, planning, innovativeness or negotiation skills. These may be learnt and are certainly developed by practice. The extent to which they reflect innate abilities is not clear and is a controversial issue.

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• Temperamental traits are those concerned with public actions – ‘how we do what we do’; for example, extroversion and introversion or internal versus external reference (whether we look inside ourselves or to the outside world for guidance and judgement on our actions) are temperamental traits. • Dynamic traits are those concerned with internal motivation – ‘why we do what we do’; they relate to internal drives. In an influential study in the early 1960s, David McClelland identified a ‘need for achievement’ (along with various other characteristics) as the fundamental driving trait in the personality of successful entrepreneurs. Other factors which have also been viewed as important include the need for autonomy, the need to be in control of a situation, a desire to face risk, creativity, a need for independence and the desire to show leadership qualities. While conceptually very powerful, the trait approach to the entrepreneurial personality raises a number of questions. To what extent are traits innate? Are they fixed features of personality or might they actually be learnt? To what extent are traits driven by external factors? How does a trait as measured in a personality test relate to behaviour in the real world? Is the same trait expressed in the same way in all situations? Does possession of certain traits lead to entrepreneurship or does pursuing an entrepreneurial career merely provide an opportunity to develop and express those traits? Do entrepreneurs simply act out the traits they feel are expected of them? The idea of traits in the personality of entrepreneurs provides a very important paradigm for the study of entrepreneurial motivation. However, the available evidence suggests it is unwise to advocate, or to advise against, an entrepreneurial path for a particular manager based on the perception of traits they might, or might not, possess. This is a theme that will be returned to when the issue of personality testing and entrepreneurship is considered in section 3.2.

Social development approaches Both personality type and trait are seen as innate. They are determined by a person’s genetic complement (nature) or by early life experiences (nurture) or by some combination of both. (The relative importance of these two things and how they might interact is a highly controversial issue in social theory.) Personality type and trait are also seen as being ‘locked into’ a person’s mental apparatus, and therefore relatively fixed. They can change only slowly or under special conditions. The social development view regards personality as a more complex issue. In this view, entrepreneurship is an output which results from the interaction of internal psychological and external social factors. The view is that personality develops continuously as a result of social interaction and is expressed in a social setting rather than being innate to the individual. The way that people behave is not predetermined, but is contingent on their experiences and the possibilities open to them. In this view, entrepreneurs are not born, they are made. While their predisposition may be important, it does not have any meaning in isolation from their experiences. A person is not, once and for all, entrepreneurial. He or she may, for example, decide to become an entrepreneur only at one particular stage in their life. Equally, he or she may decide to give up being an entrepreneur at another.

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• Innate – factors such as intelligence, creativity, personality, motivation, personal ambition, etc. • Acquired – learning, training, experience in ‘incubator’ organisations, mentoring, existence of motivating role models, etc. • Social – birth order, experiences in family life, socio-economic group and parental occupation, society and culture, economic conditions, etc. The social development model provides a more plausible picture of entrepreneurial behaviour than those that assume entrepreneurial inclination is somehow innate. Entrepreneurship is a social phenomenon. It is not inherent within a person, rather it exists in the interactions between people and with social situations. While entrepreneurs may actively grasp opportunities, they do so within a cultural framework. The social development approach is sophisticated in that it recognises that entrepreneurial behaviour is the result of a large number of factors, some internal to the entrepreneur, and others which are features of the environment within which entrepreneurs express themselves. However, this is also a weakness. While it identifies the factors which might influence entrepreneurship, it usually cannot say why they influence it. While social development models are good at indicating what factors might be involved in entrepreneurial behaviour, they often suggest so many factors that might be involved that their predictive power is limited. It can be very hard to test social development models empirically. The role of personality in entrepreneurial inclination and success is a controversial area. In part this is because there is no general consensus of what the concept of personality actually means or refers to. As Chapter 3 reviews, there are several approaches to the notion of personality within different schools of psychology. Combine this with the lack of agreement on what (or who) constitutes an entrepreneur and the scope for debate will be evident.

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A number of factors are seen as significant to the social development of entrepreneurs. In general, they fall into one of three broad categories:

Cognitive approaches Cognitive science is the branch of psychology that attempts to develop an understanding of how we as humans obtain and process information and use it to make sense of the world. Its application to entrepreneurship is of growing importance. Cognitive insights into entrepreneurship are discussed fully in Chapter 4.

1.5 Entrepreneurship: a style of management

Key learning outcome A recognition that entrepreneurship is a style of management aimed at pursuing opportunity and driving change.

The discussion so far has emphasised what the entrepreneur is not, as much as what they are because it is important to dispel certain myths about the entrepreneur. In particular, it is important to discount the theories that the entrepreneur is someone with a particular type of personality or that certain people are somehow born to be entrepreneurs. We must also recognise that the entrepreneur does not have a clear-cut economic role. However, we must now consider what the entrepreneur actually is by developing a

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perspective that will illuminate the way entrepreneurs go about their tasks as entrepreneurs rather than providing a potentially restrictive definition of the entrepreneur. What we can say with confidence is that an entrepreneur is a manager. Specifically, he or she is someone who manages in an entrepreneurial way. More often than not they will be managing a specific entrepreneurial venture, either a new organisation or an attempt to rejuvenate an existing one. The entrepreneurial venture represents a particular management challenge. The nature of the entrepreneurial venture characterises and defines the management that is needed to drive it forward successfully. Drawing together the themes that have been explored in this chapter, it is evident that entrepreneurial management is characterised by three features: a focus on change, a focus on opportunity and organisation-wide management.

A focus on change Entrepreneurs are managers of change. An entrepreneur does not leave the world in the same state as they found it. They bring people, money, ideas and resources together to build new organisations and to change existing ones. Entrepreneurs are not important as much for the results of their activities as for the difference they make. Entrepreneurs are different from managers, whose main interest is in maintaining the status quo by sustaining the established organisation, protecting it and maintaining its market positions. This is not to deprecate a desire for equilibrium as an objective – it can be very important and is an essential ingredient in the effective running of a wide variety of organisations – but it is not about driving change.

A focus on opportunity Entrepreneurs are attuned to opportunity. They constantly seek the possibility of doing something differently and better. They innovate in order to create new value. Entrepreneurs are more interested in pursuing opportunity than they are in conserving resources. This is not to suggest that entrepreneurs are not interested in resources. They are often acutely aware that the resources available to them are limited. Nor does it mean that they are cavalier with them. They may be using their own money and, if not, they will have investors looking over their shoulders to check that they are not wasting funds. What it does mean is that entrepreneurs see resources as a means to an end, not as an end in themselves. Entrepreneurs expose resources to risk but they also make them work by stretching them to their limit in order to offer a good return. This makes them distinct from managers in established businesses who all too often can find themselves more responsible for protecting ‘scarce’ resources than for using them to pursue the opportunities that are presented to their organisations.

Organisation-wide management The entrepreneur manages with an eye to the entire organisation, not just some aspect of it. They benchmark themselves against organisational objectives, not just the objectives for some particular department. This is not to say that functional disciplines such as marketing, finance, operations management, etc. are unimportant. However, the entrepreneur sees these as functions which play a part in the overall business, rather than as isolated activities.

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In short, the entrepreneur is a manager who is willing to venture: to create change and to pursue opportunity rather than just to maintain the status quo and conserve resources. Of course, the effective entrepreneur does all these things when appropriate. There are times when the status quo is worth sustaining, and times when it is unwise to expose resources. Part of the skill of the effective entrepreneur is knowing when not to venture. However, when the time is right, the entrepreneurial manager is willing to step forward. This is a ‘soft’ definition. There is no hard and fast distinction between the entrepreneur and other types of manager. This does not make the entrepreneur any less special, nor does it make what entrepreneurs do any less important. What it does do is open up the possibility of entrepreneurship. In being ‘just’ a style of management it is something that can be learnt. Managers can choose to be entrepreneurial. An illuminating characterisation of entrepreneurship is offered by Czarniawska-Joerges and Wolff (1991), who use the language of theatrical performance rather than economics to distinguish among management, which is:

‘ ‘ ‘

the activity of introducing order by coordinating flows of things and people towards collective action

and leadership, which is:

symbolic performance, expressing the hope of control over destiny

and entrepreneurship, which is, quite simply:

the making of entire new worlds.

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Entrepreneurial managers as venturers

’ ’ ’

In conclusion, we can say that entrepreneurial management is characterised by its whole organisation scope, its objective of creating change and a focus on exploiting opportunity. These characteristics are shown in Figure 1.1.

1.6 The human dimension: leadership, power and motivation

Key learning outcome An appreciation of the way in which the concepts of leadership, power and motivation are interrelated.

Entrepreneurs are managers, but they are not just any sort of manager. If we were to seek the one characteristic that distinguishes entrepreneurs from their more conventional colleagues it would most likely be found not in their strategic or analytical insights (though these are important) but in the human dimension: the way in which they use leadership and power and their ability to motivate those around them. Any discussion of entrepreneurship must, therefore, develop an insight into the ways in which leadership, power and motivation may be used as managerial tools.

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Figure 1.1 Conventional management and entrepreneurial management: a comparison

An economic perspective suggests that human organisations exist to process resources. The differentiation of labour within them allows that processing to be carried out more efficiently. However, once those resources are processed they must be distributed to the stakeholders who make up the organisation. That distribution is rarely on an ‘equal’ basis. Further, organisations are not just rational orderings of activities but are also the stages upon which their members act out the roles which define them. Hence any discussion of leadership, power and motivation must be willing to take its cues from a variety of perspectives: functional ones, which construe the organisation as a deterministic system, interpretive ones, which explore human experience within organisations, and radical ones, which question the way in which different individuals benefit from organisational life. In light of this, no one definition can possibly hope to fulfil the complete potential of any of these concepts. However, it is important to give the ideas some kind of conceptual location, and basic definitions can be suggested as follows.

Leadership might be defined as the power to focus and direct the organisation. Power might be defined as the ability to influence the course of actions within the organisation. Motivation might be defined as the process of encouraging an individual to take particular courses of action.

Leadership, power and motivation are distinct concepts but clearly any discussion of one will usually draw in the others since they are different aspects of the overall process of control over the venture. It is useful to regard them as different aspects of the approach the entrepreneur takes to controlling the direction of the venture (Figure 1.2).

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Figure 1.2 The dynamics of entrepreneurial control: leadership, power and motivation

Leadership, power and motivation come together in the means the entrepreneur chooses to shape and drive their venture in the direction they wish to take it. They are tools the entrepreneur adopts in order to turn their vision into reality, and as such, they lie at the heart of their project to create an entire new world.

It is important to recognise that entrepreneurial leadership, power and motivation cannot be confined within the formal organisation. They must extend beyond it to draw all the venture’s stakeholders (its investors, customers and suppliers as well as its employees) together.

Power

Power is a concept which appears to be central to successful management and which has resisted being reduced to a simple conceptual formula. To many people the term has a negative connotation. Power means power ‘over’ people. It suggests coercion and is something which must be curtailed. The biologist Edward O. Wilson (1975), for example, defined power as ‘the assertion of one member of the group over another in acquiring access to a piece of food, a mate, a place to display, a sleeping site or any other requisite to the genetic fitness of the dominant individual’. However, an emerging idea is that power is not centred on an individual at all. Rather, it is a result of the structural factors that define how people work together and interact with each other. House (1988) offers a good review of the development of this idea. However, if we define power as an ability to influence the course of actions within the organisation then power becomes a necessary feature of organisational life. Power is a feature of situations in which resources are limited and outcomes are uncertain. Under these conditions, actions must be influenced or the organisation would not be an organisation. In

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this respect, power is an inevitability and, like the organisation itself, it can be made to work for good as well as ill. Certainly, entrepreneurs must recognise the basis for power within their organisation and learn to use it both positively and effectively. This is an approach taken by Jeffrey Pfeffer (1981) in his important study, Power in Organizations. Power must be distinguished from authority. Authority represents a right to influence the course of actions owing to the position that the holder of that authority has within the organisation. This right is not the same as ability. The way in which authority translates into power depends on how the people who make up the organisation regard the holder’s standing and the position they occupy. Whereas one group may recognise the position, others may not do so. The entrepreneur may be given a high degree of ostensible authority by the social system in which they operate. The venture may ‘belong’ to them and be seen as the property of the individual entrepreneur. They will probably be seen as the chief executive, that is, the most senior decision maker. However, this in itself is no guarantee that they will actually have power over their venture. As with leadership, the entrepreneur’s position potentiates power rather than provides it. An important line of analysis sees power manifest itself as the control of different aspects of the venture. The relationship is reciprocal. Power gives access to control, and control provides a basis for power. Dimensions of control which are important for the development of the entrepreneur’s power base are resources, people, information, uncertainty, systems, symbols and vision.

Motivation Motivation, the condition that makes individuals undertake, or at least desire to undertake, certain courses of action, is a subject that has received a lot of attention from psychologists over the past hundred years. Because of its impact on organisational performance, it is of great interest to management theorists and practitioners. A number of approaches to its understanding have been developed. These approaches are varied, emphasise different factors and generally supplement, though at times they do contradict, each other. They all offer unique insights. They differ in the impact they have had on the understanding that has been gained of managerial motivation in general and on entrepreneurial motivation in particular. A major dichotomy exists between those theories that regard motivation as an outward expression of inner drives and those that regard motivation as something directed towards achieving externally defined and rewarded goals. Some approaches attempt reconciliation between these two factors. An understanding of entrepreneurship does however demand a distinction between an entrepreneur’s ability to motivate themself and their ability to motivate those around them.

Self-motivation Some important elements to address in terms of self-motivation are as follows.

Why am I doing this? Good entrepreneurs know why they have chosen to be entrepreneurs. They constantly remind themselves why they have chosen the entrepreneurial path. The attractions of entrepreneurship can be understood in the way that the course fulfils economic, social and

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Learning from mistakes Like any other manager, entrepreneurs make mistakes from time to time. Sales may not be made or investment propositions may be rejected. Personal interactions may be mismanaged. Entrepreneurs are, however, very sensitive to the mistakes they make. This is not just because the consequences of the mistakes are greater than those made by other managers (although they may be) but because entrepreneurs present themselves as experts in managing their venture and its associated uncertainty. Errors of judgement cut to the heart of this role. They can be a great blow to the entrepreneur’s confidence. Of course, mistakes are an inevitable part of any managerial career, not just the entrepreneurial one. Effective entrepreneurs try to avoid mistakes by thought and preparation before entering situations, but when mistakes do occur they are met positively. The good entrepreneur does not try to deny the mistake or pass off responsibility to others. Rather, mistakes are regarded as an opportunity to learn. This means that ego must be detached from the incident and a cold analytical eye used to view the situation to identify a way of avoiding a similar mistake in the future.

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self-developmental needs better than alternative routes open to the entrepreneur. Selfmotivation must be built on an understanding that the option taken is one that is desirable.

Enjoying the rewards All too often the entrepreneur can become so involved in running the venture that they forget to enjoy its rewards. At one level, this could mean spending the money that has been made. However, this consumption can only be a narrow part of the rewards of entrepreneurship. Money is rarely a complete motivating force for the entrepreneur and, in any case, significant financial rewards may only be accrued a long way down the line. The main rewards lie in the job itself: the challenges it presents, the opportunity to develop and use new skills, the power to make changes, the satisfaction of leadership, and so on. Learning to recognise these rewards and to savour them is a major factor in developing and sustaining self-motivation.

Motivation of others Once self-motivation has been achieved the entrepreneur is in a strong position to start motivating others. Motivation is a behavioural phenomenon. Individuals are motivated (or demotivated) by the way people act towards them. This behaviour is an integral part of leadership. It is sensitive to personality and situation. As such, motivating behaviour is a complex process although some common patterns of motivating behaviour can be identified. Figure 1.3 shows a framework for managing individual motivation. Its key elements are set out below.

Understanding personal drives Before someone can be motivated it is important to recognise what they want to gain from their situation. Management occurs in a social setting and the needs which individuals bring to a situation are a complex mix of financial, social and developmental ones. The effective entrepreneur lays the groundwork for motivating the people in the venture to undertake specific tasks by involving them in the vision that has been created for the venture. This is achieved by communicating the role they will play in this vision and what they will get out of it.

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Figure 1.3 A framework for individual motivation

Setting goals People are motivated not just in an abstract sense; rather, they are motivated to do something. In other words, motivation must lead somewhere. The entrepreneur is responsible for setting the goals that must be achieved. The degree to which these are specific objectives and the formality they take will be dependent on the situation, the entrepreneur’s personal style and the cultural setting. Whatever their form, individuals must recognise their goals and be able to locate them in relation to the goals of the organisation as a whole. Such goals should stretch the individual but also be realistic. They should demand effort but must be achievable given the personal and organisational resources the individual commands.

Offering support Setting objectives is just the first step in motivating people. If people are to deliver, they require support. This can take the form of ongoing encouragement, advice, the provision of resources and influencing behind the scenes. The support offered should be commensurate with the level of the task and the demands on the person undertaking it. Effective motivation means giving people room to use their skills and insights but never letting them think that they are out on their own.

Using rewards Rewards take a wide variety of forms. In character, rewards are the means that satisfy an individual’s economic, social or developmental needs. In scope, the term ‘reward’ covers everything from a simple nod of approval from the entrepreneur to a complex deal offering a share in the financial performance of the venture. Whatever the nature of the reward, an entrepreneur who knows how to motivate understands how best to use it. First, rewards must be appropriate for the task undertaken. They must match the individual’s expectations of what the reward should be. Second, their magnitude must be right: too small and they can lead to cynicism; too large and they can engender suspicion. Third, 22

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A positive approach to sanctioning The entrepreneur must occasionally resort to sanctioning individuals who fail to perform in an appropriate way. How this necessary task is handled is important not just for maintaining the motivation of the individual but also for the signals it sends to the organisation as a whole. In general, a positive approach to sanctioning is to be advocated. The objective of the sanctioning must be seen to be one of helping the individual to deliver at the proper level, not just as a punishment. It should not (primarily) be about what was done wrong in the past, but about how performance can be improved in the future. This should also encourage a forum which allows the issues to be discussed while personality and ego are put to one side. Indeed, it can provide an opportunity for the entrepreneur to show their goodwill. All in all, sanctioning, so far as possible, should be seen as a positive experience.

Chapter 1 The nature of entrepreneurship

rewards must be used on the proper occasions. Rewards which are given too freely (and this includes simple things like comments of approval) become devalued. Fourth, they must be seen to be equitable. If the reward structure for different individuals and groups is seen to be unfair then jealousy and conflicts can result.

Summary of key ideas • There is no universally agreed definition of entrepreneurship. The wide variety of definitions in the literature emphasise three aspects: – the entrepreneur as a manager undertaking particular tasks; – the entrepreneur as an economic agent generating particular economic effects; and – the entrepreneur as an individual of a particular personality.

• The idea that there is an ‘entrepreneurial’ personality which predisposes people to business success is far from clear and is controversial.

• Some important schools of thought on the entrepreneurial personality include: the great person, the social misfit, the personality type, the personality trait, social development and the cognitive.

• Entrepreneurial management may be distinguished from conventional management by: – a focus on change rather than continuity; – a focus on new opportunities rather than resource conservation; and – organisation-wide rather than specific-function management.

• Leadership, power and motivation are interrelated and interdependent tools which the entrepreneur can use to control the venture and give it direction.

• Leadership is the power to focus and direct the organisation. Entrepreneurial leadership is based on the communication of vision.

• Power is the ability to influence the course of actions within the organisation. Power is based on the control of resources and the symbolic dimensions of the organisation, particularly the vision which drives it.

• Motivation is the ability to encourage an individual to take a particular course of action. Motivation is based upon an understanding of drives and the ability to reward effort.

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Research themes This chapter has aimed at providing an introduction to the nature of the entrepreneur and the various attempts to define entrepreneurs as a distinct class of economic actors. As a starting point, it is right that this chapter highlights directions for the development of ideas later in the book. I wish to pick up on particular research ideas at these latter points, when understanding is fuller. So at this stage I will indicate some general research themes touching upon the definition of entrepreneurs.

Historical development of the concept of the ‘entrepreneur’ Despite some very good reviews, a comprehensive account of the way in which the term ‘entrepreneur’ has changed over the past three hundred years or so would add a great deal of value. Much existing work deals with the concept in a formal sense within the economics and management discourses. Less has been done on its use within the psychology, anthropology or sociology fields. Also of interest might be its use in popular literature. How does the world in general see entrepreneurs? A good starting point for ideas and style would be the edited commentaries of Pollard (2000) on the representation of business in English literature.

Perceptions and associations with the concept of the ‘entrepreneur’ Most people have some feelings about entrepreneurs (often quite strong ones) based on their knowledge and experience of them. I often run brainstorming sessions in which people are invited to suggest the ideas they associate with them. There is an opportunity to undertake this in a more systematic way, using an initial brainstorming to generate associations (for example, the entrepreneur is dedicated, is ruthless, works hard, and so on), classify those associations as positive or negative (good or bad) and then to quantify the findings in a second stage in which individuals are invited to rate their agreement with the idea (for example, strongly agree to strongly disagree). Originality would come from classifying respondents in a way that reflects their interaction with entrepreneurs (for example, only know about them from the news, have worked with one as an employee, have sold things to them, I am one!). Develop your own ideas on how respondents might be classified. Further originality would come from creating a pictorial representation (or mapping) of the results. Relationships between experience of the entrepreneur and attitudes towards them might then be revealed. Any good book on market research will guide details of an appropriate methodology. Gartner’s classic 1988 study would be a good starting point.

Philosophical issues in defining the ‘entrepreneur’ This is one for the more philosophically minded researcher. Definitions are things we find in dictionaries. But the nature of and the role of the knowledge contained within definitions are major issues in analytical philosophy (the branch of philosophy that deals with the relationship between knowledge, concepts, language and the world). For example,

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analytical philosophers distinguish between ostensive definitions – those that point to something – and contextual definitions – those that set out a list of criteria by which something is recognised. There are other issues, of course. Any good introductory book on analytical philosophy will discuss these issues. My recommendations would be the books by Grayling (1999) and by Hospers (1990). Both are excellent. The project should aim to take approaches to the definition of the entrepreneur and critically evaluate them using the relevant philosophical ideas. Think about answering the following questions. Why do we find it so hard to define entrepreneurs in an exact and universally agreed way? Is it something to do with our (lack of) knowledge of entrepreneurs (do we need more)? Are entrepreneurs inherently indefinable, or is our expectation of what a definition of the entrepreneur or entrepreneurship can (or should) do at fault?

Key readings I normally only recommend two key readings but I think William Gartner’s two papers should be read as a pair (neither are too long and are quite accessible). The BartonCunningham and Lischeron paper is slightly more conceptual in its approach but covers the difficulty in obtaining a definition very well. Barton-Cunningham, J. and Lischeron, J. (1991) ‘Defining entrepreneurship’, Journal of Small Business Management, Jan., pp. 45–61. Gartner, W.B. (1988) ‘“Who is an entrepreneur” is the wrong question’, American Journal of Small Business, Spring, pp. 11–32. Gartner, W.B. (1990) ‘What are we talking about when we talk about entrepreneurship?’, Journal of Business Venturing, Vol. 5, pp. 15–28.

Suggestions for further reading Bacharach, S.B. and Lawler, E.J. (1980) Power and Politics in Organizations, San Francisco, CA: Jossey-Bass. Baumol, W.J. (1968) ‘The entrepreneur: introductory remarks’, American Economic Review, Vol. 58, pp. 60–3. Brockhaus, R.H. (1987) ‘Entrepreneurial folklore’, Journal of Small Business Management, July, pp. 1–6. Bygrave, W.D. and Hofer, C.W. (1991) ‘Theorising about entrepreneurship’, Entrepreneurship Theory and Practice, Vol. 16, No. 2, pp. 13–22. Cole, A.H. (1968) ‘Entrepreneurship in economic theory’, American Economic Review, Vol. 58, pp. 64–71. Cromie, S. and O’Donaghue, J. (1992) ‘Assessing entrepreneurial inclination’, International Small Business Journal, Vol. 10, No. 2, pp. 66–73. Cropanzano, R., James, K. and Citera, M. (1992) ‘A goal hierarchy model of personality, motivation and leadership’, Research in Organisational Behavior, Vol. 15, pp. 267–322.

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Czarniawska-Joerges, B. and Wolff, R. (1991) ‘Leaders, managers and entrepreneurs on and off the organisational stage’, Organisation Studies, Vol. 12, No. 4, pp. 529–46. Deakins, D. and Freel, M. (2003) Entrepreneurship and Small Firms (3rd edn). London: McGraw-Hill. Drucker, P.F. (1985) Innovation and Entrepreneurship. London: Heinemann. Emerson, R.M. (1962) ‘Power-dependent relationships’, American Sociological Review, Vol. 27, pp. 31–41. Gartner, W. (1985) ‘A conceptual framework for describing the phenomenon of new venture creation’, Academy of Management Review, Vol. 10, No. 4, pp. 696–706. Grayling, A.C. (ed.) (1999) Philosophy 1, Oxford: Oxford University Press. Green, R., David, J., Dent, M. and Tyshkovsky, A. (1996) ‘The Russian entrepreneur: a study of psychological characteristics’, International Journal of Entrepreneurial Behaviour and Research, Vol. 2, No. 1, pp. 49–58. Hamilton, R. (1987) ‘Motivations and aspirations of business founders’, International Small Business Journal, Vol. 6, No. 1, pp. 70–8. Hargreaves Heap, S.P. (1998) ‘A note on Buridan’s ass: the consequences of failing to see a difference’, Kyklos, Vol. 51, No. 2, pp. 277–84. Hickson, D.J., Hinings, C.R., Lee, C.A., Schneck, R.J. and Pennings, J.M. (1971) ‘A strategic contingencies’ theory of intraorganizational power’, Administrative Science Quarterly, Vol. 30, pp. 61–71. Hisrich, R.D. and Peters, M.P. (2002) Entrepreneurship (5th edn). New York: McGraw Hill. Hitt, M.A., Ireland, R.D., Camp, S.M. and Sexton, D.L. (eds) (2002) Strategic Entrepreneurship: Creating a New Mindset. Oxford: Blackwell. Hofstede, G. (1980) ‘Motivation, leadership and organisation: do American theories apply abroad?’ Organisational Dynamics, Summer, pp. 42–63. Hornaday, R.W. (1992) ‘Thinking about entrepreneurship: a fuzzy set approach’, Journal of Small Business Management, Oct., pp. 12–23. Hospers, J. (1990) An Introduction to Philosoplical Analysis (3rd edn). London: Routledge. House, R.J. (1988) ‘Power and personality in complex organizations’, Research in Organizational Behaviour, Vol. 10, pp. 305–57. Kilby, P. (1971) ‘Hunting the Heffalump’, in Kilby, P. (ed.), Entrepreneurship and Economic Development. New York: Free Press. Kirby, D.A. (2003) Entrepreneurship. London: McGraw-Hill. Kuratko, D.F., Hornsby, J.S. and Naffziger, D.W. (1997) ‘An examination of owner’s goals in sustaining entrepreneurship’, Journal of Small Business Management, Jan., pp. 24–33. Kuratko, D.F. and Hodgetts, R.M. (2001) Entrepreneurship: A Contemporary Approach (5th edn). New York: Dryden. Kuznetsov, A., McDonald, F. and Kuznetsov, O. (2000) ‘Entrepreneurial qualities: a case from Russia’, Journal of Small Business Management, Vol. 38, No. 1, pp. 101–7. Lambing, P. and Kuehl, C. (1997) Entrepreneurship. Upper Saddle River, NJ: Prentice Hall.

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Leibenstein, H. (1968) ‘Entrepreneurship and development’, American Economic Review, Vol. 58, pp. 72–83. McClelland, D. (1961) The Achieving Society. Princeton, NJ: Van Nostrand. Mill, J.S. (1848) Principles of Political Economy with Some of their Applications to Social Philosophy. London: J.W. Parker. Morris, M.H. (2000) ‘Revisiting “who” is the entrepreneur’, Journal of Developmental Entrepreneurship, Vol. 7, No. 1, pp. v–vii. Olson, P.D. (1986) ‘Entrepreneurs: opportunistic decision makers’, Journal of Small Business Management, July, pp. 29–35.

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Landau, R. (1982) ‘The innovative milieu’, in Lundstedt, S.B. and Colglazier, E.W., Jr (eds) Managing Innovation: The Social Dimensions of Creativity, Invention and Technology. New York: Pergamon Press.

Olson, P.D. (1987) ‘Entrepreneurship and management’, Journal of Small Business Management, July, pp. 7–13. Peterson, R.A., Albaum, G. and Kozmetsky, G. (1986) ‘The public’s definition of small business’, Journal of Small Business Management, July, pp. 63–8. Petrof, J.V. (1980) ‘Entrepreneurial profile: a discriminant analysis’, Journal of Small Business Management, Vol. 18, No. 4, pp. 13–17. Pfeffer, J. (1981) Power in Organizations. Cambridge, MA: Ballinger. Pollard, A. (ed.) (2000) The Representation of Business in English Literature. London: Institute of Economic Affairs. Say, J.B. (1964) A Treatise on Political Economy: Or, the Production, Distribution and Consumption of Wealth. New York: A.M. Kelly (reprint of original 1803 edition). Scherer, R.F., Adams, J.S. and Wiebe, F.A. (1989) ‘Developing entrepreneurial behaviours: a social learning perspective’, Journal of Organisational Change Management, Vol. 2, No. 3, pp. 16–27. Schumpeter, J.A. (1928) ‘The instability of capitalism’, Economic Journal, pp. 361–86. Schumpeter, J.A. (1934) The Theory of Economic Development (1961 translation by Redvers Opie). Cambridge, MA: Harvard University Press. Seters, D.A. van (1990) ‘The evolution of leadership theory’, Journal of Organisational Change Management, Vol. 3, No. 3, pp. 29–45. Sharma, R.A. (1980) Entrepreneurial Change in Indian Industry. New Delhi: Sterling Publishers. Soltow, J.H. (1968) ‘The entrepreneur in economic history’, American Economic Review, Vol. 58, pp. 84–92. Stanworth, J., Stanworth, C., Grainger, B. and Blythe, S. (1989) ‘Who becomes an entrepreneur?’ International Small Business Journal, Vol. 8, No. 1, pp. 11–22. Tait, R. (1996) ‘The attributes of leadership’, Leadership and Organisational Development Journal, Vol. 17, No. 1, pp. 27–31. Taylor, B., Gilinsky, A., Hilmi, A., Hahn, D. and Grab, U. (1990) ‘Strategy and leadership in growth companies’, Long Range Planning, Vol. 23, No. 3, pp. 66–75.

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Thompson, J.D. (1967) Organizations in Action. New York: McGraw-Hill. Vroom, V.H. (1963) Leadership and Decision-making. Pittsburgh, PA: University of Pittsburgh. Watson, T.J. (1995) ‘Entrepreneurship and professional management: a fatal distinction’, International Small Business Journal, Vol. 13, No. 2, pp. 34–46. Webster, F.A. (1977) ‘Entrepreneurs and ventures: an attempt at classification and clarification’, Academy of Management Review, Vol. 2, No. 1, pp. 54–61. Wilson, E.O. (1975) Sociobiology: The New Synthesis. Cambridge, MA: Harvard University Press. Zaleznik, A. (1977) ‘Leaders and managers: are they different?’ Harvard Business Review, May/June, pp. 67–78.

Selected case material CASE 1.1

21 January 2006

FT

Football set to score stylishly SYL TANG It is one of those national clichés: Americans don’t understand football (or soccer, as they call it). No matter how many times it has been suggested that the sport is about to penetrate finally the stars and stripes mindset, it somehow never takes off the way it has in the rest of the world. But that may finally be about to change, if hip-hop mogul Jay-Z gets his way. His big idea? It’s fashion – not an Olympic win or a gorgeous frontman – that will spearhead the revolution. You see, Jay-Z made a move earlier this year to buy into the football club Arsenal and he’s not the only trendy US investor thinking football is about to go mainstream. Recently Californian entrepreneur David Schulte bought Lotto, a 40-year-old clothing brand based in Treviso, and the number one soccer brand in Italy, dressing over

600 European players. No sooner had he made the purchase than – score – he launched Lotto Leggenda, a non-performance luxury line sold in boutiques such as Los Angeles’s Fred Segal, Arrive in Miami, and Blue and Cream in New York. Schulte has a dream: design it and they will come. ‘My goal is to get them to buy into the flavour of soccer,’ he says. ‘I don’t know if I can get them to sit and watch every game. Soccer in the States is not defined by the local league; it’s the globalisation, the lifestyle of the soccer player, a big-money sport.’ In fact it is the money that has prevented soccer from becoming a US phenomenon. Soccer’s structure of two 45-minute halves does not lend itself to the way America broadcasts sports. The big networks have no interest in televising a game where there are no

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Perhaps it began as long as four years ago, with a project Guyer herself conceived. Charged with marketing Adidas Lifestyle, the fashion-focused arm of the brand, she set out to prove that although soccer was not a ‘mainstream American thing’, in a city such as New York, with its huge expatriate community, it could, when targeted to fashion-specific acolytes, succeed. ‘Maybe these are people who wouldn’t watch a US National Football League game; who work in or are into fashion: that was the idea,’ she says. A photography exhibit by Kai Regan of soccer being played in Brooklyn and Queens was followed by a courier project by Adidas. Hand-chosen recipients were delivered a red plastic suitcase marked World Cup Survival Kit with the word ‘Fanatic’ on it in white. Inside were fashion-relevant items, such as fashionable jerseys, soccer socks and badges, and a magazine with people in fashion and music speaking about the best moments of the World Cup and musing on which team they themselves would play, alongside true soccer profiles, schedules organised in New York time, and interviews of top players. For fun, ‘world cup aromatherapy’, comic books and the matchbooks of the best bars at which to watch soccer were included. With just 500 kits distributed by young women in soccer gear arriving in person at recipient’s offices, Adidas created a phenomenon that spawned the first Adidas Fanatic soccer tournament. What started as one event instantly became an entire month of activities. Sixteen teams from hipster fashion companies and shops such as Alife signed up to play. The following year, posters that didn’t even include date or time or any contact information drew 21 teams, from hip record labels, sneaker and skate shops, hotel groups, design magazines, marketing agencies such as Supreme, Fader, Tolkion, the TriBeCa

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commercials for 45 minutes. But, says, Adidas’s Abby Guyer, ‘Broadband television could change all that. With the advent of new sports channels, on cable and now with in-demand, it’s conceivable that big networks will offer indemand in addition to regular programming.’ Indeed, the 2006 World Cup, being played in Germany, will receive national attention in America in a way the previous tournaments did not, if for no other reason than fans will not find themselves forced to watch games taking place in Asia at 3am. ‘The traditional American view is that Americans don’t care about soccer and because it’s a pretty select group of people into soccer, Adidas has focused on the World Cup for soccer fans. But all of that will change in 2006,’ says Guyer, pointing out that lately David Beckham has spent a lot of time in America. ‘He has a lot to do with it. Americans may not know much about him as a player but he is the first well-known soccer name who wants to be a New York star.’ Schulte agrees that the globalisation of media and multinational excitement around Beckham has led Americans to consider football more seriously. ‘Though it’s an integral part of Europe, worldwide media has now made football players’ lifestyle an integral part of culture. Beckham rents yachts, has a beautiful wife, drives a Bentley. It’s a way of life that the hip-hop, high-end generations X and Y have bought into, that people want to emulate. That aesthetic is exported into our country. The tastemakers are looking for the next thing. ‘There is an exoticism to the sport. Hispanic culture has crested: Colombian culture in Miami and Mexican culture in Los Angeles have become very important to America. Countries such as Italy, Brazil and Argentina have become travel destinations. Tastemakers are into them – and soccer happens to be the only sport that matters to those countries.’

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Part 1 The entrepreneur as an individual

CASE 1.1 CONT. Grand hotel, even The Diner in Brooklyn, a barbeque joint, to the 2003 Fanatic Redux. The event was conceived for the media community – but one without pressure on fashion journalists: no media are asked to cover the Adidas element. Still, it led to the sport becoming front and centre with edgy fashion types. Two teams went on to recruit more teams and form a league that plays in Chinatown on Chrystie Street once a week, an area increasingly surrounded by hip boutiques.

CASE 1.2

But what’s is all got to do with clothes? Guyer points out that ‘soccer allows people to put national stuff on fashion.’ She agrees with Schulte that luxury wear could lead to fandom. ‘The fans always come first. For the whole of the rest of the world, soccer is their lifeblood and so it’s authenticity first, then the clothing. However, people can arrive at fandom from a different path.’ Source: Syl Tang, ‘Football set to score stylishly’, Financial Times, 21 January 2006, p. 6. Copyright © 2006 Syl Tang.

14 January 2006

FT

Clothes maketh the man AMY RAPHAEL Johnnie Boden is skating around the sample room at his North Acton HQ on an office chair. It is a strange and slightly unnerving sight. He wears a light blue shirt, a blue jumper tied untidily around his waist, dark jeans, scuffed Camper shoes and plaster of Paris on his lower left arm. He thinks it’s a bit excessive – he only broke his finger. When asked how, he pushes his right hand through his mop of dark red hair and launches himself a bit closer. ‘Pub fight.’ A pause followed by a broad smile. ‘Actually,’ he says slowly in his deep, high-class voice, ‘I fell off my horse.’ With endless energy to burn, 44-year-old Boden seems unable to sit still. He politely announces he’s thirsty, disappears to ask an assistant to fetch some water and then pounces on the jug when it arrives. He’s warm so he jumps up and opens the windows, which are covered with a blown-up photo of boys

and girls running free on an English beach, probably in Cornwall or Norfolk. The kids are in rude health and dressed, naturally, in the vibrant stripes and vivid floral patterns that have come to epitomise Mini Boden. In the 12 years since he abandoned his career as a stockbroker and first thought of setting up a mail order clothing company for ‘timepressed people’, Johnnie Boden has become so successful that his company’s name has virtually become an adjective. A ‘Boden woman’ is around 40 (though she could be as young as 25 or as old as 55), she has a couple of children and works part-time from home. She is a Yummy Mummy, a modern lady who lunches. Her husband is a professional family man who happily accepts the clothes his wife presents to him. Their kids sleep in Mini Boden jersey pyjamas and, by day, throw on velour stripy hooded dresses or camouflage cargo pants.

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this time of year,’ Johnnie himself writes of the stonewashed logo sweatshirt in the current Mini Boden catalogue. The Boden empire, which last year saw a pre-tax profit of £10.4m on sales of £86m and this year hopes to achieve sales of £100m, combines the catalogue with an equally bright and ‘fun’ website. Although the catalogue has changed beyond recognition – in the early days it used line drawings before photography was an affordable option while friends were used as models until it all became too complicated – Boden says ‘a lot of money’ is being spent to improve the quality of the images on the website. At times the privately owned company seems to bombard customers with catalogues and e-mails, each with constant special offers: ‘£10 off when you spend £30 or more plus FREE postage and FREE returns.’ Boden insists it is not rashly sending out catalogues desperate to attract new customers but that it’s done the research and the timing is scientific. ‘We’d love to be able to send out one which would serve as our shop window for six months but unfortunately people just throw the catalogues in the bin or forget about them so we have to remind them by sending one every three weeks. In America you’d get one once a week.’ It was from America that Johnnie Boden took his inspiration and it is the US that is now proving to be something of a holy grail for him. ‘I was a rather bad and unhappy stockbroker who was sent to the States. I saw how people could buy good-quality clothing from catalogues, which gave me the basic idea. We started selling to America in 2002 and it’s doing fantastically well. It now accounts for about 20 per cent of our sales.’ Though ambitious, Boden has no current plans to move into other territories, partly because America is a big country to conquer properly but also because he aims to double the UK mail order market by around 2010.

Chapter 1 The nature of entrepreneurship

With their combined income of £60,000, the Boden family is unashamedly middle-class and growing a little conservative, although apparently 20 per cent read The Guardian. Johnnie Boden, who was educated at Eton and Oxford, refers to his clients as being ‘innerdirected’. All these facts, figures and terms point to substantial market research, which Johnnie claims is a fundamental part of the company’s success in providing the Boden family with what it wants. Given that there is only one retail outlet (in Hangar Green, west London), the company has to research constantly its core customer base or it would have little idea of who makes up the half million active Boden regulars in Britain. ‘People who buy Boden want to look fashionable but don’t want to be enslaved by fashion. That to me really is a key thing.’ In other words, they’re not interested in making a statement with a label. ‘Correct. That’s a very good way of putting it. We started off with men’s wear but now the vast majority of what we sell is women’s wear and Mini Boden. And we know from the research that we’re not appealing to the twenty-something woman who has to have Stella McCartney’s latest outfit. We’re for people who are slightly more self-confident, who don’t need the labels. They like colour, and quirk is also an important factor.’ It is the quirkiness and whimsical nature of Boden’s catalogues that define them. In Mini Boden, each bright colour photo of a child is accompanied by a caption with their name, age and future occupation (Milly, eight, surfer; Giorgia, seven, ballet teacher). In the women’s catalogue, we discover that Natalie loves Chunky Monkey ice-cream. The personal touch is central too. Not only is the label Boden’s signature but he appears to contribute some of the blurb too, sometimes even referring to his own three kids (aged 5, 8 and 11). ‘My daughters wear these constantly at

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CASE 1.2 CONT. His flourishing business must, I suggest, be the result of him being a perfectionist or workaholic but he shies away from labelling himself. In fact, he hates being labelled at all. He has found, of course, that with success comes public exposure – and the press have been quick to spotlight Johnnie Boden’s Eton– Oxford background. On occasion he is seen more as a privileged Tory boy than a successful British entrepreneur. ‘Oh yeah,’ he grimaces, skating away to the other end of the sample room. ‘All that bollocks.’ He sighs. ‘The problem, as David Cameron tells us, is that people are so obsessed with these things. They think because you have that kind of background, you must be a certain type of person.’ His rich voice drops to almost a whisper. ‘I was privately educated and I don’t really want to go into it but emotionally I probably was er . . . lots of things weren’t great for me. But I don’t deny my background gave me huge benefits which I’m using to my best – and, dare I say it, everyone’s – advantage.’ His voice rises again. ‘I’m doing my best to sell fantastic clothes. The idea that we sell to a small clique is laughable. We do have a lot of customers in south-west London but that’s simply where the money is. We only get about 12 per cent of our customers’ clothing spend so the Yummy Mummy will be also be buying from M&S, Matalan, Jigsaw and Gap. Everybody shops around.’ While he’s riled, I ask Boden about an article published in May 2003 where he is quoted as ‘agreeing heartily’ with a piece he had just read in The Spectator saying teenage delinquency is caused by working mothers. His face darkens. ‘I don’t want to comment because I was misquoted and it made me very cross. I didn’t say what was attributed to me and I actually spoke to the journalist afterwards

and it all got quite nasty . . . but it was her word against mine.’ So what does he really think of working mothers? ‘My wife only doesn’t work full-time now because she’s got three children to look after. Most of the employees here are women and the ones who’ve had children tend to be very mature. Bringing up children brings an added dimension to your life. I’m completely relaxed about it.’ He shrugs and points to the door. ‘You can ask any of those women out there. Boden is extremely flexible.’ The point is Johnnie Boden has never pretended to be what he is not. In the very first press releases he mentioned his education and he has never pretended not to be a Tory. Similarly, he has never claimed that Boden has anything to do with high fashion. There are a handful of designers he admires – Matthew Williamson, Marc Jacobs, Clements Ribeiro – but his background is in the City and not in fashion. ‘Absolutely. I’m not a designer but I’ve got quite a good feel for it. My job is working with designers and saying, “Left a bit, right a bit.” In the early days, I had strong opinions about men’s wear product and I still do . . . But I’m basically tweaking the design team’s ideas.’ Boden, it seems, is quite happy with his world. ‘I don’t understand the whole catwalk industry and I’d look a bit of a prat if I tried to get involved. It’s not really what we are about.’ He roughs up his hair, fiddles with his plaster of Paris. ‘As long as we can keep our finger on the pulse with things that really matter, I’m very happy not to be part of the fashion world. I don’t really want to spend my life air kissing at catwalk shows . . .’ He smiles triumphantly. ‘Anyway, I’ve never been to a fashion show in my life.’ Source: Amy Raphael, ‘Clothes maketh the man’, Financial Times, 14 January 2006, p. 3. Copyright © 2006 Amy Raphael.

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1. Compare and contrast David Shulte (Lotto) and Johnnie Boden (Boden) in terms of (a) their roles in making the economy work, (b) the tasks they undertake to develop their ventures and (c) (what you suppose) is special about them as personalities. 2. As entrepreneurs, in what way(s) are they different from ‘ordinary’ managers?

Chapter 1 The nature of entrepreneurship

Discussion points

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CHAPTER 2 Types of entrepreneur

Chapter overview Classification often complements definition. It can sort items so that defining characteristics become evident. Definition then enables allocation of particular items to specific categories. However, classification can often be undertaken even if there is no clear definition available. This is so with the concept of the entrepreneur. As Chapter 1 makes clear, there is no single, unambiguous, universally agreed definition as to what an entrepreneur is. This chapter is concerned with outlining a variety of approaches taken to classify entrepreneurs. Consideration of social and public entrepreneurs is reserved until Chapter 7.

2.1 Classifying entrepreneurs Classification of entrepreneurs into different types provides a starting point for gaining an insight into how different types of Key learning outcome entrepreneurial ventures work and the disparate factors underlying An understanding of how their success. This provides important insights to researchers of different types of entrepreneur entrepreneurship, investors wishing to judge the opportunity to might be distinguished. invest in new ventures, governments developing policy to support entrepreneurs, and to entrepreneurs themselves when creating strategies for their ventures. After all, we should not expect there to be a single formula for success. Some success factors may be more important to some entrepreneurs than others. What is important to sucess will depend on the type of venture the entrepreneur is undertaking, his or her motivations and the strategic approach taken. There are a number of potential classification schemes. This section aims to give a flavour of the approaches taken rather than a comprehensive review of all the schemes. There are two main approaches: either to classify the entrepreneurs themselves or to classify their ventures. The most common types of entrepreneur encountered are either those planning to start up an initial venture, so-called nascent entrepreneurs, or those running a single business – singular entrepreneurs. Singular entrepreneurs at an early stage of venture development

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when they are still actively learning are referred to as novice entrepreneurs. An early move to classify singular entrepreneurs was to differentiate between opportunist entrepreneurs, who were interested in maximising their returns from short-term deals, and craftsmen, who attempted to make a living by privately selling their trade or the products they produced. Craftsmen were not so much interested in profits as in being able to earn a stable living from their specialist skills. The idea of the ‘opportunist’ entrepreneur is quite vague, and a later development was to replace the with two more definite types: the growth-orientated entrepreneur, who pursued opportunities to maximise the potential of their venture, and the independence-orientated entrepreneur, whose main ambition was to work for themself. These latter entrepreneurs preferred stability to growth and so were willing to limit the scope of their ventures. Craft entrepreneurs can be subdivided into those whose main aim is to secure a steady income and are referred to as income orientated, and those who take the risk of expanding their business and face the challenge of changing their role from being craft operators to being managers of craft operators. Such entrepreneurs are called expansion orientated. The term ‘craft’ is historical. In modern usage it refers not just to artisans but to any entrepreneur who uses a particular knowledge or skill, in addition to general management skills, that can deliver market value. So it would include independent management consultants as much as producers of arts and crafts. In line with this, a further distinction might be made between craftsmen entrepreneurs whose expertise is based on traditional skills, those whose expertise is scientific or technological and those whose skills are of a professional nature. The American entrepreneurship academic Frederick Webster (1977) considers classification schemes for both the individual entrepreneur and for their ventures. Four types of individual entrepreneur are recognised within his scheme. The Cantillon entrepreneur (named after the eighteenth-century French economist Richard Cantillon) brings people, money and materials together to create an entirely new organisation. This is the ‘classic’ type of entrepreneur, who identifies an unexploited opportunity and then innovates in order to pursue it. The industry maker goes beyond merely creating a new firm. Their innovation is of such importance that a whole industry is created on the back of it. They develop not only new products, but also a whole technology to produce them. Examples include Henry Ford and the mass production of motor vehicles, Thomas Edison and domestic electrical products, and Bill Gates with software operating systems. The administrative entrepreneur is a manager who operates within an established firm but does so in an entrepreneurial fashion. Usually occupying the chief executive or a senior managerial role, they are called upon to be innovative and to provide dynamism and leadership to the organisation, particularly when it is facing a period of change. An example here is Lee Iacocca’s rejuvenation of the Chrysler Motor Company or Jan Carlzon’s turnaround of the Scandinavian Airlines System (SAS). Nowadays, administrative entrepreneurs are often referred to as intrapreneurs. The small business owner is an entrepreneur who takes responsibility for owning and running their own venture. The business may be small because it is in an early stage of growth, or the owner may actually wish to limit the size of their business because they are satisfied that it gives them a reasonably secure income and control over their life. Webster further classifies entrepreneurial ventures by the ratio of the amount that is expected to be received as a result of the venture’s success (the perceived payoff ) and the number of investors involved (the principals). Three types of venture are identified:

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Figure 2.1 Landau’s classification of entrepreneurial types

• Large payoff: many participants – i.e. a major venture with the risk spread widely over a large number of investors. • Small payoff: few participants – i.e. a limited venture with the risk taken on by a few key investors only. • Large payoff: few participants – i.e. a major venture with the risk taken on by a few key investors. The remaining possibility – a small expected payoff with a large number of investors – is not considered to be a likely scenario. Landau (1982) has proposed that the characteristics of innovation and risk taking discussed earlier might provide a basis for classifying entrepreneurs. He suggests that both factors are independent of each other and may be defined as high or low. This gives the matrix illustrated in Figure 2.1. The gambler is the entrepreneur (or better, his or her venture) characterised by a low degree of innovation and a high level of risk. The gamble, of course, arises from the fact that without a significant innovation, the entrepreneur is taking a big chance in being better able to deliver value than existing players in the market. The consolidator is the entrepreneur who develops a venture based on low levels of both innovation and risk. This consolidates in that it is really, at best, a marginal improvement on what existing players are doing. Although risks are low, so too must be expected returns. The dreamer is the entrepreneur who attempts to combine a high level of innovativeness with low risk. All entrepreneurs would, of course, love to operate here. Many attempt to do so. However, Landau suggests the ‘dream’ cannot be realised. All innovation, by its nature, introduces risk. The more significant, and hence potentially valuable, the innovation, the greater the risk of the unknown. The final quadrant combines high innovativeness with high risk. This is where true entrepreneurs operate. They (or their investors) must accept risk, but by understanding their innovation and why it appeals to the market, they minimise and manage the risks. Technology-based entrepreneurs are especially important in modern business as it is they who are taking advantage of new scientific developments, especially in the areas of information technology, biotechnology and engineering science, and offering their benefits to the wider world. Investors are attracted by the high growth potential of their ventures. Jones-Evans

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• The ‘research’ technical entrepreneur – those whose incubation has been in a research environment. Two sub-types are suggested: pure research entrepreneurs, who have been based in academic research environments and who have not had significant commercial experience, and research-producer entrepreneurs, who while working in an academic or industrial research environment have had exposure to commercial decision making. • The ‘producer’ technical entrepreneur – those whose incubation has included an exposure to decision making in a commercial setting along with experience in technological development. • The ‘user’ technical entrepreneur – an individual whose main experience has been commercially based but has involved contact with, and the development of knowledge about, a technical development. This may be because they have been employed in its marketing or sales, or perhaps in procuring that technology for a business. • The ‘opportunist’ technical entrepreneur – one who has no previous exposure to a technology but has seen a commercial opportunity in relation to it and has pursued that with a new venture. Opportunist technical entrepreneurs may call upon a general technical knowledge base and are keen to develop an understanding of the new technology and what it offers. Eisenhardt and Forbes (1984) develop an international perspective of technical entrepreneurship.

Chapter 2 Types of entrepreneur

(1995) offers a fourfold categorisation of such technology-based entrepreneurs based on their technical and commercial experience prior to making the move to entrepreneurship:

This approach to classifying technical entrepreneurs is useful for two key reasons. First, it indicates the type of support the entrepreneur will need in order to drive the venture forward successfully. The research and producer technical entrepreneur, while in command of the technical aspects of what they are doing, may need support with the commercial management of their ventures. User and opportunist entrepreneurs may call upon dedicated technical experts to underpin their commercial moves. Second, it enables investors to judge the managerial balance of the ventures to which they are called upon to commit themselves. An investor seeks not only a good idea, but also one that has a clear market potential and is backed by a managerial team that can not only invent but also deliver that invention to the customer profitably. Wai-Sum Siu (1996) has examined the types of new entrepreneur who operate in China and he gives a fascinating snapshot of the people behind this fast-growing economy. Basing his assessment on employment, managerial, financial, technical and strategic criteria, he identifies five types of entrepreneur. The senior citizen undertakes a venture to keep occupied during his or her retirement. The business is small and based on personal expertise. It is privately funded and has no long-term strategic ambitions. Workaholics are also retired but show more ambition for their ventures than do senior citizens. They often possess administrative experience and their businesses are bigger, drawing on a wider range of technical skills. Strategic goals may be explicit and employees may be invited to make a personal investment in the future of the venture. Swingers are younger entrepreneurs who aim to make a living from making deals. They may have only limited industrial and technical experience and rely on networks of personal contacts. Their ventures may be moderately large, but they tend not to have long-term strategic goals. The main aim is to maximise short-term profits. Funding is provided through retained earnings, family contributions and personal loans. Idealists are also younger entrepreneurs who run moderate-sized ventures. However, their

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motivation is based less on short-term profit and more on the sense of achievement and independence that running their own venture gives them. They serve a variety of end markets and their ventures may be based on high-technology products. Financing is through retained profits, family contributions and private investment. High-flyers are motivated in much the same way as idealists. However, their ventures are much larger, reflecting success in the marketplace. Again, a variety of products are offered. Corporate goals and strategy tend to be much more explicit than in the idealist’s venture, and investment is drawn from a wider variety of sources, including institutional and international agencies.

2.2 Serial and portfolio entrepreneurship The motivations of entrepreneurs are many and varied. As will be discussed in more detail later, entrepreneurs are driven by a desire Key learning outcome for autonomy, prestige and a sense of achievement as much as, if An understanding of the not more than, by a desire to make money. This is most evident in types of serial and portfolio that group of entrepreneurs who, having led one business success, entrepreneurs, the motivation move on to start another. Such entrepreneurs, called serial entreof the entrepreneur to lead preneurs (sometimes referred to as habitual entrepreneurs), gain a series of ventures and the their rewards from the establishment and building of businesses, strategy they adopt to do so. not their long-term management. It is notable that some commentators, for example Gartner (1985), argue that once the building stage of the venture ends, then so does true entrepreneurship. Serial entrepreneurs, as well as being particularly interested in the start-up and early growth phase of the venture, may also have particular decision-making expertise in these areas of business development, and therefore gain their personal competitive advantage in relation to managing this stage. Such skills might be reflected in an ability to spot new opportunities, to evaluate markets and in dealing with financial backers. An entrepreneur who can point to a record of success will also be a more attractive proposition to an investor than one who cannot. Further, the capital generated from an initial venture (retained profits or money made through its sale) may provide a source of funds to start up a further venture. The establishment of additional ventures may also reflect the strategic concerns of the entrepreneur. It may be that the competitive advantage gained in the initial business can be successfully transferred to a subsequent one. Further, several businesses may be a way of diluting risk. These strategic advantages must, of course, be measured against the risk inherent in the entrepreneur’s spreading their attention over a broader area. Management buyouts and buyins are a fruitful area for serial entrepreneurs. According to Wright et al. (1997a) as many as a quarter of managers involved in buy-ins have previously held a significant equity holding as well as managerial responsibility in another venture. Westhead and Wright (1998) explore a range of factors that might encourage serial entrepreneurship, including geographical setting, managerial experience and financing, and find significant effects for a sample of US ventures. Rosa and Scott (1999) studied multiple start-up, cross-ownership and cross-managerial involvement in a sample of Scottish small businesses. They found these to be quite common and an important factor in high-growth businesses. Serial entrepreneurs may be sub-divided into two types: those who start new businesses in sequence, only running one at any time, and those who run several businesses simultaneously.

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• Defensive serial entrepreneurs are those who undertake subsequent ventures because of a forced exit from an earlier one. This need not be because it failed. It could be because the venture was sold, or floated on the stock market to pay off venture capital investment. • Opportunist serial entrepreneurs are those who undertake subsequent ventures because they perceive the opportunity for financial gain, perhaps on a short-term entry–exit basis. • Group-creating serial entrepreneurs are those who undertake serial entrepreneurship because creating a number of businesses is fundamental to the strategy they are pursuing. Two sub-types of group-creating serial entrepreneurs are suggested. Deal-making serials use acquisition as a major part of gaining the new businesses. Organic serials start new businesses from scratch and grow them.

Chapter 2 Types of entrepreneur

The former are referred to as sequential entrepreneurs; the latter as portfolio entrepreneurs. James Dyson, who started the ball-wheelbarrow business before moving on to the cyclone vacuum cleaner business, is a good example of a sequential entrepreneur. Richard Branson, who has diversified his Virgin group into a number of different areas, is a portfolio entrepreneur. Wright et al. (1997b) have suggested that serial entrepreneurs might be classified in the following way:

This adds up to quite a comprehensive classification scheme, which is summarised in Figure 2.2. We should not be overly determined to shoehorn individual entrepreneurs into one particular category. The classification of a particular entrepreneur may change over time. At some point all entrepreneurs are nascent and then novice. Most start with a single business. Serial entrepreneurs start off as singular entrepreneurs. A sequential entrepreneur may decide to retain a business before acquiring the next, and so then become a portfolio entrepreneur. At any one time, an individual entrepreneur may fall into more than one category. A portfolio entrepreneur may adopt a mixture of acquisition and organic growth to expand their portfolio. Strategic and financial objectives may be seen in parallel, or not be clearly delineated at all. The point of classification is to guide thinking, not regiment it. Whatever the approach of the serial entrepreneurs, their desire to succeed with more than one business demonstrates the excitement that the entrepreneurial career offers.

2.3 Entrepreneurship and small business management: a distinction Both small business management and entrepreneurship are of critical importance to the performance of the economy. However, it is Key learning outcome useful to draw a distinction between them since small businesses An appreciation of why the and entrepreneurial ventures serve different economic functions. entrepreneurial venture is They pursue and create new opportunities differently; they fulfil distinct from the small business. the ambitions of their founders and managers in different ways. Supporting them presents different challenges to economic policy makers. Drawing this distinction is an issue of classification. There are two possible approaches, namely to make a distinction between the characteristics of entrepreneurs and small business managers or between entrepreneurial ventures and small businesses. The former is problematical. As discussed in section 1.4, the entrepreneur is not distinguished by a distinct personality type and there is no independent test that can be performed

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Nascent Planning to start a new venture. Venture not yet initiated. Singular Running a single venture

Opportunist Look for profitable deals

(Novice in early stages)

Growth orientated Grow business by increasing range of deals Independence orientated Seek merely to retain independence

Craft Utilise personal skill or knowledge

Expansion orientated Grow business by expanding craft production capacity Income orientated Seek merely to provide steady income for self and family

Serial (or habitual) Involved in running more than one business

Sequential Running only one business at any one time. Leave one business before starting next

Portfolio Run more than one business at one time

Defensive Start new business after (forced) exit from initial business

Deal New business obtained through acquisition of extant business Organic New business initiated and grown from scratch

Opportunistic Leave initial business and start new business because of perceived better opportunity

Deal New business obtained through acquisition of extant business

Opportunistic Add on new business because of perceived financial opportunity. No real strategic consideration

Deal New business obtained through acquisition of extant business

Group Add on new business because of perceived strategic opportunity. Long-term synergy between existing and new business

Deal New business obtained through acquisition of extant business

Organic New business initiated and grown from scratch

Organic New business initiated and grown from scratch

Organic New business initiated and grown from scratch

Figure 2.2 A classification scheme for entrepreneurial ventures 40

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Innovation

Chapter 2 Types of entrepreneur

to identify an entrepreneur. The question is consequently a matter of personal opinion. Some people may regard themselves as true entrepreneurs whereas others may judge themselves to be ‘just’ small business managers. This can be an emotive issue and it is not clear what benefits are to be gained by forcing people into different conceptual bags in this way. Rather than trying to draw a distinction between managers, it is more valuable to differentiate what they manage, that is, to differentiate between the small business and the entrepreneurial venture. There are three essential characteristics which distinguish the entrepreneurial venture from the small business.

The successful entrepreneurial venture is usually based on a significant innovation. This might be a technological innovation, for example a new product or a new way of producing it; it might be an innovation in offering a new service; an innovation in the way something is marketed or distributed; or possibly an innovation in the way the organisation is structured and managed, or in the way relationships are maintained between organisations. The small business, on the other hand, is usually involved in delivering an established product or service. This does not mean that a small business is not doing something new. It may be delivering an innovation to people who would not otherwise have access to it, perhaps at a lower cost or with a higher level of service. However, the small firm’s output is likely to be established and produced in an established way. So while a small business may be new to a locality, it is not doing anything essentially new in a global sense, whereas an entrepreneurial venture is usually based on a significantly new way of doing something.

Potential for growth The size of a business is a poor guide to whether it is entrepreneurial or not. The actual definition of what constitutes a small business is a matter of judgement depending on the industry sector: for example, a firm with one hundred employees would be a very small shipbuilder, but a very large firm of solicitors. However, an entrepreneurial venture usually has a great deal more potential for growth than does a small business. This results from the fact that the entrepreneurial venture is usually based on a significant innovation. The market potential for that innovation will be more than enough to support a small firm. It may even be more than enough to support a large firm and signal the start of an entire new industry. The small business, on the other hand, operates within an established industry and is unique only in terms of its locality. Therefore, it is limited in its growth potential by competitors in adjacent localities. A small business operates within a given market; the entrepreneurial venture is in a position to create its own market. A word of caution is necessary here, since having the potential to grow is not the same as having a right to grow. If it is to enjoy growth, it is still necessary that the entrepreneurial venture be managed proficiently and that it compete effectively, even if it is creating an entirely new market rather than competing within an existing one.

Strategic objectives Objectives are a common feature of managerial life. They take a variety of forms; for example, they may be formal or informal, and they may be directed towards individuals or apply 41

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to the venture as a whole. Most businesses have at least some objectives. Even the smallest firm should have sales targets if not more detailed financial objectives. Objectives may be set for the benefit of external investors as well as for consumption by the internal management. The entrepreneurial venture will usually go beyond the small business in the objectives it sets itself in that it will have strategic objectives. Strategic objectives relate to such things as: • growth targets – year-on-year increases in sales, profits and other financial targets; • market development – activities actually to create and stimulate the growth and shaping of the firm’s market (for example, through advertising and promotion); • market share – the proportion of the market the business serves; and • market position – maintaining the firm’s position in its market relative to competitors. These strategic objectives may be quantified in a variety of ways. They may also be supplemented by a formal mission statement for the venture. This is an idea that will be discussed more fully in Chapter 12. The distinction between a small business and an entrepreneurial venture is not clearcut. Generally we can say that the entrepreneurial venture is distinguished from the small business by its innovation, growth potential and strategic objectives. However, not all entrepreneurial ventures will necessarily show an obvious innovation, clear growth potential or formally articulated strategic objectives, and some small businesses may demonstrate one or two of these characteristics. However, in combination they do add up to distinguish the key character of an entrepreneurial venture, that is, a business that makes significant changes to the world (Figure 2.3).

Figure 2.3 The difference between a small business and an entrepreneurial venture

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• Classification of entrepreneurs is important for a number of reasons, including research, government policy and investor analysis.

• An important approach classifies entrepreneurs on the basis of whether they are: – – – –

craft or opportunity based; singular, sequential or portfolio; income or growth motivated; and on the strategy they use to expand the business.

Chapter 2 Types of entrepreneur

Summary of key ideas

• Entrepreneurial ventures may be distinguished from small businesses on the basis of: – the presence of a significant innovation on which the venture is founded; – the articulation of strategic objectives; – growth potential.

Research themes Intuitive classification schemes

We human beings are inveterate categorisers. When presented with a new object, situation or problem, we tend to compare it to objects, situations or problems we have encountered before. We then group it with the most similar we have in our memory: we categorise. This influences the way we value new objects, react to situations and judge decisions, because we use values, responses and decision outcomes from our experience of stored categories to help us deal with the new. It would be an interesting project to see how naive individuals (those who have no prior knowledge of how entrepreneurs might be classified – this may include entrepreneurs themselves and those who work with them) approach the issue of classification. Prepare a series of short descriptions of entrepreneurial ventures (real or imagined – better that the subject has no prior knowledge of them). These should be of about 200–300 words. Make sure that they are matched in the types of information they contain but that there is variation in the details. Present these on separate sheets of paper to the subject. Have him or her sort them into two or more categories (you can leave the number to the subject or you may dictate the number of categories you want). Once the subject has done this, conduct an interview requesting that the subject explain why they have categorised as they have. Keep this flexible, and probe interesting details. How do such natural classification schemes match with the more formal schemes described in this chapter? Do different individuals agree on the final classification or is it highly variable? Do individuals use the same criteria or not? How does the way in which different subjects weight or prioritise particular features differ? Summarise by exploring what the findings say about the way in which individuals recognise and judge entrepreneurship.

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The effect of classification on judgement For reasons related to those discussed above, we tend to judge things we know (or are told) are in the same category as more similar than things we know to be (or are told to be) in different categories. So if we provide descriptions of two categories and then present a description of an object, situation or decision problem, individuals’ judgements will tend to vary if we suggest it falls into one category or the other even if the descriptions remain the same. For example, up to the year 2000, many businesses eagerly sought to classify themselves as dotcoms because they felt they would be favoured by investors. After the dotcom crash when internet stocks tumbled, most businesses were keen to shake off the label and emphasised the traditionality of their offerings. To a large extent, this reflects a change in investors’ assessment of the dotcom category as a whole, not the prospects of individual businesses. This raises an issue with the classification of entrepreneurs. Collecting entrepreneurs into one category will encourage decision makers to associate them and so bias their judgement. The study might progress as follows. Using the categorisation schemes discussed above, obtain or create short (500 word?) accounts of different types of entrepreneur, their ventures and their performance. Collect these into two categories: one high performing, the other low performing (call these the high- and low-context cases). Next obtain or create an account of a proposed new venture that might be classified with either the high- or low-performing groups (call this the probe case). Take two groups of subjects (at least 25 in each, ideally matched for age, sex and experience) and present each group with all the cases. For one group, associate (based on the classification scheme) the probe case with the high performers; for the other group, associate the probe with the low performers. So both groups have access to the same information; only the association of the probe case changes. Ask the two groups to judge the likely performance of the new venture. In principle, having access to the same information, they should, on average agree. But does the categorisation affect judgement of the venture’s potential? Conclude by considering the implications of the findings for the way in which information about new ventures should be presented.

Cluster analysis of entrepreneurial ventures Cluster analysis represents a variety of techniques for classifying items based on their descriptive characteristics. The methodology is somewhat mathematical but its principles only require basic algebra (a good introductory account of methods is provided by Aldenderer and Blashfield, 1984). The technique involves taking a collection (the more the better) of entrepreneurial ventures described in some detail (these may be from the same sector, or different ones). As a first stage, have a small group brainstorm on what the different characteristics of each venture are. Given this set of descriptive characteristics, then quantify them. Some characteristics (e.g. rate of growth, age of venture, number of businesses in portfolio) are directly numerical; others, such as degree of innovation, might require a judgement using a Likert scale (e.g. highly innovative, moderately innovative, and so on). Once each venture is quantified along each characteristic, apply an appropriate clustering technique and see what categories emerge (a number of software packages

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are available to do this). How does the categorisation change if the weighting of descriptive characteristics is modified? How do these ‘empirical’ categories match up with the ‘prescriptive’ ones described above? Is there a general case to be made for the classification scheme you have devised? How might the scheme be used to develop policy for the ventures in each category (e.g. governmental support, investment issues)?

Key readings The classic papers addressing the issue of entrepreneur classification. Accessible and still worth reading: Carland, J.W., Hoy, F., Boulton, W.R. and Carland, J.C. (1984) ‘Differentiating entrepreneurs from small business owners: a conceptualisation’, Academy of Management Review, Vol. 9, No. 2, pp. 345–59. Gartner, W. (1985) ‘A conceptual framework for describing the phenomenon of new venture creation’, Academy of Management Review, Vol. 10, No. 4, pp. 696–706. Siu, Wai-Sum (1996) ‘Entrepreneurial typology: the case of owner managers in China’, International Small Business Journal, Vol. 14, No. 1, pp. 53–64. Webster, F.A. (1977) ‘Entrepreneurs and ventures: an attempt at classification and clarification’, Academy of Management Review, Vol. 2, No. 1, pp. 54–61. Carland et al.’s approach is a somewhat different from mine, but contrasts rather than contradicts. Useful to see how the same issue in entrepreneurship can be seen from different perspectives.

Suggestions for further reading Aldenderer, M.S. and Blashfield, R.K. (1984) Cluster Analysis, Sage University Paper, Quantitative Applications in the Social Sciences series, No. 44. Newbury Park, CA: Sage. Dunkelberg, W.C. and Cooper, A.C. (1982) ‘Entrepreneurial typologies: an empirical study’, in Vesper, K.H. (ed.) Frontiers of Entrepreneurial Research, Wellesley, MA: Babson College Centre for Entrepreneurial Studies, pp. 1–15. Eisenhardt, K.M. and Forbes, N. (1984) ‘Technical entrepreneurship: an international perspective’, Columbia Journal of World Business, Winter, pp. 31–7. Gartner, W. (1985) ‘A conceptual framework for describing the phenomenon of new venture creation’, Academy of Management Review, Vol. 10, No. 4, pp. 696–706. Gartner, W.B., Bird, B.J. and Starr, J.A. (1992) ‘Acting as if: differentiating entrepreneurial from organisational behaviour’, Entrepreneurship Theory and Practice, Spring, pp. 13–31. Jones-Evans, D. (1995) ‘A typology of technology-based entrepreneurs’, International Journal of Entrepreneurial Research and Behaviour, Vol. 1, No. 1, pp. 26–47.

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Landau, R. (1982) ‘The innovative milieu’, in Lundstedt, S.B. and Colglazier, E.W., Jr (eds) Managing Innovation: The Social Dimensions of Creativity, Invention, and Technology. New York: Pergamon Press. Miner, J.B., Smith, N.R. and Bracker, J.S. (1992) ‘Defining the inventor-entrepreneur in the context of established typologies’, Journal of Business Venturing, Vol. 7, No. 2, pp. 103–13. Oviatt, B.M. and McDougall, P.P. (2005) ‘Defining international entrepreneurship and modeling the speed of internationalization’, Entrepreneurship: Theory and Practice, Vol. 29, No. 5, pp. 537–53. Parker, S.C. (2002) ‘On the dimensionality and composition of entrepreneurship’, Durham Business School working paper. Rosa, P. (1998) ‘Entrepreneurial process of business cluster formation and growth by habitual entrepreneurs’, Entrepreneurship Theory and Practice, Vol. 22, No. 4, pp. 43–61. Rosa, P. and Scott, M. (1999) ‘The prevalence of multiple owners and directors in the SME sector: implications for our understanding of start-up and growth’, Entrepreneurship and Regional Development, Vol. 11, pp. 21–37. Siu, Wai-Sum (1996) ‘Entrepreneurial typology: the case of owner managers in China’, International Small Business Journal, Vol. 14, No. 1, pp. 53–64. Webster, F.A. (1977) ‘Entrepreneurs and ventures: an attempt at classification and clarification’, Academy of Management Review, Vol. 2, No. 1, pp. 54–61. Westhead, P. and Wright, M. (1998) ‘Novice, portfolio and serial founders in rural and urban areas (habitual entrepreneurs and angel investors)’, Entrepreneurship Theory and Practice, Vol. 22, No. 4, pp. 63–100. Westhead, P., Ucbasaran, D. and Wright, M. (2005) ‘Decisions, actions and performance: Do novice, serial and portfolio entrepreneurs differ?’ Journal of Small Business Management, Vol. 43, No. 4, pp. 393–17. Westhead, P., Ucbasaran, D., Wright, M. and Binks, M. (2005) ‘Novice, serial and portfolio entrepreneur behavior and contributions’, Small Business Economics, Vol. 25, No. 2, pp. 109–32. Wright, M., Robbie, K. and Ennew, C. (1997a) ‘Venture capitalists and serial entrepreneurs’, Journal of Business Venturing, Vol. 12, pp. 227–49. Wright, M., Robbie, K. and Ennew, C. (1997b) ‘Serial entrepreneurs’, British Journal of Management, Vol. 8, pp. 251–68. Wright, M., Westhead, P. and Sohl, J. (1998) ‘Editors’ introduction, ‘Habitual entrepreneurs and angel investors’, Entrepreneurship Theory and Practice, Vol. 22, No. 4, pp. 5–21.

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CASE 2.1

7 December 2005

FT

Why it is better to be bootstrapped than well heeled JONATHAN GUTHRIE I love American capitalism. It is so much shinier than the UK version. The numbers are bigger. The ups and downs are more melodramatic. Even the jargon is glossier, making the dreariest concepts seem exciting. The disreputable word ‘debt’, redolent in Britain of Mr Micawber, becomes the far snappier ‘leverage’. Sacking Smith in Accounts because he seems a bit useless becomes ‘delayering’, which sounds clinical, not cruel. ‘Bootstrapping’ is another example. This means setting up a business with an embarrassing insufficiency of pecuniary wherewithal, as us Brits would describe it. Or, as Bootstrapping, a mass market US business book puts it, in very big Wild West-style letters on its front cover: ‘Start and Grow a Successful Company with ALMOST NO MONEY’. This struck a chord with me. The money mentioned by author Greg Gianforte, a Montana entrepreneur whose cover photo suggests he ropes steers for a hobby, is primarily equity capital. I have long thought that the government, the City and the financial media are unhealthily obsessed with this commodity. Few start-ups appear to need it. A recent UK survey showed only three per cent had sold shares to backers. The TV series Dragons’ Den fuels the urban myth that finding a wealthy shareholder is a natural part of setting up a business. If I was an aspiring entrepreneur, that would put me off. The private investors on the show have lots of cash. But you could fit their collective fund of charm and humility into a fruit fly’s armpit. And leave room for the producer’s heart.

Starting a business with ALMOST NO MONEY is a more appealing prospect than prostrating yourself before the show’s chief Mr Nasty, mobile phones tycoon Peter Jones, while he laughs at your bald spot. Entrepreneurs have been starting businesses with zero capital for millennia. All you need is stock supplied on tick, or customers willing to pay for products you have yet to buy or create. Would-be tech moguls have a peculiar fixation with early stage equity capital. Mr Gianforte, whose business RightNow Technologies sells customer service software, says: ‘If you asked 100 recent MBA graduates how to start a [tech] business they would tell you to write a business plan, raise money, build a bonfire and start shovelling cash on to it.’ Mr Gianforte set up his company on more parsimonious lines in 1997, in offices at the back of an estate agency in picturesque Bozeman, Montana. There were no windows. ‘We bought posters of the mountains in WalMart and stuck them on the walls,’ he recalls, because ‘a bootstrapper only spends money when it is absolutely necessary.’ The company now has sales of $85m (£49m) and a market capitalisation of $550m. Max Bleyleben of Kennet, a venture capital firm with offices in London and Silicon Valley, says that bootstrapped tech businesses ‘tend to be more efficient and better at adapting to changes in the market’. Start-ups can generate working capital, he suggests, by getting loans from software resellers and other partners. Alternatively, they can match

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CASE 2.1 CONT. cash-hungry product creation with cashgenerative consulting. Naturally, Mr Bleyleben still believes startups need VC money, otherwise he’d be out of a job. But a company should build up a few millions in turnover first, he says. That means the investor will typically get a smaller stake for a given outlay. Chirag Shah co-founded Trading Partners, a UK supply chain technology company, without early equity backers. The investment bubble burst before any had signed up. Capital was thus limited to savings from the founders’ former careers as ‘vastly overpaid consultants’. Mr Shah says: ‘We would go to customers, find out what they wanted, and start developing the product after we had sold it to them. Our programmers never slept and we took no salaries for two years.’ Turnover is now into ‘double-digit millions’. StaffWare, a UK workflow software startup, survived hand-to-mouth between 1988 and 1995, according to John O’Connell, one of its founders. It extracted development funding from big computing companies such as Unisys and ICL. And it charged software resellers a sign-up fee. StaffWare later floated on AIM [Alternate Investment Market] and was bought out for £130m last year, making Mr O’Connell a wealthy man.

He says: ‘It is much better to be funded by your partners than the City, because it brings you closer to them.’ But he adds that his seven years of bootstrapping were ‘very tough, very unremitting’. Mr O’Connell says: ‘I got good at walking tall while inwardly quaking with fear. You cannot make sales if you look and sound desperate.’ Starting a tech venture is now a lot cheaper than it was for Mr O’Connell because the cost of memory has plummeted. Superior programming languages have increased the productivity of each programmer. Widespread internet use has made promotion easier too. Indeed, early stage tech investors who survived the shakeout of the early 1990s in the US are now getting the cold shoulder from some start-ups, says Mr Bleyleben. ‘These no longer need to raise much money to get started,’ he says, ‘$100,000 will do it, instead of $3m.’ Tech entrepreneurs on both sides of the Atlantic should therefore have increasing opportunities to scrutinise the bald spots of would-be ‘dragons’ beseeching them to sell a stake. After watching a characteristically haughty performance by the Dragons’ Den panellists last week, I find that a pleasing prospect. Source: Jonathan Guthrie, ‘Why it is better to be bootstrapped than well heeled’, Financial Times, 7 December 2005, p. 16. Copyright © 2005 The Financial Times Limited.

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26 January 2006

FT

Jaeger owner sets up fund to support fashion students JON BOONE Harold Tillman, the retail entrepreneur, has set up a scholarship fund to support fashion students in an attempt to address industry concerns that too many fail to fulfil their potential because of a lack of financial support. Mr Tillman, the owner of the Jaeger brand, hoped his £1m gift to the London College of Fashion would help to give students the financial freedom that he had enjoyed. ‘When I was a student in the 60s everything was basically paid for but we know that today there are several students a year who can’t afford to go on and study at MA level. Because they have to repay their student loans, some of them end up taking professions they haven’t even studied, and that is a huge loss to our industry.’ He called on other fashion and retail businesses to support emerging talent through scholarship and mentoring schemes. ‘Fashion is worth around £10bn a year to Britain but it is only based around a very small network of businesses and I don’t think those are aware of how much they rely on students coming through the system. We are not talking about the world class British designers . . . but about the general design pool that most businesses need.’ Philip Green, the retail entrepreneur, has spent £5m setting up a Fashion Retail Academy to give teenagers aged 16–18, the skills he said were lacking among recruits to his industry. Frances Corner, head of the LCF, welcomed the donation and said: ‘The creative industries

are vital for our economic future and yet while China, India and Singapore are putting huge amounts into their creative businesses many people here don’t seem to realise that in order to develop major fashion companies, designers need to be supported . . . when they are still at the one man band stage.’ In 2004, the clothing industry produced almost £4bn of goods and employed more than 90,000. If the textile industry is added, the combined sectors produce more than £9.5bn worth of goods at manufacturers’ prices and employ 180,000 people. Overseas sales combined are worth more than £6bn at manufacturers’ prices. Mr Tillman’s gift to the LCF will pay for 10 MA places at the college, which is celebrating its 100th anniversary this year. Graduates will also receive work placements at Jaeger or one of Mr Tillman’s other businesses. Ms Corner said with most government funding focused on undergraduates many fashion students who wanted to study further were unable to do so. ‘This will be a huge help because students have to spend a lot of money on materials and producing a portfolio and many of them have considerable debt. Many . . . will want to start their own businesses, which obviously requires even more funding.’

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CASE 2.2

Source: Jon Boone, ‘Jaeger owner sets up fund to support fashion students’, Financial Times, 26 January 2006, p. 3. Copyright © 2006 The Financial Times Limited.

Discussion Point 1. Using the scheme developed in the chapter, classify Greg Gianforte and Philip Green as entrepreneurs.

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CHAPTER 3

The entrepreneurial personality Chapter overview This chapter builds on the initial discussion (section 1.4) of the role of personality factors in entrepreneurial inclination, motivation and performance. The difficulties in relating personality to entrepreneurship are explored, particularly in terms of instrumentalising these fundamental concepts. Different psychological theories of personality are introduced. An introductory account of the increasingly important role that cognitive psychology is playing in entrepreneurship studies is offered. The role of personality testing in predicting entrepreneurial behaviour is considered and some difficulties with it explored.

3.1 Personality and entrepreneurship: some theoretical issues The idea that an entrepreneur is, in some way, a special sort of person is commonly held. Surveys that I conduct with undergraduKey learning outcome ates and postgraduates at the start of courses in entrepreneurship Recognition of some of the suggest that typically 85 per cent of students hold the belief that theoretical and methodological there is something unique about the personality of entrepreneurs. problems encountered in This belief is persistent. At the end of the course, in which the attempting to link the concepts idea of the entrepreneurial personality is challenged, 65 per cent of entrepreneurship and still retain this belief. The arguments put forward are accepted, individual personality. but there is insistence that, intuitively, the idea still ‘feels right’. Section 1.4 considered some general schools of thinking about the entrepreneurial personality and some issues with them. This chapter expands upon these preliminary ideas. The primary objective of this chapter is not to offer a resolution, but to explore the theoretical and methodological difficulties in settling the issue. The claim that entrepreneurs have a special, or distinctive, personality is, ultimately empirical. It is something that can be examined and demonstrated to be right or wrong. The methodology for doing this has four aspects: the instrumentalisation of entrepreneurship and personality, the ontology of personality and theoretical pragmatics. It is useful to consider these in detail before moving on to consider different schools of thinking about personality.

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Instrumentalisation refers to the methodological approach taken to defining, characterising and measuring a variable that plays a part in some theoretical explanation. If the personality of entrepreneurs is to be compared with that of non-entrepreneurs then a strict specification of who is an entrepreneur is necessary. As was made evident in Chapter 1, this is not an easy question to answer. The specification must be in terms of economic function or managerial characteristics. It cannot be in psychological terms because this would make the theory self-fulfilling. The claim is that certain tasks, or economic causality, attract (or perhaps lead to the development of) particular personality types. We cannot use a method in which individuals judge who, from a sample of individuals, are entrepreneurial or not, unless we are sure that the judges are not using (explicitly or implicitly) presumptive personality criteria. A common criterion is simply that a person must have started their own business. An example here is the study by Blanchflower and Oswald (1998). This is useful, because it is quite specific and easy to observe and confirm. However, it is very broad as it includes small business managers as well as entrepreneurs who start and develop large ventures. It also excludes intrapreneurs. The context of, experience of and motivations for starting a business are highly variable. It would be surprising if all business starters were unified within a single personality type. More fruitful might be to use the way in which entrepreneurs are recognised by different schools of economic thinking (see section 6.1). However, here, we noted the difficulty in distinguishing entrepreneurs from other managers. It is a matter of degree. Issues such as identifying significant new opportunities (Austrian School), or being responsible for evaluating and responding to customer demand (heterogeneous demand school), or significantly moulding an organisation’s resource base (resource-based view), or positioning a business in a particular sector (industrial organisational economic school) might be used as scales. A weighted average approach to assigning a numerical degree of entrepreneurship to individuals might then be adopted.

Chapter 3 The entrepreneurial personality

Instrumentalisation of the concept of entrepreneurship

Instrumentalisation of personality If entrepreneurial behaviour and effect are to be correlated with personality, then not only entrepreneurship but also personality must be a strictly defined concept. There is not, though, a universal agreement on what, exactly, personality is, what its theoretical underpinning should be or how it should be measured (even if it can be measured). The ways in which different schools of psychology see the personality concept is discussed in more detail below. Whichever conceptualisation is adopted, personality must be something that can be determined independently of the individual’s specific domain of entrepreneurial activity. Otherwise there is the danger that the domain of activity predetermines personality allocations, once again making the theory self-fulfilling. For example, we may judge an ‘eagerness to take risks’ as a personality trait. However, entrepreneurs are in jobs where taking risks is (or is seen to be) a major part of their activity. Individuals in other jobs may not get the chance to take risks. This does not mean that, given the right circ*mstances, they would not be eager to take risks. If so, then risk taking is an aspect of that person’s personality, he or she just has not had a chance to reveal it. If risk taking is regarded as (potentially) significant, then there must be a test for risk propensity independent of individuals’ task contexts.

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Ontology of personality The way in which theories of personality are approached and constructed is sensitive to assumptions about the ontology of personality. Ontology is the branch of analytical philosophy that is concerned with the existence of concepts. Broadly, there are three positions. Realism is the view that a concept has an actual existence in the world independent of our understanding of it. It is there to be discovered through inquiry. Positivism proposes that only that which can be observed is real and that we should be suspicious of things we cannot observe. Instrumentalism is the view that concepts exist only in the sense that they provide accounts of the world that lead to useful and correct predictions. A realist view of personality would claim that personality is something that individuals actually have and it is the responsibility of research programmes to describe it. A positivist position might be more suspicious. Can we actually observe personality? If so, in what way? Do we need a concept of personality in addition to the notion of ‘behaviour’? Personality might be regarded as a way of summarising consistencies and patterns in behaviour, but it is no more than a summary, not something directly observable. An instrumentalist position might claim that personality is a useful concept in that it allows us to account for and predict behaviour and we should accept its existence on this basis.

Theoretical pragmatics The final aspect of a theory linking personality to entrepreneurship is its pragmatics. Broadly, what do we want the theory for and what do we want it to do? There are three positions with respect to this. A descriptive theory is based on independent observations of an individual’s personality and their entrepreneurial inclination, behaviour and performance. It then describes correlations between the two. A descriptive theory is simply an account of the way in which the world works. A normative theory, on the other hand, goes further. It makes a claim that certain aspects of personality are necessary for effective entrepreneurial behaviour. A normative theory can be based on empirical observation within a descriptive theory but usually has an element of theoretical presumption that precedes empirical observation (for example, that entrepreneurs must be individuals who respond positively to change, whether or not this is actually observed). Normative theories direct descriptive theories in a particular direction, suggesting which factors are important and should be the basis of empirical study. Finally, prescriptive theories suggest that if one wants to be a successful entrepreneur then one should have (or adopt or develop) a particular personality type. Prescriptive theories are usually based on the edicts of normative theories or findings of descriptive theories. Each of the above three types of theory has a different role. Descriptive theories are concerned with how the world is. They regard the personality–entrepreneurship link as a phenomenon that can be discovered and is meaningful in its own terms. Normative theories aspire to make predictions. Given a personality type, then the success or otherwise of that type in an entrepreneurial career can be predicted (to some degree). Personality testing of nascent entrepreneurs makes practical use of normative theories (see below). Prescriptive theories suggest pathways of development to entrepreneurs in that they suggest the personality characteristics entrepreneurs should aim to acquire if they are to be successful. They are important in programmes for education of entrepreneurs.

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These different types of theory differ in the way they instrumentalise the personality concept and the ontology they ascribe to personality. Descriptive theories require that personality be something observable, measurable and independent of entrepreneurial activity. They may be comfortable with a positivistic or instrumental ontology. Normative theories are not so dependent on observable counterparts of personality. A normative theory may claim personality to be something that cannot be revealed in a positivistic or even instrumental sense, although this would reduce the validity of the theory to many researchers in the field. Prescriptive theories must limit themselves to aspects of personality that can be developed through conscious action, whether those aspects can be independently measured or not. The ways in which the entrepreneur may be defined has been discussed in Chapter 1, and these will be expanded upon from an economic perspective in Chapter 6.

3.2 Schools of thinking on personality

Key learning outcome An introductory understanding of the ways that different schools of psychology approach the concept of personality and the implications of those approaches for thinking about the personality of the entrepreneur.

Psychology, like economics, is a subject that is characterised by numerous schools that agree on some particulars and disagree on others. A fairly general definition of personality might be along the lines of:

A relatively stable pattern or profile of thoughts, feelings and actions that characterise a particular individual or

What makes us unique. Such definitions do not get us very far in making personality an observable and measurable concept. Although some advances have been made in this area by psychology, many psychologists are becoming suspicious of the notion of personality. It is interesting to note that the Penguin Reference Dictionary of Psychology (3rd edition, 2001) notes at the beginning to its entry on personality that the term is One of the classic ‘chapter heading’ words in psychology. That is, a term so resistant to definition and so broad in usage that no coherent simple statement about it can be made – hence the wise author uses it as the title of a chapter and then writes about it without incurring any of the definitional responsibilities that go with introducing it into the text. As with entrepreneurship, it is not so much that no definition of personality can be found, but that we are embarrassed by riches. A number of different schools of psychology lay claim to the concept (and many other related ones) and offer often contradictory or non-comparable (the technical term is incommensurate) definitions. Each school has its own theoretical underpinning and methodological approach. Critically, each sees the concept of personality in a different light. Before reviewing the leading schools it is worthwhile to consider what they agree upon. This will reveal the core of

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beliefs about what ‘personality’ is. Carver and Scheier (2000) develop a definition of personality that covers areas of general agreement across the different schools. They suggest personality is: • Organised – it has a coherent unity and is not fragmented. • Active – personality is maintained by and revealed through dynamic processes. • Physical – personality is a psychological concept, but it is derived from physical (anatomical, neurophysiological) processes, particularly, but not exclusively, in the brain. • Causal – personality determines how an individual will act and react in particular circ*mstances. • Regular – the personality of an individual is consistent over periods of time, and leads to consistent patterns of behaviour. • Manifest – it shows up in many different ways, including physical states, affective moods, personal feelings, decisions and actions. Around this core, different psychological schools develop different interpretations of the personality concept. The more important are briefly reviewed below. Accounts of these different perspectives can be found in any good textbook on the psychology of personality. Phares (1987), Mischel (1999) and Carver and Scheier (2000) are recommended. A very accessible introductory account can be found in Jarvis (2000). For an excellent review of recent thinking on the nature of personality the more ambitious student might try David Funder’s review in the 2001 Annual Review of Psychology.

Psychodynamic approaches Psychodynamic approaches to personality see it as the result of a series of internal psychological processes that may work in harmony or in discord. The most famous exemplifier of the psychodynamic approach was the Viennese therapist Sigmund Freud (1856–1939). Freud suggested that such forces psychologically determined human behaviour. These were not always under conscious control. The unconscious mind played an important role and these forces were often manifest beyond awareness. Freud suggested three primary processes in the anatomy of the mind: the Id, which lies in the unconscious, relates to basic biological urges and impulses. It includes biologically determined instincts that demand immediate gratification. The Id is impulsive and irrational. The Superego, on the other hand, manages social behaviour and graces. The Superego, which lies in both the conscious and unconscious, maintains an individual’s moral beliefs and is imparted by parents and socialisation processes. The Ego, which lies in the conscious mind, mediates between the Id and Superego. It helps the Superego keep the Id in check while making sure that the Superego is informed of the person’s deeper wants and needs within the Id. The Ego is rational, calculating and plans ahead. Freud developed his theory based on the presumption that these three processes should work in harmony in a balanced, dynamic way and that if they were out of step then some form of mental strife or even illness would result. This strife took the form of three anxieties: neurotic anxiety, the belief that one’s base instincts would take control (and so one would lose control of one’s behaviour), and moral anxiety about actions one has taken (guilt, regret, embarrassment, etc.). These are derived from reality anxiety, justified (at least to self) beliefs that one is in some sort of danger. Motivation arises from the transformation of instincts within the Id. If these are not socially acceptable, then they must be transformed

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into actions that are. A number of psychologists have added to, and developed, Freud’s thinking. Freud divides psychologists. Some are intensely loyal to his ideas. Others dismiss his work as speculative, unscientific and not testable in any real sense. If the claim is made that entrepreneurs are so, because running one’s own venture is a way of managing these anxieties (the ‘misfit’ school might have some sympathy with this idea) and that motivation arises from motive transformation, then these claims are not such that can be empirically validated through objective inquiry. It should be recognised that this is not of immediate concern to researchers who are adopting a subjective methodological approach (such methodologies are explored further in Chapter 28).

A disposition is a tendency to act in a particular way in a particular situation. We may say of a person, she is outgoing, or alternatively, introspective. Some people are predictable; others less so. Some people look towards internalised values to judge their acts; others look outside themselves to others’ reactions to judge their acts. And so on. Features like these are referred to as traits. Traits are dimensions. An individual may have more or less of a trait and be located somewhere along a spectrum. Eysenck (1975) suggested that two key traits were the introvert–extrovert dimension and the emotionally stable–unstable dimension. Combining these two independently gave rise to four basic personality types: stable introverts were phlegmatic, unstable introverts were melancholic, stable extroverts were sanguine and unstable extroverts were choleric. A number of workers have developed a five-factor model of traits (see Carver and Scheier, 2000, p. 69). The five factors relate to the individual’s characterisation in their approach to power, love, work, affect (emotionality) and intellect. The idea of traits is linked to some ideas in cognitive psychology (see below). Research has been conducted to see if entrepreneurs are drawn disproportionately from one particular trait group. The findings are generally negative; all trait groups are represented in entrepreneurs as they are in the wider population. However, there are issues of methodology and definition, and research continues.

Biological approaches The term ‘biological approaches’ covers a range of approaches and might include the evolutionary approaches discussed below. Central, though, is the idea that personality is, fundamentally, a biological process. A specific idea is that personality is dictated by genes. If so, personality can be explained through genetics. At face value, this is quite convincing. After all, our genes dictate our bodies, so why not our minds as well? Environmental factors also play a part. We know that personality must, in part, be physically located, because personality can be changed by physical processes (alcohol, narcotics and brain lesions, for example). The central question is, to what extent is behaviour determined by genetics or environment? Some evidence supporting the genetic claim has been obtained from twin studies. Identical twins share their genetic complement, while non-identical twins share just half (the same as any siblings). By assessing the personalities of twin-pairs separated at birth through adoption, any closer match between the personalities of identical twins over that of non-identical

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must be due to genetic factors. This area of research is highly controversial. Not least among the objections is the notion that the approach negates the role of society and personal experience in moulding personality. The study of individual genetic endowments has been transformed by modern DNA technology and the Human Genome Project. To my knowledge, no twin studies have been conducted on entrepreneurs, nor have the genetics of entrepreneurs been explored. Such studies will be an interesting, but frightening, prospect. Can we really imagine venture capitalists giving up reading business plans and talking to entrepreneurs and instead sending them off for DNA testing?

Evolutionary psychological approaches Evolutionary psychology is based on the premise that modern human cognitive skills are the result of evolution through selective forces. Human beings were essentially ‘completed’ evolutionarily by about 100,000 years ago. Since then we have not changed significantly in terms of physical characteristics and mental architecture. So we cannot look to the modern world to explain our current repertoire of cognitive skills; rather we must look to that period in the late Palaeolithic when we became what we are. An important aspect of our situation then was the growing complexity of social interactions, motivated not least by the possibility of increasing welfare through the exchange of goods. One of the more controversial claims made by evolutionary psychology is that our cognition is modularised. We do not have a single, integrated mental system. The human mind is composed of a series of systems that have evolved to deal with different decision situations. There is debate as to the extent to which these systems are integrated at a higher level. Accessible accounts of this idea, and the debate it has engendered, are given by Corballis and Lea (1999), Badco*ck (2000), Carruthers and Chamberlain (2000), Cartwright (2000), Oyama (2000), Wright (2000) and Barrett et al. (2002). Ofek (2001) gives an account of the economic basis of human evolution. By its nature, though, evolutionary psychology is talking about the psychology of human beings as a species, not at an individual level. Its concern is with our common psychological inheritance. So while it may offer an explanation of entrepreneurial behaviour in general, it is less well placed (at this time) to explain why one person decides to take on the role of entrepreneur and another does not.

Phenomenological approaches The schools of thinking so far discussed share a belief in the commonality of personality. Individuals may fall into different categories, but within those categories, individuals ‘share’ a personality. The phenomenological approach takes issue with this. It emphasises the uniqueness of each individual and the irreproducibility of his or her historical and introspective experiences. It prioritises subjective experience over objective classification. Usually associated with the approach are two beliefs about human beings. The first is that humans are endowed with free will, the possibility of making choices for themselves. In practice, these choices may be restricted by both external and internal factors. In principle, though, these restrictions can be removed, freeing the individual to make free choices. Second, it regards humans as self-perfecting, drawn towards the ‘good’, in terms of health, welfare and personal maturity. The phenomenological approach is, to a greater or lesser degree, antipositivistic (see Chapter 28). It does not concern itself with generalisations. It prefers to

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Behavioural approaches Behavioural psychology was founded largely by the animal psychologist B.F. Skinner, who, in the late 1940s, studied behavioural conditioning in pigeons. He moved on to extend his ideas to humans. The basic postulates of behaviourism are that psychology must become a ‘proper’ science and so should concern itself only with what is observable (behaviour) and forget about the unobservable (introspection). In this respect, behaviourism is super-objective and at the opposite end of the scale to phenomenological approaches. Skinner’s methodology was to connect human action directly to externally imposed stimuli without calling on the notion of mind as an intervening factor. As might be imagined, Skinner’s ideas were, and still are, highly controversial. Skinner’s rather brutal behaviourism quickly lost favour when its limitations in explaining some human actions were demonstrated (the most important area is in language development and performance). Some attempts were made to salvage the ideas, but behaviourism has largely been superseded by cognitive psychology (see below), which still connects actions to inputs, but calls upon personal cognitive processes as an intervening mechanism. Most studies into entrepreneurial psychology came at a time after behaviourism was in descent. Despite this, behaviourist ideas are still influential, often at the level of the metaphor. Do we not say entrepreneurs are stimulated by new opportunities? Or that making more capital available will encourage more people to become entrepreneurs? Or that certain social, cultural and economic conditions facilitate entrepreneurship? Unadorned with concern over what is actually happening in the individual mind to connect these stimuli to the response of becoming entrepreneurial, these are in essence behaviourist linkages.

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regard accounts of psychology as essentially personal narratives. There are some good phenomenological accounts of the psychological experiences of individual entrepreneurs, but, necessarily, they cannot be extended to the experience of others. Phenomenological approaches cannot explain why some people become entrepreneurs and others do not, simply because it does not set out to.

Social-cognitive learning approaches The social-cognitive learning school moves the debate from concern with personality as something, essentially at least, predetermined and ‘in the head’ of the individual to something that results from social experience and interaction. It places emphasis on personality as something that is, to a greater or lesser extent, imparted to the individual by others. Social-cognitive learning approaches are very diverse and this school is not unified by a single methodology or even theoretical outlook. However, there is agreement on the importance of learning in a social context. Leadership and the role of mentors are brought into play, as are personal learning styles and strategies. Life experiences such as exposure to incubating organisations are drawn in, along with antecedent (inherent, given) personality factors. This school is influential in the study of entrepreneurship particularly because of its flexibility in dealing with these issues, which are widely seen as relevant. A number of workers have developed social-cognitive learning models of entrepreneurship. An important example includes Cooper (1981), who suggested a model that included three sets of factors influencing entrepreneurial start-up: antecedent influences (those things inherent to the entrepreneur such as genetic endowment, education and life experiences), incubator organisation

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experience, and environmental experiences (including the availability of opportunities and resources). The flexibility of the approach, while a strength, is also a weakness. In being able to call upon a wide range of factors, the approach loses specificity. It can fail to make clear predictions, and the move to entrepreneurship can always be accounted for given the range of explanatory factors available. This is not to say that the approach has not offered a number of important insights, especially when handled by researchers careful to control its methodology.

Attribution-based approaches All of the ideas explored so far have assumed (implicitly at least) that personality is something we, as individuals, possess. Different schools disagree on how it is located and what its psychological underpinning is, but where it is located is not at issue. Attribution theories take a more radical approach and suggest that personality is not so much something an individual has, but is something awarded to individuals by others. Personality is in the eye of the beholder, not the beholden. Attribution theory was largely founded by H.H. Kelley (1973), who asked why individuals tended to assign objects to particular categories and specific events to certain causes. He concluded that individual decision makers were ‘intuitive scientists’ in that they used an intuitive analysis of variance to make assignments. In particular they looked at three factors: consistency, distinctiveness and consensus. The suggestion in attribution theory is that when allocating an individual of whom we have experience to a particular personality type (either a formal typing from psychological theory, or our personal intuitive categories), we decide across three factors, here applied to the label of ‘entrepreneur’: • Consistency in the way in which an individual reacts – e.g. we always expect entrepreneurs to react positively and embrace new opportunities. • Distinctiveness in that the individual reacts differently to those stimuli we regard as proper entrepreneurial stimuli, compared with how they react to stimuli we do not regard as such – e.g. we may expect an entrepreneur to be a tough negotiator in a business setting, but not so in his or her family life. • Consensus in that the entrepreneur acts differently from those we do not regard as entrepreneurs. If all people react in a certain way, then there is no point in looking towards that action as a way of distinguishing entrepreneurs from others. If we see that an individual is consistent in reacting positively to entrepreneurial stimuli, is distinctive in their response to specifically entrepreneurial stimuli and is of low consensus in that they react differently from most others, then we will label that person an entrepreneur. The important point to note is that it is we who are assigning that label, not the ‘entrepreneur’ her or himself. Kelley’s attribution theory has been very influential in the social sciences (Figure 3.1). Within ten years of its publication, over one thousand papers in the social sciences were published citing it (see Kelley and Michela’s review (1980) for an account of early application and developments of the theory). Important avenues of application are in investigating the way dispositions are attributed to an actor (e.g. Ajzen, 1971), the way in which individuals attribute success and failure to themselves or to external factors beyond their control (e.g. Bernstein and Stephan, 1979) and differences in attribution of causal effect between individuals involved in an event (actors) and those looking in on the event

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Figure 3.1 Kelley’s attribution theory model and its application to the assignment of entrepreneurial personality

(observers) (e.g. Arkin and Duval, 1975). Despite the number of studies, however, I know of no research that utilises attribution theory specifically to explore how people assign the label ‘entrepreneur’ to other people. There is a clear research opportunity here.

The limitations of personality models Personality is a concept of central importance in psychology. It plays a crucial role in aiding our understanding of the social interaction between people and it has both illuminated our understanding of, and enriched our appreciation of, the entrepreneur. However, it is important that we do not let an inappropriate idea of personality distort our view. There is no real evidence to suggest that there is a single ‘entrepreneurial personality’. People of all personality types, attitudes and dispositions not only become entrepreneurs but become successful entrepreneurs. A consequence of this is that personality testing does not provide a good indicator of who will, or will not, be a successful entrepreneur. To be a successful entrepreneur takes many things: ambition, drive, hard work, effort in learning to understand a business and practice as a manager. But it does not demand a particular personality. Experience shows that a reserved introvert who carefully calculates their next move can look forward to as much entrepreneurial success as their more ‘theatrical’, and instinctive, counterpart. No one with entrepreneurial ambitions should ever dismiss the option of an entrepreneurial career because they do not feel they are the ‘right type’ of person. To do so reveals more about their misconceptions of entrepreneurship than it does about their potential.

3.3 Entrepreneurship and psychometric testing Personality testing is part of a more general class of psychological tests generally known as psychometric tests. Psychometric tests aim to discover something about an individual’s

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mental architecture by having him or her answer a specific series of questions. These may be on the basis of written answers (‘penciland-paper’ tests) or an interview, or a combination of the two. In Introductory understanding of addition to personality tests, psychometric testing includes general the principles of personality intelligence testing (such as the IQ test), tests for particular mental testing, the challenges to aptitudes and a series of techniques for examining psychological developing effective personality abnormalities. The most famous test here is the Rorschach test, in tests, and the role of the tests which subjects reveal what they see in a random pattern of ink in entrepreneurship research blots (although few psychologists now take this particular test and investors’ selection of seriously). entrepreneurs. Tests that aim to reveal an individual’s personality (or personal outlook) face a number of challenges. First, the questions posed must be meaningful and relevant in revealing specific aspects of personality. As will be appreciated from the earlier discussion of schools of thought about personality, the relevance of particular questions will be sensitive to theoretical assumptions being made about what, exactly, personality is. Second, the responses must be correlated to particular personality factors with regard for proper statistical methods. Third, the subject must give honest answers to the questions. Their response should not be influenced by what they feel the investigator wants them to say, nor should they answer on behalf of the person they want to be, rather than actually are. Fourth, if the test is to have any value as a predictive tool, it must be demonstrated that the way in which the subject responds to the test matches up with the way they actually behave in the real world. Fifth, those aspects of personality revealed must be stable over time. All of these issues present significant methodological challenges and much of the research in the psychometrics field is aimed at resolving them (the interested student is referred to a standard work in the field such as Kaplan and Saccuzzo (1997) for details on methodology and research). The challenges are particularly acute when it comes to testing the personality of entrepreneurs. Two groups have a particular interest in this area: researchers who are exploring the links between personality and entrepreneurial inclination, and investors who want to be able to predict the likely performance of an individual seeking financial support. Clearly, there is much sympathy between these two groups and they often work in collaboration. A number of tests have been developed for testing entrepreneurs. The most popular are the proactive personality disposition (PPD) and the entrepreneurial-orientation (EO) scale. Proactivity is defined as the extent to which individuals take action to control their environments. This proactivity is measured by asking subjects how they would react in a variety of situations. The assumption is that the more proactive a person is, the more likely they are to is to seek out and pursue an entrepreneurial career. Crant (1996) tested individuals’ proactivity measures and then correlated them (along with variables such as sex, education and parental entrepreneurship) with intentions to start a business. The study found that proactivity correlated positively with intention. Becherer and Maurer (1999) tested the proactivity of 215 small business presidents and found that the president’s proactivity correlated with the firm’s overall entrepreneurial posture (as judged independently), but could not be correlated with the president’s leadership style. The EO scale probes the entrepreneur’s strategic outlook, rather than personality directly, and it can be applied to

Key learning outcome

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firms as well as to individuals. However, it is a psychometric test methodology. The test has eight items that ask, for example, whether the entrepreneur/entrepreneur’s firm looks towards introducing new products, or prefers to rely on existing products, whether they tend to initiate actions that competitors react to, or vice versa, and whether the entrepreneur prefers bold, far-reaching acts to cautious incremental acts, and so on. Kreiser et al. report studies on the regularity of these orientations on an international basis (2002a) and explore how they are affected by environmental uncertainty (2002b). These authors give full details of the test. Weaver et al. (2002) also explore the effect of environmental uncertainty on entrepreneurial orientation. The findings of studies using instruments such as the PPD and EO scale have produced mixed results. As noted above and in Chapter 1, it is fair to say that, at present, no real consensus has emerged as to the link between personality and entrepreneurial behaviour. No test has consistently and robustly demonstrated any clear, significant connection. (The research picture is a bit distorted because researchers, and journal editors, tend to prefer studies with positive results rather than negative. This is an issue in all walks of academic inquiry, not just entrepreneurship. The negative findings of the Blanchflower and Oswald study (1998) are a notable exception; see section 5.1.) However, research continues and new methodological advances in the future may make the picture clearer (my belief is that cognitive approaches have great potential and are likely to be the most valuable in the future). Nevertheless, many venture capitalists do insist on prospective entrepreneurs undergoing personality tests before they are awarded investment funds. A number of agencies have started up offering this service to venture capitalists. If they are not going to reveal anything of value, why should they be willing to pay for them? The answer lies (and what follows is very much a personal view) not in personality tests as such, but in the wider nature of human decision making. We are impelled to make sense of the world. We like regularity and patterns (which is why we see faces and other objects in random ink blots). We like to connect events to clear, unambiguous causes, because then we can make decisions influencing them (or at least feel we can). Unfortunately many aspects of the real world are not connected through simple cause and effect chains; they are causally ambiguous. So we seek, and grasp at, simple explanations that give accounts of why contingencies happen. After all, no matter how often it is demonstrated that astrology, tarot card reading and handwriting analysis are sheer nonsense, with no predictive or explanatory power whatsoever, many people simply refuse to give up their belief in them, because in doing so they lose their ability to explain how the world works, something they value greatly. The decision by a venture capitalist to invest, or not, in a particular personality test is a major one. It is fundamentally a matter of judgement and that judgement is hard to explain (even good venture capitalists find it hard to explain why they are good). A lot of money and risk is involved. That risk is not just financial. The venture capitalist’s reputation and career prospects are on the line as well. Anything that can externalise and objectify an investment decision will be valued. So some venture capitalists’ belief in the value of personality testing is based not so much on the fact that it highlights the best investment opportunities, but if the final decision is the wrong one, the investor can point to something public and explicit that is outside his or her own judgement to explain why. In short, it is a self-defence mechanism. But such self-defence may be rational if the investor can safeguard his or her reputation using it.

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Summary of key ideas • The notion that entrepreneurs, as a group, share some aspects of personality that makes them different to non-entrepreneurs is intuitively appealing.

• However, establishing if this is so is problematical. • Any theory linking entrepreneurship to personality must be clear on what the terms mean and how they can be (independently) measured (instrumentalised).

• This is a challenge with both concepts. It is particularly so with personality. • Different schools of psychological thinking define, characterise and measure personality in different ways. Important schools include: – psychodynamic – dispositional – biological – evolutionary – phenomenological – behavioural – social-cognitive learning – attributional.

• Personality testing has been used as both a practical and research tool for evaluating and studying entrepreneurs. However, it is premature to suggest that such testing is unambiguously able to distinguish entrepreneurs from non-entrepreneurs.

• Cognitive approaches consider how humans acquire, store and process information in order to make decisions. Whether entrepreneurs (as a group) are distinct from non-entrepreneurs in their cognitive style and strategy is not yet clear, but it is the subject of extensive research.

• Entrepreneurs are decision makers. The experimental study of human decision making is a fast-growing area that promises to illuminate the way in which entrepreneurs think.

Research themes Presumptions about entrepreneurial personality As noted at the beginning of this chapter, many people feel, intuitively, that entrepreneurs have a particular sort of personality. This may be researched further using a Delphi technique. The first stage would be to identify a group of individuals (say 30–50) who might be expected to have developed such a belief – for example, practising entrepreneurs,

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people who work with entrepreneurs, management consultants, academics in the business field, supporting agencies, local and national politicians. Contact them, asking four openended questions. First, what do they think is and how would they define ‘personality’? Second, how would they define the term ‘entrepreneur’? Third, what personality characteristics would they associate with the entrepreneur and how are these different from the population as a whole? Fourth, what is the role of these personality characteristics in entrepreneurial success? Once the responses have been collected, go through them, coding the points raised. Different people say the same or similar things in different ways. Try to find the core issues in the responses to each question and summarise them as single words or propositions. Next, set up a survey based on these propositions. Submit it to each of the original respondents, asking for the degree to which they agree or disagree with the propositions (a Likert scale may be used). Once the findings have been summarised (perhaps graphically), resubmit them to the respondents, getting their final view on the overall findings. You may ask if they would change their original opinion given the aggregated findings. As a final analysis, conclude the nature of people’s presumption about the link between personality and entrepreneurial activity. Is this consistent or do people hold widely different views? Is there a core of assumptions? How might these presumptions affect the way in which entrepreneurs see themselves, the personality they aspire to and how those around them see them?

A literature review There is an extensive literature on the relationship between personality and entrepreneurial inclination and behaviour. References to some of the key studies are given in the suggested reading. A search by an academic search engine will find many more. Consider these studies chronologically. Review each, asking how the concepts of entrepreneur and personality are instrumentalised, make evident the assumptions about the ontology of personality and expose the underlying pragmatics using the scheme discussed above. Are these aspects discussed explicitly in the study or are they implicit? How are the notions of ‘entrepreneur’ and ‘personality’ defined? What issues might there be with the instrumentalisations selected? How do they support the methodology used? Do the findings support the notion of an entrepreneurial personality or not? What is the current stage of knowledge and what issues remain to be investigated? Summarise by discussing the trends in these issues and map out directions for future studies.

Correlating entrepreneurial activity with personality Identify a pool of individuals whom you (based on some explicit criteria that do not involve personality, for example managerial history or business type) consider to be entrepreneurs and a complementary set of individuals who are not. Ideally these should be matched for age, sex and sector they are working in. Construct a survey that asks those selected how they would react in certain (briefly described) situations. For example, how they would react if presented with a new business opportunity, or how they would deal

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with a leadership challenge, or would approach a particular negotiation (the EO scale may be adopted). The aim here is to have the subject reveal something about their personality. It is, of course, being assumed here that the subjects’ approach to the situation is an indicator of personality (i.e. a rather behavioural definition of personality). Aim for around twenty or so situations. You may wish to limit subjects’ responses to one of a few (four to six) options for each situation. These options may be found by coding responses from an open-ended preliminary study. Once the responses have been collected the next stage would be to have an independent group of judges (perhaps other students) assess the responses and categorise the individuals as entrepreneurial or not. How well does the categorisation judgement match up with the actuality of whether a subject is an entrepreneur or not (based on your initial definition)? Does personality (as revealed by the subjects’ responses) provide a good lead indicator of who is, or is not, an entrepreneur? Might a better correlation be obtained if the entrepreneur is defined in a different way? In the summary, consider the limitations of this methodological approach and how it might be improved.

Key readings Many psychologically minded students of entrepreneurship have not given up on the notion of the entrepreneurial personality. Having been somewhat dismissive of the concept, it seems only fair that I recommend two recent studies that take a more positive view. Both also provide excellent reviews of the issues involved. From a more practical perspective is: Chapman, M. (2000) ‘“When the entrepreneur sneezes, the organization catches a cold”: a practitioner’s perspective on the state of the art in research on the entrepreneurial personality and entrepreneurial process’, European Journal of Work and Organizational Psychology, Vol. 9, No. 1, pp. 97–101. Slightly more theoretical is: Müller, G.F. and Gappisch, C. (2005) ‘Personality types of entrepreneur’, Psychological Reports, Vol. 96, No. 3, pp. 737–46. You decide!

Suggestions for further reading Ajzen, I. (1971) ‘Attributions of dispositions to an actor: effects of perceived decision freedom and behavioural utilities’, Journal of Personality and Social Psychology, Vol. 18, No. 2, pp. 144–56. Amundson, N.E. (1995) ‘An interactive model of career decision-making’, Journal of Employment Counselling, Vol. 32, No. 1, pp. 11–21. Arkin, R.M. and Duval, S. (1975) ‘Focus of attention and causal attribution of actors and observers’, Journal of Experimental Social Psychology, Vol. 11, pp. 427–38.

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Barrett, L., Dunbar, R. and Lycett, J. (2002) Human Evolutionary Psychology. London: Palgrave. Becherer, R.C. and Maurer, J.G. (1999) ‘The proactive personality disposition and entrepreneurial behavior among small company presidents’, Journal of Small Business Management, Vol. 37, No. 1, pp. 28–36. Bernstein, W.M. and Stephan, W.G. (1979) ‘Explaining attributions for achievement: a path analytical approach’, Journal of Personality and Social Psychology, Vol. 37, No. 10, pp. 1810–21. Blanchflower, D.G. and Oswald, A.J. (1998) ‘What makes an entrepreneur?’, Journal of Labour Economics, Vol. 16, No. 1, pp. 26–60.

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Badco*ck, C. (2000) Evolutionary Psychology. Cambridge: Polity Press.

Brandstatter, H. (1997) ‘Becoming an entrepreneur: a question of personality structure?’, Journal of Economic Psychology, Vol. 18, No. 2/3, p. 157. Carruthers, P. and Chamberlain, A. (eds) (2000) Evolution and the Human Mind: Modularity, Language and Meta-cognition. Cambridge: Cambridge University Press. Cartwright, J. (2000) Evolution and Human Behaviour. London: Macmillan. Carver, C.S. and Scheier, M. (2000) Perspectives on Personality (4th edn), Boston, MA: Allyn & Bacon. Chell, E. (1985) ‘The entrepreneurial personality: a few ghosts laid to rest’, International Small Business Journal, Vol. 3, No. 3, pp. 43–54. Chu, P. (2000) ‘The characteristics of Chinese female entrepreneurs: motivation and personality’, Journal of Enterprising Culture, Vol. 8, No. 1, pp. 67–84. Cooper, A.C. (1981) ‘Strategic management, new ventures and small business’, Long Range Planning, Vol. 14, No. 5. Corballis, M.C. and Lea, S.E.G. (eds) (1999) The Descent of Mind: Psychological Perspectives on Hominid Evolution. Oxford: Oxford University Press. Crant, J.M. (1996) The Proactive Personality Scale as a predictor of entrepreneurial intentions, Journal of Small Business Management, Vol. 34, No. 3, pp. 42–9. Eisen, S.V. (1979) ‘Actor–observer differences in information inference and causal attribution’, Journal of Personality and Social Psychology, Vol. 37, No. 2, pp. 261–72. Eisenhauer, J.G. (1995) ‘The entrepreneurial decision: economic theory and empirical evidence’, Entrepreneurship Theory and Practice, Summer, pp. 67–79. Escher, S., Grabarkiewicz, R., Frese, M., van Steekelenburg, G., Lauw, M. and Freidrich, C. (2002) ‘The moderator effect of cognitive ability on the relationship between planning strategies and business success of small scale business owners in South Africa: a longitudinal study’, Journal of Developmental Entrepreneurship, Vol. 7, No. 5, pp. 305–18. Eysenck, H.J. (1975) The Inequality of Man, San Diego, CA: EdITS. Funder, D.C. (2001) ‘Personality’, Annual Review of Psychology, Vol. 52, pp. 197–221. Frese, M., Brantjes, A. and Hoorn, R. (2002) ‘Psychological success factors of small scale businesses in Namibia: the role of strategy process, entrepreneurial orientation and the environment’, Journal of Developmental Entrepreneurship, Vol. 7, No. 3, pp. 259–82.

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Gilhooly, K.J. (1996) Thinking: Directed, Undirected and Creative (3rd edn). London: Academic Press. Gimenez, F., Pelisson, C., Kruger, E.G.S. and Hayashi, P. (2000) ‘Small firms’ ownermanagers construction of competition’, Journal of Enterprising Culture, Vol. 8, No. 4, pp. 361–79. Ginsberg, A. and Buchholtz, A. (1989) ‘Are entrepreneurs a breed apart? A look at the evidence’, Journal of General Management, Vol. 15, No. 2, pp. 32–40. Hull, D.L., Bosley, J.J. and Udell, G.G. (1980) ‘Renewing the hunt for the Heffalump: identifying potential entrepreneurs by personality characteristics’, Journal of Small Business Management, Vol. 18, No. 1, pp. 11–18. Jarvis, M. (2000) Theoretical Approaches in Psychology. London: Routledge. Kaplan, R.M. and Saccuzzo, D.P. (1997) Psychological Testing: Principles, Applications, and Issues (4th edn). Pacific Grove, CA: Brooks/Cole. Katz, J.K. (1992) ‘A psychosocial cognitive model of employment status choice’, Entrepreneurship Theory and Practice, Fall, pp. 29–37. Katz, J.K. (1992) ‘The dynamics of organizational emergence: a contemporary group formation perspective’, Entrepreneurship Theory and Practice, Winter, pp. 97–101. Kelley, H.H. (1973) ‘The process of causal attribution’, American Psychologist, Feb., pp. 107–28. Kelley, H.H. and Michela, J.L. (1980) ‘Attribution theory and research’, Annual Review of Psychology, Vol. 31, pp. 457–1. Kikul, J. and Gundry, L.K. (2002) ‘Prospecting for strategic advantage: the proactive entrepreneurial personality and small firm innovation’, Journal of Small Business Management, Vol. 40, No. 2, pp. 85–97. Korunka, C., Frank, H., Lueger, M. and Mugler, J. (2003) ‘The entrepreneurial personality in the context of resources, environment and the start-up process – a configural approach’, Entrepreneurship: Theory and Practice, Vol. 28, No. 1, pp. 23–42. Kreiser, P.M., Marino, L.D. and Weaver, K.M. (2002a) ‘Reassessing the environment–EO link: the impact of environmental hostility on the dimensions of entrepreneurial orientation’, Academy of Management Best Papers Proceedings. Kreiser, P.M., Marino, L.D. and Weaver, K.M. (2002b) ‘Assessing the psychometric properties of the entrepreneurial orientation scale: a multi-country analysis’, Entrepreneurship Theory and Practice, Vol. 26, No. 4, pp. 71–94. Kristiansen, S. (2002) ‘Individual perception of business contexts: the case of small-scale entrepreneurs in Tanzania’, Journal of Developmental Entrepreneurship, Vol. 7, No. 3, pp. 283–304. Luthans, F., Stajkovic, A.D. and Ibrayeva, E. (2000) ‘Environmental and psychological challenges facing entrepreneurial development in transition economies’, Journal of World Business, Vol. 35, No. 1, pp. 95–110. Markman, G.D., Balkin, D.B. and Baron, R.A. (2002) ‘Inventors and new venture formation: the effects of general self-efficacy and regretful thinking’, Entrepreneurship Theory and Practice, Winter, pp. 149–65.

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McCline, R.L., Bhat, S. and Baj, P. (2000) ‘Opportunity recognition: an exploratory investigation of a component in the entrepreneurial process in the context of the health care industry’, Entrepreneurship Theory and Practice, Vol. 25, No. 2, pp. 81–94. Minniti, M. and Bygrave, W. (1999) ‘The microfoundations of entrepreneurship’, Entrepreneurship Theory and Practice, Vol. 23, No. 4, pp. 41–53. Minniti, M. and Bygrave, W. (2001) ‘A dynamic model of entrepreneurial learning’, Entrepreneurship Theory and Practice, Vol. 25, No. 3, pp. 5–16. Mischel, W. (1999) Introduction to Personality. New York: Harcourt Brace.

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McCarthy, B. (2003) ‘The impact of the entrepreneurial personality on the strategy formation and planning process in SMEs’, Irish Journal of Management, Vol. 24, No. 1, pp. 154–72.

Mitchell, R.K., Smith, B., Seawright, K.W. and Morse, E.A. (2000) ‘Cross-cultural cognitions and the venture creation design’, Academy of Management Journal, Vol. 43, No. 5, pp. 974–93. Myers, D.G. (2002) Intuition: Its Powers and Perils. New Haven, CT: Yale University Press. Neck, C.P., Neck, H.M., Manz, C.C. and Godwin, J. (1999) ‘I think I can; I think I can: a self-leadership perspective towards enhancing the entrepreneur through thought patterns, self-efficacy and performance’, Journal of Managerial Psychology, Vol. 14, No. 7/8, pp. 477–501. Ofek, H. (2001) Second Nature: Economic Origins of Human Evolution. Cambridge: Cambridge University Press. Oyama, S. (2000) Evolution’s Eye: A Systems View of the Biology–Culture Divide. London: Duke University Press. Phares, E.J. (1987) Introduction to Personality (2nd edn). New York: Scott, Foresman. Robichaud, Y. and Egbert, R.A. (2001) ‘Towards the development of a measuring instrument for entrepreneurial motivation’, Journal of Developmental Entrepreneurship, Vol. 6, No. 2, pp. 189–201. Shepherd, D.A. and Krueger, N.F. (2002) ‘An intentions-based model of entrepreneurial teams’ social cognition’, Entrepreneurship Theory and Practice, Winter, pp. 167–85. Stancill, J.M. (1981) ‘Realistic criteria for judging new ventures’, Harvard Business Review, Nov./Dec., pp. 60–71. Uusitalo, R. (2001) ‘hom*o entreprenaurus’, Applied Economics, Vol. 33, pp. 1631–8. Weaver, K.M., Dickson, P.H., Gibson, B. and Turner, A. (2002) ‘Being uncertain: the relationship between entrepreneurial orientation and environmental uncertainty’, Journal of Enterprising Culture, Vol. 10, No. 2, pp. 87–106. Wright, R. (2000) Nonzero: History, Evolution and Human Cooperation. London: Abacus. Yves, R., McGraw, E. and Roger, A. (2001) ‘Towards the development of a measuring instrument for entrepreneurial motivation’, Journal of Developmental Entrepreneurship, Vol. 6, No. 2, pp. 189–201.

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Selected case material CASE 3.1

19 November 2005

FT

Dyson seeks to brush up industry’s image JEAN EAGLESHAM The ‘you’re fired!’ ethos of The Apprentice television show has been criticised by a leading entrepreneur, who warns that the cutthroat portrayal of business risks perpetuating the historic British aversion to working in industry. In an interview with the Financial Times, James Dyson praised Dragons’ Den, the BBC 2 show where budding entrepreneurs compete for investment, as a ‘great help’ to efforts to attract graduates to manufacturing. In contrast, the format for BBC 2’s The Apprentice, where Sir Alan Sugar eliminates would-be Amstrad protégés ruthlessly, was a ‘bit unfortunate’, said Mr. Dyson. ‘Alan Sugar’s a great entrepreneur but it’s a pity that firing people is the catchphrase.’ He warned that television tended to reinforce people’s impression of industry, underscoring bleak images assimilated over the decades from the dark satanic mills of Victorian literature through to the mass strikes of the 1970s. Citing a recent show featuring an unethical executive, Mr. Dyson protested: ‘I don’t think businessmen cheat any more than anyone else.’ The criticism matters because of Mr. Dyson’s rare position among business leaders, as an inventor who has developed a good idea into a global brand. The seemingly unstoppable success of his eponymous vacuum cleaners – which overtook Hoover in the US this year, becoming the biggest selling brand by value – has made him a fortune estimated at £800m. It has also given him considerable influence as a voice on government policy.

Ministers appear to worship at the Dyson shrine. Alan Johnson, the trade and industry secretary, marked Enterprise Week on Tuesday by lauding the Norfolk inventor as one of two British entrepreneurs – along with Richard Branson – who epitomised the spirit of risktaking and determination the government hoped to foster. He told delegates entrepreneurs were ‘essential to our wealth, health and happiness’. Unfortunately for the government, this admiration is not reciprocated by the entrepreneur. Mr. Dyson might have acted as a government adviser but he is no fan of officialdom. Asked if he had become disillusioned with Tony Blair, he said: ‘I don’t think I was expecting an awful lot in the first place. Nothing’s really been done to help industry for the past 50 years.’ This low level of expectation does not prevent Mr. Dyson from fulminating about the perceived failure of the government to give sufficient backing to innovation. He lauds Gordon Brown’s decision to allow 120 per cent tax relief on research and development as a ‘good move – it’s a pity it came so late, but at least he did it.’ But Mr. Dyson wants the chancellor to go further in next month’s pre-Budget report, by expanding the R&D tax credit to offer 160 per cent relief. The cost would be rewarded over time, Mr. Dyson argues, saying the ‘government should take a long-term view, if a government ever will do that’. This scepticism about ministerial willingness to give sufficient fiscal incentives for

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that’s the model for modern Britain, that’s OK,’ he says. But he warns ministers not to take this vision of an added-value manufacturing sector for granted. Policies such as the increasing burden of corporate taxation might end up driving the entire sector offshore. ‘It absolutely could happen. But we’re a British company, I’m British, I like living here. I just hope the government makes life easier, not more difficult.’ Source: Jean Eaglesham, ‘Dyson seeks to brush up industry’s image’, Financial Times, 19 November 2005, p. 4. Copyright © 2005 The Financial Times Limited.

CASE 3.2

30 January 2006

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innovation is matched by a concern about the impact of the government’s broader policies, particularly on corporate tax. Some erosion of the manufacturing base through production moving offshore is inevitable, given both wage differentials and the increasing supply base in the Far East, says Mr. Dyson. But this need not be disastrous if Britain could retain and develop added-value manufacturing. This corporate model is exemplified by the Dyson example, where a contentious decision to move the assembly line to Malaysia in 2002 has been followed by increased employment of designers and engineers in the UK. ‘If

FT

Saïd MBA was ‘best year of my life’ FT REPORT ANDREW BAXTER For Keely Stevenson, working as a hospice volunteer was the spark that first lit a long-term passion for social entrepreneurship, bringing her in a series of steps to Oxford University’s Saïd Business School in 2004 – as one of the first Skoll Scholars to take the MBA. In between have been so many different experiences that Ms Stevenson could almost be called a veteran social entrepreneur at the age of 28. Starting from the University of California Berkeley, where her research included projects on US public housing reform and microlending in Bangladesh, Ms Stevenson has had a rich variety of roles. Among other things, she has been a Fellow at the United Nations, working on public outreach strategies; designer and manager of Social Edge, an online community for social

entrepreneurs, a task she undertook while working at the Skoll Foundation; and interim executive director of ProWorld Service Corps, a social enterprise working in Peru, Mexico and Belize on community empowerment and social and economic development. Even with this experience, however, she felt that doing an MBA would help her to make a bigger impact. ‘I considered a masters in public policy,’ she says, ‘but decided I needed to build my finance and general management skills. I thought that using the academic framework of an MBA would be helpful, and I had not had any sort of management training.’ But which MBA? Although there are several MBA programmes in the US with social entries electives and other related activity,

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CASE 3.2 CONT. Ms Stevenson was attracted to the Oxford programme partly because the social entrepreneurship side was new and there was thus ‘a chance to shape something,’ but also because of its broad, entrepreneurial remit and its international character. ‘It’s really useful to get the perspective of someone from Kenya or Egypt,’ she says. The Oxford MBA was ‘the best year of her life’, says Ms Stevenson, and even by her standards was eventful. She spent the summer as an MBA intern/consultant at Triodos Bank, a social bank with offices in the UK Netherlands, Belgium and Spain. This, she says, was an important way to apply the skills learned in the MBA classroom, in a financial institution whose values and vision were aligned with her own. A further opportunity to put classroom experience into practice came with Ms Stevenson’s three-month strategic consulting

project for an outside company or client, which for her and four classmates was South Africa’s Royal Bafokeng tribe. Platinum was recently discovered on the 300,000-strong tribe’s land, and it is now investing its wealth in designing world-class education, healthcare and economic and social development projects. Following an invitation from Princess Tirelo Molotlegi, the MBA team stayed with the Royal family, which has begun a campaign called Vision 2020 to ensure the tribe is selfsustainable by 2020. Ms Stevenson is now back in the US, looking for a job in microfinance and capital markets, a sector where the strong finance background she has developed as a result of the Oxford MBA should help her as she pursues her social entrepreneurial ambitions. Source: Andrew Baxter, ‘Saïd MBA was “best year of my life”’, Financial Times, 30 January 2006, p. 6. Copyright © 2006 The Financial Times Limited.

Discussion point 1. ‘All entrepreneurs share certain personality characteristics.’ Discuss.

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CHAPTER 4

Entrepreneurship, cognition and decision making Chapter overview Cognitive psychology is providing new and profound insights into the thinking of entrepreneurs and how they engage with the entrepreneurial process. This chapter considers the key elements of cognitive psychology with a focus on the agenda for entrepreneurship. Two specific aspects of entrepreneurial cognition are considered: decision making (drawing a distinction between normative, descriptive and prescriptive accounts), and perception of and response to risk (drawing a distinction between rational and natural responses).

4.1 Cognitive aspects of entrepreneurship

Key learning outcome An appreciation of the cognitive approach to understanding entrepreneurial behaviour and the significance of individual cognitive style and strategy in entrepreneurial decision making.

• • • • •

Cognitive psychology is a relatively new but increasingly important avenue of psychological explanation and research. Cognitive psychology deals with the way in which humans obtain, store, process and use information about the world. So it is interested in:

• attention and perception, the initial processing of raw sensual experiences; • storage of information in memory systems – both working memory and long-term memory; • the way in which knowledge is stored, accessed and created, induction and deduction processes; • judgement and decision making – the use of processed information to choose particular course of action; thinking and problem solving; learning, skill and expertise development; language, use, acquisition and comprehension; creativity and inventiveness; the way in which information is manipulated by mental routines to drive decision making.

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Cognitive psychology is very much an experimental science, with its findings based on repeatable experiments and the testing of hypotheses. Cognitive psychologists often develop systems models of information processing. There is no immediate claim that these systems have an anatomical or even neurological representation in the human brains; rather they are accounts of the way in which the brain works as a system. Some cognitive psychologists talk of specific cognitive styles (which are relatively permanent features of an individual, though they may develop with learning) and strategies (which are specific to particular problems) that reflect the generalised ways in which humans process information. For example, when faced with a new problem some people call to mind methods they are already familiar with; others will seek out original and new solution methods; some people seek risky situations, others avoid them; some people are willing to make decisions with only a limited amount of information, others hold back until they are well informed. These are only examples. But these examples give a hint that entrepreneurs might be distinguished not so much by their personality, but by the cognitive strategies and styles they adopt (which may be related to personality but are not the same thing). From this description of cognitive psychology it will be clear why interest has grown in the cognitive aspects of management in general and entrepreneurship in particular. Cognitive psychology has made great strides in enhancing our understanding of human thinking. It is now recognised that we all have our own cognitive styles that we use to process information and that we adopt particular cognitive strategies when called upon to use that information in order to solve problems. Many of these strategies and styles resonate with our experiences of how other people approach challenges. We may, for example, note that some people are ‘big-picture’ – that is, they only like to take the essential, important facts into account when they first meet a new problem. Others are ‘small-picture’. They like detailed and extensive information before attempting a solution. At other times we may recognise that some people prefer tried and trusted solutions; others are willing, eager even, to find new ways of doing things. At a deeper level, some people compartmentalise new information into a pre-existing set of categories and see new things in established terms. We may regard such people as relatively fixed in their thinking. Other people prefer to set up new categories and so see things in new ways. We may regard these as more open in their thinking. These general observations about how people work, however useful as rules of thumb, cannot be accepted at face value, though. Cognitive psychology is a science. It is concerned with establishing the well-defined and experimentally reproducible processes that are revealed through the actions taken in response to specific cognitive challenges. Cognitive processes are sometimes split into three types: • Perception processes – these are concerned with how we see the world and gather information about it. Examples are complexity–simplicity, the number of dimensions that are used to categorise the world, levelling–sharpening, the use of existing or the creation of new categories to incorporate new information, and verbalising–visualising, the use of verbal or, alternatively, visual imagery to develop understanding. • Problem-solving processes – these govern how information is used when an individual is called upon to make a decision. Examples include scanning–focusing, how much information is called in order to solve a problem, serialism–holism, referring to whether problems are approached in a linear, reducing way, or are dealt with as an integrated whole, and adaptation–innovation, the preference for established solutions or new solutions.

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Stubbart (1989) and Hayes and Allinson (1994) provide full reviews of cognitive styles and their relevance to management. Cognitive styles and strategies may be linked to, and provide a basis for, what we consider to be personality. They are, however, distinct from it. Individuals may rely on well-honed cognitive approaches, but they are not necessarily invariant over time. Our cognitive approaches are subject to learning and may be modified, either intentionally or unintentionally, in the light of experience. Cognitive psychology is increasingly offering insights that can potentially account for and explain a number of aspects of the individual entrepreneur’s inclination towards the entrepreneurial option and their engagement in the entrepreneurial process. Particularly important areas are: • the influence of cognition on motivation and the entrepreneur’s perceptions and valuation of the entrepreneurial option compared with conventional employment alternatives (e.g. Campbell, 1992; Katz, 1992a,b; Amundson, 1995; Eisenhauer, 1995; Robichaud and Egbert, 2001; Uusitalo, 2001); • the impact of cognition on the individual’s ability to spot new business opportunities (e.g. Minniti and Bygrave, 1999; McCline et al., 2000; Keh et al., 2002); • the analytical skills of the individual and his or her ability to evaluate and make proper judgements about the value of that opportunity (see section 3.3); • creativity in developing new innovations to capitalise on those opportunities; • cognitive abilities in terms of considering competitive environments and dynamics (e.g. Giminez et al., 2000; Luthans et al., 2000; Frese et al., 2002; Kreiser et al., 2002a,b; Kristiansen, 2002; Weaver et al., 2002); • abilities in relation to ‘strategic foresight’, the potential to imagine future worlds and consider the outcomes of current decisions in relation to them (see section 16.4); • judgement over what parts of the world are under personal control and which are not (do entrepreneurs overestimate their ability to control the world as compared with nonentrepreneurs?) (e.g. Neck et al., 1999; Markman et al., 2002; Shepherd and Krueger, 2002); • the ability to judge risk (either realistically, or perhaps more positively than others, e.g. Stancill, 1981; Chaterjee et al., 2003); • skills in creating appropriate strategic approaches and plans (e.g. Escher et al., 2002); • abilities in relation to communicating with and persuading key stakeholders (e.g. Kamm and Nurick, 1992); • social relationship skills in sustaining and maintaining the organisation (e.g. Katz, 1992); • the ability to develop personal learning strategies in light of experience (e.g. Minniti and Bygrave, 2001).

Chapter 4 Entrepreneurship, cognition and decision making

• Task processes – these are concerned with determining the way in which we approach particular jobs. Themes here include constricted–flexible, the preference for new types of task over established ones, impulsive–reflective, the tendency to act in a decisive or considered way, and uncertainty accepting–cautious, the willingness to take on tasks with an element of risk in them.

The question of whether or not entrepreneurs (as a group) have a cognition (cognitive skills or strategy) that is different from non-entrepreneurs has been the subject of a number of recent studies. Buchanan and Di Pierro (1980) provide a historical and conceptual introduction to this issue. Mitchell et al. (2002) lay out the foundations for, and emphasise the potential of, a cognitive approach to understanding entrepreneurial behaviour and performance.

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Forbes (1999) reviews studies of the role of management cognition (particularly decision heuristics and cognitive schemas) in entrepreneurship. Neck et al. (1999) develops the notion that ‘thought self leadership’, the process of self-influence through the cognitive strategies of self-dialogue and mental imagery, plays a role in entrepreneurial management, and Keh et al. (2002) examine the effect of cognitive processes on assessment of opportunities under risky conditions. The theme of cognition and its influence on entrepreneurship will be revisited in sections 7.3 and 5.6, where cognitive insights into entrepreneurship and culture and the start-up decision, respectively, will be considered. It is probably premature to insist that entrepreneurs, as a group, share any particular set of cognitive approach. The ‘best’ cognitive approach in any situation is dependent on a particular situation. Entrepreneurial situations are as varied as any other type of situation. However, it is true that entrepreneurs do tend to be innovative, are receptive to new ideas and do set out to find new ways of doing things. How this general observation can be rationalised in terms of specific, well-defined cognitive strategies is a subject of much interest within industrial and organisational cognitive psychology.

4.2 Entrepreneurship and human decision making The making of decisions is a fundamental part of the human experience. We can imagine different outcomes and possibilities; we can Key learning outcome judge that which we can act to influence and that which we must An appreciation of the accept, and we have preferences for some outcomes over others. distinction between normative, The study of human decision making is a rapidly growing field descriptive and prescriptive of inquiry, both in terms of fundamental decisional processes in accounts of human decision cognition and in specific areas of professional decision making, making, the anchoring, particularly in management, medicine and law. Clearly, entreavailability and preneurs are, if nothing else, decision makers. representativeness biases that There are three types of theory that aim to explain and predict influence decision making and decision making. The first are normative theories. Normative thethe dangers they present to the ories identify what is the best (optimal) decision in a particular situintuitive decision maker, and ation and the process for making it. Such theories are based on the use of prescriptive methods sound logical and statistical methodologies. They are often based to improve decision making. on an assumption that human beings are rational (they make best use of information) and are utility maximising (they want the best possible outcomes for themselves). Following groundbreaking work by mathematicians in the early post-war period, these theories are often expressed in highly mathematical terms. They underpin much work in management science and finance. The second type of theory is descriptive. Descriptive theories provide accounts of the decisions people actually make. Their concern is with what people really do, rather than what they should do. Descriptive theories may also take on a mathematical form, but they are more likely than normative theories to be expressed in psychological terms. The final type of theory is prescriptive. Prescriptive theories suggest ways individuals can improve their decision-making practice. They are usually expressed in pedagogical terms. If humans were perfectly rational (in the formal economic sense) then there would be no difference between normative and descriptive theories and there would be no need for pre-

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Anchoring bias The anchoring bias involves using an irrelevant and spurious number to make a numerical judgement. For example, consider two (matched) groups of expert investors offered the same business plans with exactly the same information. Both groups are given a suggested investment price (with one group given a high price, the other a low price), then asked if that price is too high or too low and finally asked to give the price at which they would invest. It might be imagined that both groups would offer the same (average) investment price, but those initially given the high price tend to offer a higher (often much higher) fair price.

Chapter 4 Entrepreneurship, cognition and decision making

scriptive theories. But we are not. For any specific decision problem there is usually a difference between what a normative theory predicts is optimal and what human decision makers actually do. Such a deviation between actual decision-making outcomes and theoretically optimal ones is referred to as a bias. A bias is not simply an error caused by not understanding the normative method, or laziness in applying it (after all, normative methods may be difficult to use). Errors would lead to decision outcomes being randomly dispersed around the normative mean. Biases are consistent (the bias is usually in one particular direction away from the normative), prevalent (they occur in a wide variety of decision contexts) and persistent (they are difficult to eliminate, even if the decision maker is informed of the normative method and is rewarded for using it). A few examples of biases are described below.

Availability bias The availability bias involves using prominent instances that are in memory as the basis for making a judgement. Entrepreneurs (and investors) are often called upon to judge the frequency, probability or regularity of an event. For example, how likely is it that a business of a particular size, or operating in a particular sector, or led by a particular type of entrepreneur will succeed or fail? If information on actual numbers is limited (which it usually is) then we show a tendency to judge how frequently something occurs by how easily we can call an example to mind. But how prominent something is in our memory is consequential on many factors, regularity being only one. In fact, the less often something happens, the more likely it is to gain a lot of news coverage. (Plane crashes are rare, but dramatic; car crashes are frequent but not usually newsworthy – result: people will happily drive to an airport (taking, statistically speaking, quite a high risk) and then sit nervously on the plane where (again, statistically speaking) they are quite safe). This can be significant in terms of entrepreneurial investment. During the dotcom boom, the news media were full of amazing internet success stories. They were cognitively available and so investors overestimated the chances of an investment’s paying off. After the dotcom crash, the press was full of internet failures. These now became cognitively available and the precariousness of the sector was overestimated. Investors pulled their money out. Result: boom and bust overswings in investment.

Representativeness bias and base-rate neglect The representativeness bias involves judging a sample or event as being more or less likely because it is felt to be more or less typical of a population or process. This can often result

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in base-rate neglect bias – ignoring background information in making judgements. In one study I conducted (Wickham, in press), decision makers were induced to think that highly unlikely statements about entrepreneurs were more likely to be true when they were combined with statements that were highly likely to be true, though statistically, the truth of an unliklely statement is not changed by combining it with a more likely one. However, the combined statement seemed more representative than the unlikely one on its own. Consider how this might influence judgement of business plans if unlikely events are linked to highly likely. One manifestation of representativeness occurs when a pool of investors are given a description of an entrepreneur, which states, for example that ‘he has a degree in computer science, is fascinated by technology, reads science fiction’ and so on. It is then suggested that his business plan has been drawn at random from a pool of 100 that contains plans for hightech ventures and retailing start-ups. The proportion of investors who suggest that the chance is the entrepreneur’s plan is for a high-tech start-up does not change, whether they are told that the high-tech–retail mix of plans is 80:20, 50:50, 20:80 or even 1:99. Of course, the chance (of being selected randomly) of its being a high-tech falls across this range. And this should influence judgement – but it doesn’t. This is referred to as base-rate neglect. Other biases include framing effects – judgement changing on the basis of how information is contextualised (especially if positive or negative aspects of a problem are emphasised) – and a series of biases associated with judging correlation and causation. Why do we exhibit such biases? Cognitive psychologists have suggested that these biases arise because individuals use deep-seated heuristics or practical ‘rules of thumb’ to make judgements rather than normative methods. It is important to recognise that using a heuristic, even if it leads to a bias, is not necessarily wrong. The human brain is a costly organ (in energy terms). The average man’s brain will be about 2 per cent of his bodyweight, but it will use nearly one-quarter of all the energy he consumes. Heuristics are ‘fast’ and ‘frugal’. Because they simplify problems, they offer up decisions quickly and do not use a lot of the brain’s capacity. What matters is not so much that they get the answer ‘wrong’ occasionally, but that when they do, it does not matter too much. Normative methods give the ‘right’ answer, but take a lot of time (and brain power) to implement. The investment may not always be worth it. The key point is that such biases can, at times, impact on the quality of decision making both for entrepreneurs and for those supporting them (especially investors). The issue is not so much one of the entrepreneur (and her supporters) eliminating heuristics – because they can be useful – but one of being aware that they may be present. The advantages and dangers of relying on intuitive (heuristic-based) decision making are explored by Myers (2002). Gigerenzer (2002) suggests practical methods for eliminating biases and improving decision making. There is not space here to explore these issues further. An excellent, and quite accessible account of heuristics and biases in management decision making is Bazerman (2002). The student interested in exploring the theory in some depth is referred to the books by Plous (1993), Gilhooly (1996), Baron (2000) and Hastie and Dawes (2001), which offer good introductions to the issues. The contributions to Kahneman et al. (1982) and Kahneman and Tversky (2000) are also recommended but are more advanced.

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Key learning outcome An appreciation of the role of the overconfidence bias and how it can distort the decision making of entrepreneurs and their supporters.

As discussed in section 5.2, entrepreneurs need self-confidence. However, a number of studies have demonstrated that at time we all exhibit what are referred to as positive biases. A positive bias is said to occur when we make a judgement about ourselves that results in a view of ourselves that is more positive than statistical rules, or indeed basal experience, deems to be proper or hold to a view of the world that is overly optimistic. The term ‘positive bias’ refers to a range of judgements, but they probably have a common source. These include the following:

• An overconfidence in the veracity of declarative knowledge (knowledge of facts). This might lead an entrepreneur to overestimate their understanding of a market, product technology, customers or competitors. • An overly positive self-rating of personal characteristics relative to base rates. Entrepreneurs often believe themselves to be better-than-average managers or negotiators. • An overly positive belief in ability to make judgements under uncertain conditions. This can lead to decisions being made too quickly and before a proper evaluation has been made. • An overly optimistic belief in the likelihood of desired outcomes. The positives loom larger than the possible negatives. • Overconfidence in the prediction of own actions in a particular situation. That is, ‘given a particular problem, I know what I will do and I know I will do it right!’ • Overconfidence in the prediction of actions of others in a particular situation. That is, ‘I know how they (customers, investors, competitors, distributors, etc.) will react.’ • An excessive confidence in the security of position in negotiations.

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4.3 Entrepreneurial confidence and overconfidence

Many of these facets support each other when judgements are made about the value of investments. A decision maker may both overestimate his or her ability to judge the information provided and be overly optimistic about the possibility of success. The overconfidence bias should not be interpreted to mean that every statement made by every entrepreneur should be downgraded because it is contaminated by overconfidence. The phenomenon says nothing about individuals or specific statements. It is a statistical effect. Ask 100 entrepreneurs how they rate their abilities, and more than 50 are likely to rate themselves above average. Not all are fooling themselves, but some must be! Busenitz and Barney (1997) found that overconfidence in personal ability and overoptimism for favoured outcomes play a role in entrepreneurial entry. Forbes (2005) found that entrepreneurs tend to demonstrate higher degrees of overconfidence than non-entrepreneur managers. Simon and Houghton (2003) examined how overconfidence affected the willingness of high-tech firms to introduce new products and found a positive correlation. A model linking overconfidence to entrepreneurial entry is developed by Bernardo and Welch (2001). It is not just entrepreneurs who are prone to overconfidence. Zacharakis and Shepherd (2001) found venture capitalists could also succumb.

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4.4 Entrepreneurs and the human response to risk In section 1.3 it was suggested that while most people associate entrepreneurs with risk, it was in fact investors who are the risk Key learning outcome takers. While accepting the logic of this argument, many feel An understanding of the uncomfortable with it. ‘But don’t entrepreneurs put their own distinction between syntactic money into their venture – mortgage their houses even!’ Yes, (formal) and pragmatic often. But if so, the entrepreneur is acting as an investor as well. (everyday) uses of the The roles are quite different. It just so happens that the same word ‘risk’ and how this person is playing two roles (this is not to say that the fact that influences discourse by and the same person is playing two roles at once is trivial. It may be a about entrepreneurs. An powerful signal that the entrepreneur has faith in the venture – see understanding of the concept section 6.3). ‘What about the entrepreneur’s reputation!’ Of course, of risk aversion and how it but to an economist a person’s reputation is only worth what it impacts on the relationship can add to their (properly discounted) future earnings. So putting between entrepreneurs and one’s reputation on the line is simply another form of investment. investors. An appreciation of By this stage, most people feel the argument has become a little the prospect theory approach slippery. It has not; it is just being strict. But they have a point. The to understanding behavioural strictness of the argument relies on a very formal definition of risk. responses to risk and the role And, as with many concepts that are used in everyday life, and are of entrepreneurs in managing adopted as technical terms by specialists, the way the term is used investor ambiguity. (we say pragmatically) in everyday life may be different from the way in which it is used technically (we say syntactically). Syntactically, risk is a distribution of outcomes (which have some financial value). Positive outcomes (getting more than we expect) add to risk as much as negative things (getting less than we expect). If two traders exchange risk (which happens every day in the insurance and financial markets), the one whose distribution of outcomes gets wider is gaining risk; the one whose distribution narrows is offsetting risk. But pragmatically, risk is the sense that ‘something bad might happen’. The thing that happens need not have a direct financial value (though it might have an indirect cost) and it is the negative side – the bad – that concerns people, not the fact that things might turn out better than expected. In general, we do not like risk. If you were offered the chance to win £100 on the toss of a fair coin (you choose heads or tails – so 50 per cent chance of winning), would you pay £50 to enter? Most people would not. They expect a premium (a discount on the cost of entering the bet) to enter. This discount is a measure of the person’s risk aversion. If you were willing to pay more than £50 (this is quite rare) then you would be referred to as risk seeking. If exactly £50, then risk neutral. Institutions demonstrate risk aversion as much as individuals. Venture capitalists are willing to invest in a new venture (in effect, buying risk from the entrepreneur) – but only if they get a premium (an excess return) for doing so.

Prospect theory The syntactic (formal) interpretation of risk is highly mathematical. It is the one that informs economics, and from it management science and finance theory. It underpins insurance contracts. Work by mathematicians in the early post-war period developed a highly sophisticated normative model of risk and described the decisions a rational decision maker (one

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What are decision makers interested in? According to expected utility theory, where they finish up – their final ‘endowment’. According to prospect theory what they might gain or lose. This makes sense. If you find you have lost £10, you don’t think, ‘Well, I will adjust my endowment. There is the value of my house, my car, my savings. I will just deduct £10.’ No, it is more natural just to think, ‘Oh, no! I have lost £10.’

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who wishes to maximise his or her possessions and uses information efficiently) should make. This is known as expected utility theory. These predictions were soon put to the test (and so behavioural economics was born) and it was quickly found that most decision makers did not follow them: again, they demonstrated biases. The most sophisticated descriptive model of how people really respond to risk was proposed by two psychological-economists – Daniel Kahneman and Amos Tversky – in 1979. This they titled prospect theory. Daniel Kahneman won the Nobel Memorial Prize in Economics in 2002 for this work. (Sadly, Amos Tversky died in 1996.) The Kahneman–Tversky paper is quite technical (though the mathematics is not too difficult and for those with some mathematical confidence and working through it is a fine investment). Fortunately, as with all profound ideas, the central themes can be described without recourse to equations. Prospect theory’s proposals are best compared to those of expected utility theory. What follows applies to organisations as much as to individuals.

Is ‘where are we now’ important? As far as expected utility theory is concerned, to a secondary degree. But this only arises because of the technical idea it locates the decision maker on his or her utility function. For prospect theory, the where are we now is of fundamental importance because it defines the reference point from which decision makers judge gains and losses. This makes sense. An entrepreneur may look towards some future state in which he or she has achieved certain things (towards a vision), but when it comes to taking actual and immediate decisions, it is the win or lose (relative to where he or she was before the decision) that seems to matter.

Do decision makers take risks? According to expected utility theory – it depends. Generally speaking people are risk averse. They may be risk-seeking occasionally, but it is hard to predict when. Everything depends on a technical condition known as the shape of the individual’s utility function. Prospect theory is much clearer. In the domain of gains (when people are winning), they are risk averse (they avoid or expect to be paid to take on risk). In the domain of losses (when people are losing), they actually become risk seeking (they are willing to take on risk – in principle, even willing to buy risk) This is counterintuitive, but it has been observed in a wide variety of situations. Corporate risk behaviour has proved to be an interesting application because prospect theory makes a prediction that firms in a loss situation will take risks, whereas those in a winning situation will avoid risk – a prediction that is at odds with capital asset pricing theory (which suggests the reverse). Empirical evidence offers a good deal of support to the prospect theory position.

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Do gains eliminate losses? Expected utility theory would suggest yes. Finding £10 and then losing £10 should leave us feeling indifferent (provided there are no additional costs due to the gain and loss). However, prospect theory proposes ‘loss aversion’. In other words, losing £10 hurts more than gaining £10 brings pleasure. So the gain–loss above would leave us feeling worse than when we started. This seems to fit with most people’s intuitive experiences.

What about chance? In expected utility theory (as in prospect theory), chance is brought in via the formal concept of probability. A probability is a measure between 0 (impossible) and 1 (certain to happen). Something that may happen has a probability between 0 and 1. Expected utility theory proposes that decision makers should take probabilities at face value. Prospect theory, on the other hand, suggests that decision makers distort probabilities. Specifically, they act as if low probabilities were higher than they really are (so they feel lucky when gains are made and unlucky when losses are suffered), and act as if moderate to high probabilities were lower than they really are (so people feel unlucky where gains are concerned and (relatively) lucky where losses are concerned). This distortion of probability has an interesting effect on risk taking. The feeling of being lucky at low probabilities may overcome the risk aversion in gains and so make people risk seeking. At the same time, the feeling of being unlucky at low probabilities in losses may overcome risk seeking and induce risk aversion. Have you ever wondered why the same person is often willing to pay for a lottery ticket with a very low chance of winning and, at the same time, pay for insurance for an unlikely loss – with both the lottery company and insurance company making a profit?

Does it matter how decisions are articulated? According to expected utility theory, no. All that matters is the core information that the decision maker should be concerned with – outcomes and the chance of those outcomes. Superfluous information is stripped away. Logically equivalent presentations of the same decision problem elicit the same response. Prospect theory however suggests framing effects are important. A framing effect is the encouragement of risk aversion or risk-seeking behaviour by presenting the positive (gain, opportunity) aspects of a problem or negative (loss, threat) aspects, respectively. Strictly speaking, framing effects are not simply a matter of emphasis (though this is important) but one of restructuring a problem so that its logical content does not change. The idea that losses induce risk-taking behaviour is at first sight counterintuitive. Surely, entrepreneurs take risks when faced with opportunities or gains? Sometimes they do, but human risk behaviour is quite subtle. A good example of risk seeking in losses is the sunk cost effect, the phenomenon where a manager, entrepreneur or investor continues to invest in a project long after it is clear that it will never offer a return (expected utility theory suggests a decision maker should care only about what happens in the future; what has happened in the past does not matter). McCarthey et al. (1993) examined decisions made by entrepreneurs to expand their business asset base and found that escalation of commitment under losses was frequent. Not just entrepreneurs are affected. One would expect an

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Prospect theory is enormously influential. It is based on psychological insights as much as economic theory and its explanatory power is considerable. It has been applied to a wide variety of managerial decision making and is being applied increasingly to entrepreneurial and venture capital decision making. There is another decisional anomaly that is of interest. Consider the following two bets. In the first, a jar contains 100 marbles; 50 are red and 50 are white. You choose a colour. If your colour is drawn at random, then you will win £1,000. How much would you be willing to pay for a ticket to enter this bet? Now consider the following bet. A jar contains 100 marbles. Each is either red or white. But you do not know how many of each colour is in the jar. Again you choose red or white. If your colour is drawn, you win £1,000. How much are you willing to pay for a ticket to enter this bet? Most people are not willing to pay as much for the second bet as they are for the first. But statistical theory suggests both bets must be of the same value. This anomaly was demonstrated by Daniel Ellsberg in 1961. The first case is formally referred to as one of risk, because probabilities are known. Strictly speaking, the second is known as one of ambiguity because probabilities are not known. It will be appreciated that most entrepreneurial decision situations are ones of ambiguity, not risk (though the word ‘risk’ is more commonly used). This test demonstrates that we tend to show an aversion to ambiguity (strictly speaking, an irrational aversion) that is different from, and additional to, aversion to risk. It is usually possible (at least in principle) to obtain insurance against risk. But it is not possible to insure against ambiguity. This revisits the point that the fundamental role of the entrepreneur is one not so much of eliminating risk as of their using their expertise and management skills to turn ambiguity into risk.

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entrepreneur to put a positive spin on their venture’s performance when communicating with investors. But close observation of entrepreneur–investor communications (see Guler, 2003, for example) has uncovered instances where the entrepreneur has played down performance in order (perhaps instinctively) to create a sense of loss in the investor, induce risk-seeking behaviour and encourage further sunk cost investment.

Summary of key ideas • Cognitive psychology is a relatively new branch of psychology that is concerned with how humans acquire, process and act upon information about the world.

• It is of growing influence in the study of management in general and entrepreneurship in particular.

• Cognitive processes that are relevant to the study of entrepreneurship are: – Perception processes – how entrepreneurs see the world; – Problem-solving processes – how entrepreneurs address immediate challenges and bring creativity to bear; – Task processes – how entrepreneurs approach and undertake actions and related performance issues.

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• Decision making may be studied from a normative or descriptive perspective. The normative is concerned with calculating from theoretical principles what the optimal course of action should be; the descriptive is concerned with observing and describing what human beings actually do.

• A systematic difference between a normative recommendation and an observed decision pattern is referred to as a bias.

• Three biases are influential in entrepreneurial decision making: – anchoring bias – using an irrelevant number or quantity to make a judgement; – availability bias – regarding how easy it is to call an instance to mind as a good guide to the the quantity, size or frequency of something; – representativeness bias – judging an item or situation on the basis of how typical it seems to be in relation to the population it might have been drawn from or the process that might have created it, and ignoring base-rate information that is also relevant.

• Entrepreneurs (and their supporters) may be subject to positive or overconfidence biases where they either rate their own abilities greater than statistical inference would suggest is proper or hold an overly positive view of the world.

• The normative approach to risk behaviour is referred to as expected utility theory. It is mathematically elegant but does a poor job of predicting and explaining real human risk behaviour.

• One of the best, and most successful, descriptive approaches to human risk behaviour is prospect theory. Prospect theory suggests that human decision makers: – are concerned about gains and losses; – make decisions from an initial reference point; – find that losses hurt more than gains bring pleasure; – avoid risk when winning, but take risks when losing; – distort probabilities – at low probabilities feel lucky when winning, feel unlucky when losing; the other way round at moderate to high probabilities; – are susceptible to framing – whether the positive or negative perspective on a problem is emphasised.

• Prospect theory is increasingly influential in the study of managerial risk taking generally and in the study of entrepreneurial risk taking in particular.

• In addition to an aversion to risk (where decisions are made knowing probabilities), decision makers show a separate aversion to ambiguity (where decisions are made without knowing probabilities) – even though this is statistically irrational.

• One perspective on the entrepreneur’s fundamental task is that it is to use his or her knowledge, experience and skills to turn ambiguity into risk on behalf of investors.

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Heuristics and biases in entrepreneurial decision making: case study analysis Develop a case study of an entrepreneurial start-up or period of significant business development. This may on the basis of already published secondary data or primary data obtained from interviews. Concentrate on getting information about key decisions by the entrepreneur and key stakeholders. Assess the decisions made and the outcomes that resulted. Is there any evidence that biases were present in the decision making? Focus on instances where anchoring, availability, representativeness and overconfidence might have come into play. How did these affect the quality of the decisions and the resulting performance of the business?

Concepts of risk: a content analysis Content analysis is a research methodology in which communications (written, transcripts of speech or even visual images) are broken down into elements to see what constituent words, phrases or concepts are present. The project involves developing an understanding of how the notion of risk and related terms such as uncertainty and ambiguity (and any other words you feel to be related) are used in real, practical discourse (contrasted with how the concepts are used in a formal economic sense). Obtain a series of specialist dictionaries in the social and other sciences (e.g. economics, finance, sociology, psychology, anthropology, mathematics, plus any others you think relevant). Look up the key words and undertake a content analysis on the definitions offered. How do these compare and contrast? What terms, phrases and concepts are common to all? Which are unique to specific fields? You may attempt to produce a visual representation (a map) of how the key words relate to each other both within and across fields. How does this conceptualisation of risk concepts relate to how the key words are used in a formal sense? How might it relate to how entrepreneurs (and key stakeholders) might use the terms? You may even conduct a survey of practitioners to find out.

Chapter 4 Entrepreneurship, cognition and decision making

Research themes

Key readings Three papers that provide an accessible account of common biases in managerial and strategic decision making are: Roxburgh, C. (2003) ‘Hidden flaws in strategy’, McKinsey Quarterly, No. 2, pp. 26–39. Wickham, P.A. (2006) ‘How to be an effective – bias-free – decision-maker in an increasingly global economy’, Handbook of Business Strategy 2006, Bradford: Emerald. Wickham, P.A. (in press) ‘Framing strategic messages for the growth-orientated organisations’, Handbook of Business Strategy 2007, Bradford: Emerald.

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The latter two include a preliminary set of test questions (useful preparation for a tutorial) that demonstrate how easy it is to fall for bias traps when making strategic decisions.

Suggestions for further reading Amundsen, N.E. (1995) ‘An interactive model of career decision-making’, Journal of Employment Counselling, Vol. 32, No. 1, pp. 427–38. Baron, J. (2000) Thinking and Deciding (3rd edn). Cambridge: Cambridge University Press. Bazerman, M.H. (2002) Judgement in Managerial Decision Making. Hoboken, NJ: Willey. Bernardo, A.E. and Welch, I. (2001) ‘On the evolution and overconfidence of entrepreneurs’, Journal of Economics and Management Strategy, Vol. 10, No. 3, pp. 301–30. Buchanan, J.M. and Di Pierro, A. (1980) ‘Cognition, choice, and entrepreneurship’, Southern Economic Journal, Vol. 46, No. 3, pp. 693–701. Busenitz, L.W. and Barney, J.B. (1997) ‘Difference between entrepreneurs and managers in large organizations: biases and heuristics in strategic decision-making’, Journal of Business Venturing, Vol. 12, No. 1, pp. 9–30. Campbell, C.A. (1992) ‘A decision theory model for entrepreneurial acts’, Entrepreneurship Theory and Practice, Fall, pp. 21–7. Chatterjee, S., Wiseman, R.M., Fiegenbaum, A. and Devers, C.E. (2003) ‘Integrating behavioural and economic concepts of risk into strategic management: the twain shall meet’, Long Range Planning, Vol. 36, pp. 61–79. Eisenhauer, J.G. (1995) ‘The entrepreneurial decision: economic theory and empirical evidence’, Entrepreneurship Theory and Practice, Summer, pp. 67–79. Ellsberg, D. (1961) ‘Risk ambiguity and the Savage axioms’, Quarterly Journal of Economics, Vol. 75, pp. 643–69. Escher, S., Grabarkiewicz, R., Frese, M., van Steekelenburg, G., Lauw, M. and Freidrich, C. (2002) ‘The moderator effect of cognitive ability on the relationship between planning strategies and business success of small scale business owners in South Africa: a longitudinal study’, Journal of Developmental Entrepreneurship, Vol. 7, No. 5, pp. 305– 18. Forbes, D.P. (1999) ‘Cognitive approaches to new venture creation’, International Journal of Management Reviews, Vol. 1, No. 4, pp. 415–39. Forbes, D.P. (2005) ‘Are some entrepreneurs more overconfident than others?’, Journal of Business Venturing, Vol. 20, No. 5, pp. 623–40. Frese, M., Brantjes, A. and Hoorn, R. (2002) ‘Psychological success factors of small scale businesses in Namibia: the role of strategy process, entrepreneurial orientation and the environment’, Journal of Developmental Entrepreneurship, Vol. 7, No. 3, pp. 259–82. Gigerenzer, G. (2002) Reckoning with Risk: Learning to Live with Uncertainty. London: Allen Lane. Gilhooley, K.J. (1996) Thinking: Directed, Undirected and Creative (3rd edn). London: Academic Press.

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Guler, I. (2003) ‘Throwing good money after bad? Sequential decision-making in the venture capital industry’, Academy of Management Best Conference Paper 2003. Hastie, R. and Dawes, R.M. (2001) Rational Choice in an Uncertain World: The Psychology of Judgement and Decision Making. Thousand Oaks, CA: Sage. Hayes, J. and Allinson, C.W. (1994) ‘Cognitive style and its relevance for management practice’, British Journal of Management, Vol. 5, pp. 53–71. Kahneman, D. and Tversky, A. (1979) ‘Prospect theory: an analysis of decision-making under risk’, Econometrica, Vol. 47, pp. 263–91. Kahneman, D. and Tversky, A. (2000) Choices, Values and Frames. Cambridge: Cambridge University Press. Kahneman, D., Slovic, P. and Tversky, A. (1982) Judgement under Uncertainty: Heuristics and Biases. Cambridge: Cambridge University Press. Kamm, J.B. and Nurick, A.J. (1992) ‘The stages in team venture formation: a decisionmaking model’, Entrepreneurship Theory and Practice, Winter, pp. 17–27.

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Giminez, F., Pelisson, C., Kruger, E.G.S. and Hayashi, P. (2000) ‘Small firms’ ownermanagers’ construction of competition’, Journal of Enterprising Culture, Vol. 8, No. 4, pp. 261–79.

Katz, J.K. (1992a) ‘A psychosocial cognitive model of employment status choice’, Entrepreneurship Theory and Practice, Fall, pp. 29–37. Katz, J.K. (1992b) ‘The dynamics of organizational emergence: a contemporary group formation perspective’, Entrepreneurship Theory and Practice, Winter, pp. 97–101. Keh, H.T., Foo, M.D. and Lim, B.C. (2002) ‘Opportunity evaluation under risky conditions: the cognitive process of entrepreneurs’, Entrepreneurship Theory and Practice, Vol. 27, No. 2, pp. 125–48. Kreiser, P.M., Marino, L.D. and Weaver, K.M. (2002a) ‘Reassessing the environment–EO link: the impact of environmental hostility on the dimensions of entrepreneurial orientation’, Academy of Management Best Papers Proceedings. Kreiser, P.M., Marino, L.D. and Weaver, K.M. (2002b) ‘Assessing the psychometric properties of the entrepreneurial orientation scale: a multi-country analysis’, Entrepreneurship Theory and Practice, Vol. 26, No. 4, pp. 71–94. Kristiansen, S. (2002) ‘Individual perception of business contexts: the case of small-scale entrepreneurs in Tanzania’, Journal of Developmental Entrepreneurship, Vol. 7, No. 3, pp. 283–304. Luthans, F., Stajkovic, A.D. and Ibrayeva, E. (2000) ‘Environmental and psychological challenges facing entrepreneurial development in transition economies’, Journal of World Business, Vol. 35, No. 1, pp. 95–110. Markman, G.D., Balkin, D.B. and Baron, R.A. (2002) ‘Inventors and new venture formation: the effects of general self-efficacy and regretful thinking’, Entrepreneurship Theory and Practice, Winter, pp. 149–65. McCarthey, A.M., Schoorman, F.D. and Cooper, A.C. (1993) ‘Reinvestment decisions by entrepreneurs: rational decision makers or escalation of commitment?’ Journal of Business Venturing, Vol. 8, No. 1, pp. 9–24.

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McCline, R.L., Bhat, S. and Baj, P. (2000) ‘Opportunity recognition: an exploratory investigation of a component in the entrepreneurial process in the context of the health care industry’, Entrepreneurship Theory and Practice, Vol. 25, No. 2, pp. 81–94. Minniti, M. and Bygrave, W. (1999) ‘The microfoundations of entrepreneurship’, Entrepreneurship Theory and Practice, Vol. 23, No. 4, pp. 41–53. Mitchell, R.K., Busenitz, L., Lant, T., McDougall, P.P., Morse, E.A. and Brock-Smith, J. (2002) ‘Towards a theory of entrepreneurial cognition: rethinking the people side of entrepreneurship research’, Entrepreneurship Theory and Practice, Winter, pp. 93–104. Myers, D.G. (2002) Intuition: Its Powers and Perils. New York: Harcourt Brace. Neck, C.P., Neck, H.M., Manz, C.C. and Godwin, J. (1999) ‘I think I can; I think I can: a self-leadership perspective towards enhancing the entrepreneur through thought patterns, self-efficacy and performance’, Journal of Managerial Psychology, Vol. 14, No. 7/8, pp. 477–501. Plous, S. (1993) The Psychology of Judgement and Decision Making. New York: McGrawHill. Poltis, D. (2005) ‘The process of entrepreneurial learning: a conceptual framework’, Entrepreneurship: Theory and Practice, Vol. 29, No. 4, pp. 399–424. Robichaud, Y. and Egbert, R.A. (2001) ‘Towards the development of a measuring instrument for entrepreneurial motivation’, Journal of Developmental Entrepreneurship, Vol. 6, No. 2, pp. 189–201. Shepherd, D.A. and Kreuger, N.F. (2002) ‘An intentions-based model of entrepreneurial teams’ social cognition’, Entrepreneurship Theory and Practice, Winter, pp. 167–85. Simon, M. and Houghton, S.M. (2003) ‘The relationship between overconfidence and the introduction of risky products: Evidence from a field study’, Academy of Management Journal, Vol. 46, No. 2, pp. 139–49. Stancill, J.M. (1981) ‘Realistic criteria for judging new ventures’, Harvard Business Review, Nov./Dec., pp. 60–71. Stubbart, C.I. (1989) ‘Managerial cognition: a missing link in strategic management’, Journal of Management Studies, Vol. 26, No. 4, pp. 325–47. Uusitalo, R. (2001) ‘hom*o entreprenaurus’, Applied Economics, Vol. 33, pp. 1631–8. Weaver, K.M., Dickson, P.H., Gibson, B. and Turner, A. (2002) ‘Being uncertain: the relationship beteween entrepreneurial orientation and environmental uncertainty’, Journal of Enterprising Culture, Vol. 10, No. 2, pp. 87–106. Wickham, P.A. (2003) ‘The representativeness heuristic in judgements involving entrepreneurial success and failure’, Management Decision, Vol. 41, No. 3, pp. 156–67. Wright, R. (2000) Nonzero: History, Evolution and Human Cooperation. London: Abacus. Zacharakis, A.L. and Shepherd, D.A. (2001) ‘The nature of information and overconfidence on venture capitalists decision making’, Journal of Business Venturing, Vol. 16, No. 4, pp. 311–32.

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CASE 4.1

7 November 2005

FT

Management training for the young STEPHEN OVERELL future of both technicians and sales staff depends on other skills, too: a facility with information technology, strong listening and communication abilities, an aptitude for collaboration, deductive reasoning and interpersonal skills, such as reading body language and emotional intelligence. Schools, he argues, tend to foster ‘content sponges’, not entrepreneurs. ‘If you can’t work in a team as a child, you won’t be able to as an adult,’ he claims. Naturally, the industrialisation of education inspires terror among some. The fear that what were once known as ‘the liberal arts’ are being enslaved by ‘the servile arts’ (occupational learning) is an old one. T.S. Eliot wrote: ‘There is no doubt that in our headlong rush to educate everybody, we are lowering our standards . . . destroying our ancient edifices to make ready the ground upon which the barbarian nomads of the future will encamp in their mechanised caravans.’ Yet the QCA is keen to stress that its interest in innovative experiments in schools is not aimed at making them more ‘vocational’ – a loaded term in Britain. Rather, it is asking if there is more that schools can do to teach academic subjects in ways that will serve employers’ long-term skill requirements better. ‘Literacy and numeracy standards are absolutely vital,’ says David Burrows, director of education for Microsoft, the software company. ‘But schools need an appreciation of what the economy is going to need – things like problem-solving, critical thinking, how to – contextualise information, learning to learn.’

Shortly after mastering the potty, but before they can count to 20, pupils at the Grange Primary School in Derbyshire savour their first taste of life in the corporate fast lane. From the age of three – yes, three – all 400 children become involved in running one of the enterprises that together form ‘Grangetown’, a model town. At the school’s ‘healthy eating shop’, for example, children between seven and 11 take on a variety of management tasks. They must research a product base, survey changing customer needs and understand inventory and stock control. Formed with a £250 ($441) loan (now repaid), the shop turns a £100 profit every six weeks. Mercantilism is tempered by social responsibility, however: all profits are ploughed back into Grangetown. ‘The national curriculum is still stuck in the 19th-century model of receiving knowledge passively,’ says Richard Gerver, the school’s headteacher. ‘I’m just not sure we are set up to create dynamic, problem-solving, independently minded young people.’ Similar doubts were aired at a conference in London last week organised by the Qualifications and Curriculum Authority (QCA), a state body that oversees the qualifications system, which sought to ask employers which skills they thought would be most valuable in the future. For Jeff Jennings, director of the Centre for Development at BMW UK, the British arm of the German carmaker, the skills of writing, reading and arithmetic are more important than ever for his industry’s future. But the

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CASE 4.1 CONT. The analysis of future skills needs in western economies is an uncertain task. It involves both attempting to understand the ways that information technology will transform the nature of jobs inside organisations; and also identifying which occupations are most likely to grow or diminish as a result. According to The New Division of Labour, in which Frank Levy and Richard Murnane, two American academics, examine how IT affects work, computers are increasingly taking over work governed by ‘rules-based logic’. If a job involves following a set of ‘if–then–do’ rules, then it is programmable, and a candidate for either computer substitution or offshoring. The skills most important to the future as nations move up the value chain, the authors argue, will be in two areas: ‘expert thinking’ – advanced problem-solving and pattern recognition; and ‘complex communication’ – human interactions involving persuasion, collaboration and negotiation. The effect of advancing IT in factories and offices is that more of the jobs humans do revolve around interpersonal interactions and sophisticated intellectual work. Technology thus tilts the labour market decisively against the less well-educated. Take bank cashiers, for example. Automated teller machines now dispense cash and enable simple account administration. But smaller numbers of cashiers are still necessary to sort out complicated queries and push new products. Given this effect, it is unsurprising that the biggest growth has been in jobs that require significant training or education – managers, professionals, technical and administrative staff. Low-skills service jobs have also grown, hence rising social polarisation – but not at the speed of higher level jobs. The authors write: ‘Between 1969 and 1999 the number of adults employed as service

workers [in America] grew from 11.6 per cent to 13.9 per cent of the adult workforce, but managers, administrators, professional workers and technicians taken together – the highest paid categories – grew from 23 per cent to 33 per cent.’ The pattern has been similar in the UK, too. The biggest single occupational category is now managers and professionals – a development anticipated by Karl Marx in the 19th century. And it is high-paying jobs that have grown fastest over the past 25 years. The UK government’s most recent National Skills Survey found that of ten different measures of generic skill used at work, nine showed a rise in requirements. These included literacy, numeracy, technical know-how, problem-solving, checking, planning and various forms of communication. The sole exception was physical strength and stamina. About one-quarter of jobs today require a degree. Of course, not everyone will become a manager, or would want to. But what is the best way to educate children to prosper in this likely world of work? Mr Levy, a professor of urban economics at the Massachusetts Institute of Technology, argues against treating expert thinking and complex communication as new subjects in the curriculum. ‘Kids still need to know rule-based subjects like algebra,’ he says. ‘But solving problems has two parts. First, there is modelling a situation and knowing which rules to apply to solve it; and then there is executing a solution. It is knowing which rules to apply that will retain its labour market value.’ Using analogies, project-based collaborations, emphasising the underlying relationships between facts, and cutting back on multiple-choice tests should help develop skills of critical thinking and social capital. However, Mr Levy admits his suggestions for the classroom are as yet tentative.

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CASE 4.2

vocational development. But, notes Gerhard Bosch, vice-president of the Institute Arbeit and Technik, based in Dusseldorf, Germany, for schoolchildren, the state believes ‘raising academic achievement prior to entry into the labour force is the best answer to growing social polarisation’. Source: Stephen Overell, ‘Management training for the young’, Financial Times, 7 November 2005, p. 10. Copyright © 2005 Stephen Overell.

28 January 2006

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But, as always, the risk of such innovations is that they may be perceived as yet another flaky fad. After all, languages, literature and maths will never date in the way more ‘practical’ skills will. Alison Wolf, professor of management and professional development at Kings College, London, has argued in her book Does Education Matter?, for example, that traditional academic disciplines are the best preparation for the workplace. This is also the approach in Germany, which has a long history of high quality adult

FT

TBA EMMA CRICHTON-MILLER It’s a sunny Saturday in a garden after a lazy lunch. We are a group of old friends, from our late 30s to early 50s, sprawled on the grass, keeping half an eye on small children trampling the flower beds. The subject turns to work and suddenly we’re alert. Rather than a relaxed account of careers rising to high tide, apprehension crackles. A mixed bunch of professionals, we are all gripped by the same question: how are we going to earn a living for the next 20 or 30 years? Most of us are arts graduates who spurned vocational degrees the first time around to pursue strong personal interests – in art or literature, drama, history or anthropology. Our subsequent careers are a patchwork of passionately pursued projects – either in academe or the media or as film-makers and writers. Mostly we avoided the more obviously lucrative professions available then to arts graduates in PR and advertising – partly, it is true, out of youthful high-mindedness

(clearly misguided!) – but partly because the lure of the next assignment and the pleasures of growing expertise were irresistible. Now, however, the time for play is over. For some, there is a sense of guilt, at having contributed perhaps less usefully to society than our education might have allowed us to. Certainly I feel the eyes of public-service driven ancestors – all those doctors and priests and teachers – bearing down on me sternly. The shift in values over our adult lifetime from the ego-driven 1980s to the public service culture of New Labour has perhaps exacerbated this crisis of conscience. And for many the increasing casualisation of the workplace and the whole ghastly mess of pension provision are issues that are beginning to bite in the early hours of the morning. First one person and then another admits that more traditionally vocational professions have recently taken on a new allure. Various reasons are offered: it could be a desire for

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CASE 4.2 CONT. financial security and predictability of employment, the quest for job satisfaction, or the unearthing of a latent ambition never before fully expressed. This is not idle chat. It transpires that every one of us has seriously investigated the possibilities. I inform everyone that to become a solicitor you need to do a graduate diploma in law (£6,000–£7,000), then take a legal practice course (£5,000–£9,000) and then spend two years under a very modestly remunerative training contract. A friend explains how you can move from the diploma to a Bar vocational course, then into pupillage (and temporary penury) to become a barrister. Can he, with a mortgage and three children, afford it? Another tells the story of a friend who, although she had already trained as a barrister, has shifted in her late 30s from family law to clinical psychology, taking first a conversion degree course in psychology, then completing three years of a PhD, all along volunteering in various mental health institutions, before fulfilling a further probationary period. And she has three children. Between us we come up with a journalist who retrained as a midwife; a wine merchant who has become a barrister; a solicitor who has become a social worker; a graduate mother who retrained in her late 40s as a barrister; a doctor who moved into equity finance; and a television producer who has become a primary school teacher. Far from downsizing, these people have achieved the kind of substantial career redirection that is fairly common for people in their 20s, still working out what it is they really want to do, but has up until now been rarer for people in their later 40s and 50s. There are of course significant material reasons why our age group might consider undertaking expensive and time-consuming

professional re-education. As the government keeps reminding us, the notion of a ‘job for life’ is redundant and today’s buzz phrase is ‘employability for life’. As our energy declines and creative ideas no longer flow to order, a vocational qualification seems a comfortingly clear signal of competence. The fact that we seem likely to be pressed to work until we are 68 or later is a strong incentive to choose a career that will still provide both work and job satisfaction well on into our 60s. Other, more purely psychological, reasons also play a part. Many people describe a subtle shift in values as they reach the end of their 30s or have children. Others see this moment as their last chance to realise an ambition that maybe their parents, a forbidding teacher or financial circ*mstances had blocked earlier. Some simply want a new challenge. Over her professional lifetime, Professor Susan Cartwright of the Manchester Business School has seen an increase in major career change. She herself moved from the insurance industry into organisational psychology when her daughter was small, as the high pay and many travel opportunities of her first career seemed less appealing in her 30s. ‘There are so many professions that benefit from having people not straight from university – and organisations should acknowledge that,’ she says. If businesses have been reluctant to offer sabbaticals and some institutions of higher education slow to accommodate the needs of mature students, other universities and colleges have stepped in. The backbone of mature study is the Open University. About half of its students are taking courses explicitly with the intention of changing career and, over the last five years, its careers service has expanded rapidly to help students achieve this. Other universities also offer correspondence and distance learning opportunities,

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suggested family law, which immediately appealed. He used his savings to finance the two years of law course and Bar school and the 16-month period of pupillage, during which he earned very little. ‘You have to be confident of your own abilities. You shouldn’t try to become a barrister unless it’s absolutely what you’ve got to do.’ He feels, however, that family law is particularly suitable for older candidates. ‘You’ve got to represent clients in very difficult and emotional circ*mstances, so it helps to have some maturity,’ he says. He counts among his colleagues a former architect, an erstwhile archaeologist, an exmidwife and a one-time psychiatric nurse. For another barrister I spoke to, who made the change in his early 40s and is doing his pupillage now, the most difficult part is the financial strain on his family. Alongside this is the vow of humility you have to take when you give up being the boss of your own business, used to managing others, and become the lowest of the low in the pecking order. For Hannah Stephens, the trigger for change as she entered her 40s was her children. Stephens, who had been a senior television drama producer running a successful team, said ‘there was no single Road to Damascus moment’. She had been well paid and allowed to work four days a week to accommodate her children’s needs. ‘But I had got more involved with and interested in my children’s education and was increasingly frustrated at not being able to help them.’ She was so inspired by her interview for the PGCE at the Institute of Education that, although she was offered a very good job the same day she learnt her application had been accepted, she chose the course. Stephens’ husband was also a teacher and he was able to support the family while she did her PGCE. She acknowledges that it was a huge bonus that she had achieved a certain level of security for her family before embarking on this new

Chapter 4 Entrepreneurship, cognition and decision making

and there has been an expansion in the provision of graduate level conversion degree programmes in vocational subjects such as law and psychology, with reasonable flexibility about completion times and on-site attendance. Teaching has been actively recruiting older, experienced candidates on to PGCE programmes, with the additional incentive that your fees are paid for you, and even the Law Society, which supervises the professional training of solicitors, admits that the average age of people qualifying is now 28 – requiring a fair constituency of the over-35s. Medicine is inevitably a harder nut to crack, given the length of time it takes to qualify. Even Kings College’s fast track four-year medical degree programme for non-medical graduates rarely sees candidates much over 30. All this opportunity cannot disguise the fact, however, that once you start probing your own financial and emotional readiness, the loss of earnings and achieved status may just be unsustainable. As Simon Broomer, director of the careers advice service Career Balance puts it: ‘The educational door may increasingly be open but if you can’t go through it, you can’t go through it.’ He is very cautious about encouraging major change. Often people have a romanticised view of life on the other side and underestimate the value of the skills and experience they have already acquired. Often a deep dissatisfaction can be resolved either by a change in the sector where they are using their skills, or by the development of new skills within the same sector. You might write novels rather than journalism, teach adults rather than children or move, within the same company, from accounts to personnel. For Edward French the shift happened early enough, in his early 30s, for him to sustain the financial shock. He had resigned from a high-earning job in the City when a friend

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CASE 4.2 CONT. career. ‘I learnt something new every day. I was so much more purposeful about studying than the first time around. You only have nine months and you have to come out of it with the right qualification.’ Her fees were paid by the local authority and she received a bursary of £6,000. Curiously, now in her first year as a qualified teacher, teaching at a primary school near her home, she has less time to be with her children. ‘I work very long hours. I get up before them and I am not there when they get home from school. I am driven. But it’s good to feel driven about something that you feel really matters.’ Max Whitby had already had several careers – as a prolific BBC television producer making science programmes, as a pioneer of interactive television, as the director of an independent production company, as the founder of a science-based company – when a niggling envy of pure science drove him in his late 40s to embark on a Masters in Research in Nanomaterials at Imperial College. ‘However absorbing the individual projects, I increasingly felt that I was outside the greenhouse looking in,’ he says. Although Whitby had three science A levels, he had read philosophy at university. Normally a good first or upper second class degree in chemistry or physics is a requirement of the course, ‘But this is frontier territory, intellectually like the Wild West, and because everybody has got only part of the background, I was able to persuade them to take me.’ Throughout the first year Whitby took emergency maths lessons from a friend, plumbed the expertise of his fellow students in quantum mechanics, chemistry and molecular biology and recorded every lecture on his iPod. ‘I loved my first year. I was twice the age of my fellow students but you make up in

guile for the lack of computational power. Occasionally I’ve hit a brick wall and that is daunting.’ At first Whitby’s intention had been to take a sabbatical, partly funded by his company. However, having earned a distinction in his Masters and made a potentially exciting discovery, he has now embarked on a PhD and has established a further company for the exploitation of his research findings. Whitby admits that anyone making such a huge change of direction faces all kinds of risks and uncertainties ‘but it is also an opportunity to fit in another life’. For Robert Montagu that other life had been waiting all along. He had been a successful entrepreneur, businessman, audiovisual producer, writer, consultant and father to four children when, aged 50, he started to retrain as a psychologist. ‘It was something I had always wanted to do since I was a child. I had had a dysfunctional family life and, when I got to boarding school, I started helping others to help myself. I would practise family therapy illegitimately with groups of up to 10 boys who had problems with severe sexual bullying in the school.’ Montagu took a four-year postgraduate course in systemic family psychotherapy, offered by the KCC Foundation in Vauxhall, partly because their criteria for entry were more flexible. ‘I embarked on the course thinking I would use it in business practice. It was only when I started that I realised I was going to change career.’ While studying, Montagu practised for three years with the Wandsworth social team, where they had no other therapeutic services. ‘This was incredible experience. We handled hundreds of very difficult cases, in a very multi-ethnic environment, and had to work closely with social services.’ After graduating with a distinction, he got a job with the Hertfordshire Health Trust, was promoted rapidly and has just taken a

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they compensate for with clarity of purpose, time management skills and commitment. Months on from our lazy summer lunch, we are still exchanging notes. One friend is about to embark on the law diploma, another has been offered a job so appealing within her own field that she has gone for it but says the soul-searching has at least enabled her to put other nagging thoughts to rest. I have been too busy to think. But it is still January, and along with the rest of the world, I say maybe this will be the year I make that leap for another life. As the government’s anti-age discrimination legislation is made law this October, it could be that many more of us, creeping into middle age, decide that rather than endure the declining satisfactions of our first career, we go for broke and build a second.

Chapter 4 Entrepreneurship, cognition and decision making

senior position at the Brent Centre for Young People. ‘I feel very much at home in my work, very much supported by my colleagues’, but Montagu acknowledges that it has been very tough on his wife. They had always lived together in the country. Now Montagu works long hours in London and returns exhausted. However his wife, a sculptor, said: ‘We have always both believed in continual growth.’ Montagu’s example is confirmed by Julie Evans, director of the conversion degree programme in psychology at the London Metropolitan University. Besides the many students in their early 20s, her next largest group of students are those aged anywhere from late 30s through to 50. She interviews intensively to identify those who have really thought through the whole process from academic qualification to final career transformation and so has an almost invisible dropout rate. What older students lack in brain speed,

Source: Emma Crichton-Miller, ‘TBA’, Financial Times, 28 January 2006, p. 1. Copyright © 2006 Emma Crichton-Miller.

Discussion point 1. To what extent might the different cognitive skills of entrepreneurs (a) be present at birth; (b) develop through schooling; (c) develop through professional experience in later life?

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CHAPTER 5

Taking the entrepreneurial option Chapter overview This chapter is concerned with developing a picture of the entrepreneur as an individual. It considers the type of people who choose an entrepreneurial path, the characteristics that successful entrepreneurs bring to the job and the skills they use. The chapter concludes by emphasising the importance of understanding the entrepreneur in a social setting and the influences exerted by the culture in which they operate.

5.1 Who becomes an entrepreneur?

Key learning outcome A recognition of the different type of people who take up an entrepreneurial career.

The discussion in Chapter 1 should make it clear that we should be very wary of trying to answer the question ‘who becomes an entrepreneur?’ by looking for a certain type of personality or trying to identify innate characteristics. In these terms, anyone can become an entrepreneur. A more fruitful approach is to look at the broader life experience and events which encourage a person to make a move into entrepreneurship. A number of general life stories or ‘biographies’ can be identified.

The inventor The inventor is someone who has developed an innovation and who has decided to make a career out of presenting that innovation to the market. It may be a new product or it may be an idea for a new service. It may be high-tech or it may be based on a traditional technology. The inventor often draws on technical experience of a particular industry in order to make his or her invention. However, the invention may be derived from a technology quite unrelated to the industry in which they work. It may be based on technical expertise they have gained as the result of a hobby. Alternatively, the invention may result from a ‘grey’ research programme carried out unofficially within the inventor’s employer organisation or it may be the product of a private ‘garden shed’ development programme.

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It is an unfortunate fact of life that, in general, many such ‘inventors’ have a poor track record in building successful businesses. This is not because their ideas are not good: their innovations are often quite valuable. More often, it is due to the fact that no new product, regardless of how many benefits it might potentially bring to the customer, will manufacture and promote itself. Successful entrepreneurship calls upon a wide range of management skills, not just an ability to innovate. The entrepreneur must establish a market potential for their innovation and lead an organisation which can deliver it profitably. They must sell the product to customers and sell the venture to investors. Inventors can often be so impressed with the technical side of their innovation (often justifiably) that they neglect the other tasks that must be undertaken. An example of an inventor who combined technical insight with consummate business skills is James Dyson, who built up not one but two highly successful businesses to market innovative products.

The unfulfilled manager Life as a professional manager in an established organisation brings many rewards. It offers a stable income, intellectual stimulation, status and a degree of security. For many people, though, this is still not enough. The organisation may not offer them a vehicle for all their ambitions: for example, the desire to make a mark on the world, to leave a lasting achievement, to stretch their existing managerial talents to their limit and to develop new ones. It may simply not let them do things their way. Such a manager, confident in their abilities and unsatisfied in their ambitions, may decide to embark on an entrepreneurial career. The question they often face is ‘doing what?’ The desire and the ability to perform entrepreneurially means nothing if a suitable opportunity has not been spotted and an innovation to take advantage of it developed. In a sense, the unsatisfied manager faces the opposite problem to the inventor: entrepreneurial ability but nothing to apply it to. If they are to be successful they must put effort into identifying and clarifying a business idea and developing an understanding of its market potential. This can often be resolved by working as part of an entrepreneurial team with an inventor who dreams up the initial idea.

The displaced manager The increasing pace of technological and economic change means that managers are likely to make an increasing number of career changes during their professional lives. Restructuring trends such as ‘downsizing’ and ‘delayering’ mean that unemployment among professional groups is increasing in many parts of the world. This increases the pressure on managers to work for themselves and one possibility is to undertake an entrepreneurial route. The severance package which may be offered by their organisations (often supplemented with training and support) can sometimes facilitate this possibility. Many managers approach redundancy positively, seeing it as an opportunity to achieve things they could not within the organisation. In effect, they recognise themselves as unfulfilled managers and feel grateful for the push they have been given. Others, however, may not adopt such a positive approach. They may see the uncertainties looming larger than the possibilities. Making entrepreneurship successful is very difficult, if not impossible, unless it is approached with enthusiasm. If a person does not find the prospect of an entrepreneurial career attractive then such a career is plainly wrong for them. However, one

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should not underestimate the power of a few early successes to change attitudes and to alter a manager’s perception of possibilities.

The young professional Increasingly, young, highly educated people, often with formal management qualifications, are skipping the experience of working for an established organisation and moving directly to work on establishing their own ventures. Despite some very high-profile success stories, not least with internet ventures, such entrepreneurs are often met with suspicion. There may be a concern that whatever their ‘theoretical’ knowledge, they lack experience in the realities of business life. While youthful enthusiasm may hide a lack of real acumen, the young entrepreneur should not be dismissed out of hand. In the mature economies of the western world, young entrepreneurs have been disproportionally important in leading new industries, particularly in high-tech areas such as computing, information technology and business services. The fast-growing emergent economies of the Pacific Rim and the developing world have populations which are generally much younger in profile than those of the West. Entrepreneurs may have to be younger if sufficient entrepreneurial talent is to be available to drive the economy’s growth. The post-communist world of eastern and central Europe is undergoing a radical economic and social restructuring. To a great extent it is young people who are taking the lead and making the adaptations necessary to take advantage of the new possibilities these changes are offering. Delmar and Davidsson (2000) found that some 2 per cent of the Swedish population were considering starting their own business. After exploring a number of social and personal factors they found that sex was the dominant indicator of entrepreneurial intention and age an important secondary factor.

The excluded Some people turn to an entrepreneurial career because nothing else is open to them. The dynamism and entrepreneurial vigour of displaced communities and ethnic and religious minorities is well documented. This is not because such people are ‘inherently’ entrepreneurial; rather it is because, for a variety of social, cultural, political and historical reasons, they have not been invited to join the wider economic community. They do not form part of the established network of individuals and organisations. As a result they may form their own internal networks, trading among themselves and, perhaps, with their ancestral countries. Ethnic entrepreneurship can be very important within a national economy. Small communities often make a contribution to the overall entrepreneurial vigour of a country in a way which is quite disproportionate to their number. Nevertheless, one of the main challenges faced by ethnic entrepreneurs is making the move from running a small business to starting a full-blown entrepreneurial venture. This is because to achieve its growth potential the entrepreneurial venture must spread its network of relationships quite widely, and this often involves going beyond the confines of the small community in which it starts. In a sense, this goes against the reason for the business coming into existence in the first place. In making the move, the ethnic entrepreneur may face risks that the non-ethnic entrepreneur does not.

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In a far-reaching study, Blanchflower and Oswald (1998) have investigated the factors that lie behind the drive to become an entrepreneur. The basis of their research was information on the National Child Development Study (NCDS), a database recording biographical information, psychometric and personality test data on all individuals born in Great Britain between 3 and 9 March 1958. Taking a broad view of entrepreneurship, that is, starting one’s own business, the researchers attempted to identify the factors that predisposed individuals to take this career option. They found no correlation between personality factors, important life events and entrepreneurial inclination. This is a finding that reinforces this book’s proposition that successful entrepreneurship is not personality dependent. The one thing they did find to be important was receiving a lump sum of money, say in the form of a legacy, which allowed individuals to make the initial investment in a start-up. The authors then develop an econometric model of entrepreneurial labour economics. This finding confirms the importance of access to initial capital as a key event in the entrepreneurial process. This is not to say that one cannot become an entrepreneur if one does not receive a legacy. But it does emphasise the importance of building a good relationship with investors. This is an issue that will be explored further in Chapter 20.

Chapter 5 Taking the entrepreneurial option

There is growing evidence that, after a time, say three or four generations, small business managers from ethnic minorities are increasingly willing to make the move to entrepreneurism. In doing so they add another spur to the wider economy.

Miner (1997) suggests that four primary types of individual become entrepreneurs. These are: • The personal achiever – the individual who is driven to succeed and chooses the entrepreneurial option as the best means of doing this. The personal achiever is characterised by clear objectives, hard work and dedication. • The emphatic supersalesperson – this type is characterised by a well-developed ability to understand customer needs, to empathise with them and to communicate their offerings to them effectively. They are motivated to become entrepreneurs by their ability to deliver sales. • The real manager – the entrepreneur who is motivated by having an organisation large enough to put demands on their managerial abilities. They are motivated to build their own organisations because of the lack of extant organisations that can offer them the challenges they seek. • The expert-idea generator – an individual who is motivated by the entrepreneurial option because it offers them a platform to develop and market an innovation they have created and to achieve the satisfaction of seeing it become reality. Miner considers appropriate routes into entrepreneurship and some of the pitfalls along the way for each type.

5.2 Characteristics of the successful entrepreneur Although there does not seem to be a single ‘entrepreneurial type’ there is a great deal of consistency in the way in which entrepreneurs approach their task. Some of the characteristics that are exhibited by the successful entrepreneur are discussed below. However, we should

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Key learning outcome A recognition of the characteristics exhibited by successful entrepreneurs.

be careful to draw a distinction between personality ‘characteristics’ and the character somebody displays when working. The former are regarded as innate, a permanent part of the make-up of their personality. The latter is just the way they approach a particular set of tasks. This is just as much a product of their commitment, interest and motivation to the tasks in hand, as it is a predisposition.

Hard work Entrepreneurs put a lot of physical and mental effort into developing their ventures. They often work long and antisocial hours. After all, an entrepreneur is their own most valuable asset. That said, balancing the needs of the venture with other life commitments such as family and friends is one of the great challenges which faces the entrepreneur.

Self-starting Entrepreneurs do not need to be told what to do. They identify tasks for themselves and then follow them through without looking for encouragement or direction from others.

Setting of personal goals Entrepreneurs tend to set themselves clear, and demanding, goals. They benchmark their achievements against these personal goals. As a result, entrepreneurs tend to work to internal standards rather than look to others for assessment of their performance.

Resilience Not everything goes right all the time. In fact, failure may be experienced more often than success. Entrepreneurs must not only pick themselves up after things have gone wrong but also learn positively from the experience and use that learning to increase the chances of success the next time around.

Confidence Entrepreneurs must demonstrate that they not only believe in themselves but also in the venture they are pursuing. After all, if they don’t, who will? However, note the issue of over confidence discussed in section 4.3.

Receptiveness to new ideas So, entrepreneurs must not be overly confident. They must recognise their own limitations and the possibilities that they have to improve their skills. They must be willing to revise their ideas in the light of new experience. One of the main reasons that banks and venture capitalists give for not supporting a business proposal is that entrepreneurs were too sure of themselves to be receptive to good advice when it was offered.

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Entrepreneurs are usually clear as to what they want to gain from a situation and are not frightened to express their wishes. Being assertive does not mean being aggressive. Nor does it mean adopting a position and refusing to budge. Assertiveness means a commitment to outcomes, not means. True assertiveness relies on mutual understanding and is founded on good communication skills.

Information seeking Entrepreneurs are not, on average, any more intelligent than any other group. They are, however, characterised by inquisitiveness. They are never satisfied by the information they have at any one time and constantly seek more. Good entrepreneurs tend to question rather more than they make statements when communicating.

Chapter 5 Taking the entrepreneurial option

Assertiveness

Eager to learn Good entrepreneurs are always aware that they could do things better. They are aware of both the skills they have and their limitations, and are always receptive to a chance to improve their skills and to develop new ones.

Attuned to opportunity The good entrepreneur is constantly searching for new opportunities. In effect, this means that they are never really satisfied with the way things are at any moment in time. The entrepreneur uses this sense of dissatisfaction to make sure they never become complacent.

Receptive to change The entrepreneur is always willing to embrace change in a positive fashion, that is, to actively embrace the possibilities presented by change rather than resist them.

Commitment to others Good entrepreneurs are not selfish. They cannot afford to be. They recognise the value that other people bring to their ventures and the importance of motivating those people to make the best effort they can on its behalf. This means showing a commitment to them. Motivation demands an investment in understanding how people think. Leadership is not just about giving people jobs to do; it is also about offering them the support they need in order to do those jobs.

Comfort with power Entrepreneurs can become very powerful figures. They can have a great impact on the lives of other people. Power can be one of the great motivators for the entrepreneur. Effective entrepreneurs are aware of the power they possess and recognise it as an asset. They are not afraid to use it and never let themselves be intimidated by it. However, the true entrepreneur uses power responsibly, as a means to an end and not as an end in itself.

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These are essential characteristics. How they become manifest is, of course, subject to political and economic conditions. They are recognised and judged in a social setting subject to social norms and expectations. How these characteristics are developing in social systems that have undergone major changes (such as the post-communist bloc of central and eastern Europe) is of particular interest. Green et al. (1996) and Kuznetsov et al. (2000) offer studies of the emergence of entrepreneurial characteristics in Russia.

5.3 Entrepreneurial skills A skill is simply knowledge which is demonstrated by action. It is an ability to perform in a certain way. An entrepreneur is someKey learning outcome one who has a good business idea and can turn that idea into A recognition of the skills reality. To be successful, an entrepreneur must not only identify that enhance entrepreneurial an opportunity but also understand it in great depth. They must performance. be able to spot a gap in the market and recognise what new product or service will fill that gap. They must know what features it will have and why they will appeal to the customer. The entrepreneur must also know how to inform the customer about it and how to deliver the new offering. All this calls for an intimate knowledge of a particular sector of industry. Turning an idea into reality calls upon two sorts of skill. General management skills are required to organise the physical and financial resources needed to run the venture and people management skills are needed to obtain the necessary support from others for the venture to succeed. Some important general management business skills include: • strategy skills – an ability to consider the business as a whole, to understand how it fits within its marketplace, how it can organise itself to deliver value to its customers, and the ways in which it does this better than its competitors; • planning skills – an ability to consider what the future might offer, how it will impact on the business and what needs to be done to prepare for it now; • marketing skills – an ability to see past the firm’s offerings and their features, to be able to see how they satisfy the customer’s needs and why the customer finds them attractive; • financial skills – an ability to manage money; to be able not only to keep track of expenditure and to monitor cash flow, but also to assess investments in terms of their potential and their risks; • project management skills – an ability to organise projects, to set specific objectives, to set schedules and to ensure that the necessary resources are in the right place at the right time; • time management skills – an ability to use time productively, to be able to prioritise important jobs and to get things done to schedule. Businesses are made by people. A business can only be successful if the people who make it up are properly directed and are committed to make an effort on its behalf. An entrepreneurial venture also needs the support of people from outside the organisation such as customers, suppliers and investors. To be effective, an entrepreneur needs to demonstrate a wide variety of skills in the way he or she deals with other people. Some of the more important skills we might include under this heading are:

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• Leadership skills – an ability to inspire people to work in a specific way and to undertake the tasks that are necessary for the success of the venture. Leadership is about more than merely directing people; it is also about supporting them and helping them to achieve the goals they have been set. • Motivation skills – an ability to enthuse people and get them to give their full commitment to the tasks in hand. Being able to motivate demands an understanding of what drives people and what they expect from their jobs. It should not be forgotten that, for the entrepreneur, an ability to motivate oneself is as important as an ability to motivate others. • Delegation skills – an ability to allocate tasks to different people. Effective delegation involves more than instructing. It demands a full understanding of the skills that people possess, how they use them and how they might be developed to fulfil future needs. • Communication skills – an ability to use spoken and written language to express ideas and inform others. Good communication is about more than just passing information. It is about using language to influence people’s actions. • Negotiation skills – an ability to understand what is wanted from a situation, what is motivating others in that situation and recognise the possibilities of maximising the outcomes for all parties. Being a good negotiator is more about being able to identify win–win scenarios and communicate them, than it is about being able to ‘bargain hard’. All these different people skills are interrelated. Good leadership demands being able to motivate. Effective delegation requires an ability to communicate. The skills needed to deal with people are not innate, they must be learnt. Leadership is as much an acquired skill as is an ability to plan effectively. The ability to motivate and to negotiate can be learnt in the same way as project management techniques. Entrepreneurial performance results from a combination of industry knowledge, general management skills, people skills and personal motivation (Figure 5.1). The successful

Figure 5.1 Factors influencing entrepreneurial performance

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entrepreneur must not only use these skills but learn to use them and learn from using them. Entrepreneurs should constantly audit their abilities in these areas, recognise their strengths and shortcomings, and plan how to develop these skills for the future.

5.4 The supply of entrepreneurs If we look at any of the world’s economies we will see a certain number of entrepreneurs operating within them. The exact number will depend on how we define entrepreneurship, but their An understanding of the forces importance to the economy within which they operate will be which encourage and inhibit evident. They will be responsible for providing economic efficiency entrepreneurship. and bringing new innovations to the market. In mature economies, such as western Europe and North America, they are responsible for most new job creation. In the former communist bloc, the emergence of an entrepreneurial class is a necessary prelude to establishing a market-driven economic order. The question is, what governs the number of entrepreneurs who will emerge at any given time? The answer to this macroeconomic question lies in an understanding of the factors that lead any one individual to pursue an entrepreneurial career. If we assume that entrepreneurs are born, or that entrepreneurship is the result of inherent personality characteristics, then the supply of entrepreneurs must be fixed. The number will depend on the number of people who are impelled to pursue the entrepreneurial option by virtue of their inherent characteristics, which are likely to be stable over long periods. This might reflect deep-rooted cultural factors but it will be largely independent of external influences. On the other hand, if we assume that entrepreneurs are managers who have freely decided to become entrepreneurs, then the number of entrepreneurs at any one time will be sensitive to a variety of external factors. A simple approach to explaining this uses a model in which there are two pools of labour: a conventional labour pool in which people take up paid employment, and an entrepreneurial pool in which people are acting as entrepreneurs. Such a model assumes that there is a clear definition of what constitutes entrepreneurship and that it is distinct from ‘ordinary’ labour. The assumption that there is a clear dividing line between the entrepreneurial and the non-entrepreneurial, is obviously artificial. However, it does serve to make the model simpler. It can be relaxed and more complex models can be developed to reflect a finer-grained reality more closely. These more complex models still work on the same basic premise. Managers are assumed to make a choice between the two options: a ‘conventional’ career versus an ‘entrepreneurial’ one (Figure 5.2). The process of moving from the conventional labour pool to the entrepreneurial pool is known as start-up. The reverse process of moving from the entrepreneurial pool back to the conventional labour pool is fall-out. The choice will depend on the relative attractiveness of the two options as perceived by the individual manager. Two forces are said to work driving the manager from the conventional labour pool to the entrepreneurial: pull factors and push factors. Pull factors are those which encourage managers to become entrepreneurs by virtue of the attractiveness of the entrepreneurial option. Pull factors might be thought of as the ‘come on in, the water is lovely!’ aspects of the attractiveness of the entrepreneurial option. Some important pull factors include:

Key learning outcome

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• • • • •

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Figure 5.2 The dynamics of entrepreneurial supply

the financial rewards of entrepreneurship; the freedom to work for oneself; the sense of achievement to be gained from running one’s own venture; the freedom to pursue a personal innovation; a desire to gain the social standing achieved by entrepreneurs.

Push factors, on the other hand, are those which encourage entrepreneurship by making the conventional option less attractive. These might be thought of as the ‘get out, the kitchen is too hot!’ aspects propelling individuals from conventional employment. Push factors include: • • • • • •

the limitations of financial rewards from conventional jobs; being unemployed in the established economy; job insecurity; career limitations and setbacks in a conventional job; the inability to pursue a personal innovation in a conventional job; being a ‘misfit’ in an established organisation.

The number of entrepreneurs operating at any one time will depend on the strength of the pull and push forces. If the forces are strong, then a large number of entrepreneurs will emerge. However, the supply of entrepreneurs will still be limited if inhibitors are operating. Inhibitors are factors which prevent the potential entrepreneur from following an entrepreneurial route, no matter how attractive an option it might appear. Some important inhibitors include: • • • • • • • •

an inability to secure start-up capital; the high cost of start-up capital; the risks presented by the business environment; legal restrictions on business activity; a lack of training for entrepreneurs; a feeling that the role of entrepreneur has a poor image; a lack of suitable human resources; personal inertia in following through business ideas.

Kouriloff (2000) takes a multi-disciplinary approach to investigating barriers to entrepreneurship, drawing ideas from economics, sociology and psychology, and gives a good

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Figure 5.3 Factors in entrepreneurial supply

account of methodologies for exploring the issue. Politicians and economic policy makers increasingly put the elimination of inhibitors to entrepreneurism at the top of their agenda. This is because they recognise the importance of increasing the number of entrepreneurs within the economy to stimulate growth. Figure 5.3 indicates the type of factors operating on managers considering a move to entrepreneurship. It will be appreciated that life experiences and situations will have an impact on the decision to make the move into entrepreneurship. A study of business start-ups in Western Australia by Mazzarol et al. (1999) revealed that gender, employment by government and redundancy had an impact on an individual’s desire to start a small business. A host of other factors including age, marital and family status and history of family business were less important. A substantive number of studies have examined factors that support, or hinder, the move to entrepreneurship on a national basis. Nations or regions examined include Australia (Mazzarol et al., 1999; Schaper, 1999), Central Europe (Fitzgerald, 2002), China (Tan, 1996; Zapalska and Edwards, 2001), the Czech Republic (Benacek, 1995), Greece (Maggina, 1992), Korea and the USA (Lee and Oysteryoung, 2001), Hungary and the Ukraine (Danis and Shipilov, 2002), Papua New Guinea (Schaper, 2002), Poland (Zapalska, 1997), Russia (Puffer et al., 2001), southern and east Africa (Trulsson, 2002) and South Africa (Ahwireng-Obeng and Piaray, 1999). Labour economists and psychologists studying the factors that are influential in encouraging entrepreneurship often use models based on sophisticated econometric and statistical methodologies. A full discussion of these is not possible in this book. The student who has an interest in these approaches is referred to the Mazzarol study above, the Blanchflower and Oswald study discussed in section 5.1 and also a study on business start-up in the UK by Galt and Moenning (1996). Details are given in the ‘Suggestions for further reading’ at the end of this chapter.

5.5 Influences on the move to entrepreneurship Whatever the forces acting on the labour market to encourage entrepreneurship, the decision to become an entrepreneur is an individual and personal one. We need to understand the factors involved in driving and shaping that decision in order to understand entrepreneurs. We

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An understanding of the factors involved in making the decision to become an entrepreneur.

are all active in an economy because we seek the rewards it brings. However, an economy is part of a wider pattern of social life and, although money is important, we seek more than purely financial rewards from the world in which we live. The decision to pursue an entrepreneurial career reflects a choice about the possibility of achieving satisfaction for a variety of economic and social needs. We might classify the needs of individuals under three broad headings:

• Economic needs – these include the requirement to earn a particular amount of money and the need for that income to be stable and predictable. The amount desired will reflect the need for economic survival, existing commitments such as the home and family, and the pursuit of personal interests. • Social needs – these represent the desire a person has to be a part of, and to fit into, a wider group and their desire to be recognised and respected within that group. The satisfaction of social needs is reflected in the creation and maintenance of friendships and other social relationships. • Developmental needs – these relate to the desire a person has to achieve personal goals and to grow intellectually or spiritually.

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Key learning outcome

A manager seeking to satisfy these needs is faced with a number of possibilities. There may be a choice between two or more conventional career options as well as the possibility of pursuing an entrepreneurial career. The entrepreneurial career itself may present itself in a number of ways. The manager’s decision on which path to take will be based on the potential each option has to satisfy the needs they perceive for themselves (Table 5.1). If the entrepreneurial route is seen to offer the best means of satisfying them then this will be chosen. However, making the move between different options will be sensitive to four factors: knowledge of entrepreneurial options open, the possibility for achieving them, the risks they present, and valence – the way in which the potential entrepreneur is willing to play off different needs against each other. Figure 5.4 represents a model of the factors involved in making the move to entrepreneurship.

Figure 5.4 A model of the move to entrepreneurship

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Table 5.1 The potential of entrepreneurial and conventional careers to satisfy economic, social and personal development needs

Economic needs

Social needs

Personal development needs

Entrepreneurial career

Conventional career

Can offer the possibility of high financial rewards in the long term

Financial rewards typically lower, but secure and predictable

However, income may be low in early stages and risks are high

Risks are relatively low

Entrepreneur creates organisational change

Established organisation usually provides good stage for making social relationships

A great deal of freedom to create and control network of social relationships

Manager may have only limited scope to control potential of social relationships formed

Social status of the entrepreneur usually high

Social status of manager variable

Entrepreneur in control of own destiny

Good potential to pursue personal development

Possibility of creating an ‘entire new world’

However, the direction of personal development may need to be compromised to overall organisational objectives and values

Venture may be powerful vehicle for personal development and expression of personal values

Career options limited and subject to internal competition

However, this is dependent on success of venture

Knowledge The individual must know that the entrepreneurial option exists and they must be aware of its potential. In the case of establishing an entrepreneurial venture, the manager must know of a particular business opportunity and have an idea how it might be exploited profitably. After all, the desire to be entrepreneurial must be expressed through the actuality of running a specific business venture. It cannot exist in a vacuum.

Possibility The individual must have the possibility of pursuing that option. This means that there must be no legal restrictions on their undertaking the venture (as there was in the former communist bloc, for example). They must also have access to the necessary resources:

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Risk The entrepreneur may have a detailed knowledge of a business opportunity and access to the resources necessary to initiate it. However, the entrepreneur will make the move only if the risks are seen as being acceptable. The entrepreneur must be comfortable with the level of risk the venture will entail, and they must be sure that the potential rewards are such that it is worth taking the risk. It is useful to distinguish between the actual level of risk in the venture and the level of risk that is perceived by the entrepreneur. These may be quite different. Entrepreneurs can often be overconfident and underassess risk. In addition to convincing themselves, entrepreneurs must convince any investors asked to back the venture that the risks are of an acceptable level.

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start-up funding, human resources and access to the established network. Finally, they must have (or at least feel that they have) the necessary experience and skills in order to make a success of the venture.

Valence The conventional career option and the option to start an entrepreneurial venture do not offer separate opportunities to satisfy economic, social and developmental needs; rather they offer a different mix of opportunities. The final factor which will influence the option selected is valence, that is, the way we are attracted to different options. Different people are willing to play off different needs against one another in different ways. Whereas many people ‘play safe’ and give priority to economic needs, by no means everyone does so. Some people prioritise social needs. Thus they may continue to work in an organisation they enjoy, with people they like, even though the option to move to a higher-paid job elsewhere is available to them. The artist starving in a garret or the religious aesthete is pursuing the need for personal development even though it is causing them economic hardship. Similarly, the entrepreneur may be so drawn to the possibilities of personal development offered by the entrepreneurial option, that they will pursue it even though it carries greater economic risks and perhaps, for the foreseeable future, a lower income than a conventional managerial career that is available to them. An interesting example of valence in action is revealed by Khandwalla in a series of studies of Indian managers and entrepreneurs. Khandwalla (1984, 1985) defines a pioneeringinnovative motive which leads individuals to ‘make path-breaking achievements through the accomplishment of unique tasks’. This pioneering-innovative drive encourages individuals to pursue an entrepreneurial career even if the financial and personal risks are perceived to be very high. A decisional model of the motivation to start a business might emphasise the balance of reasoning about the advantages and disadvantages of that move compared to alternatives. Both positive and negative reasons might be articulated for both (Figure 5.5). The decision requires that a wide range of factors be taken into consideration. Such a decision is termed a multi-criteria problem. A lot of experimental work has looked at how individuals compare and integrate the various criteria to arrive at a decision. The findings indicate that decision makers do not usually judge each reason independently to produce a simple, balanced answer. They often weigh different reasons, giving prominence to some and

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Figure 5.5 The balance of reasons for starting a new venture

downplaying others. Different reasons may interact with each other to change the overall priority given to each. So, while it is true to say that a nascent entrepreneur will initiate a venture if the positives of doing so outweigh the negatives compared with the positives and negatives of the alternatives, how this judgement takes place may be quite complex. Feldman and Bolino (2000) use Schein’s model of ‘career anchors’ to evaluate the motivations entrepreneurs have. Formal utility-based models of the decision to start a venture are developed by Campbell (1992), Katz (1992), Amundson (1995) and Eisenhauer (1995).

5.6 The initiation decision Starting a new business, working independently and facing the risks this presents – venture initiation – is clearly a major decision Key learning outcome for individuals pursuing the entrepreneurial option. Economists, An understanding of the factors social psychologists and cognitive psychologists have started to that influence the decision to take a great deal of interest in this particular decision and have initiate a venture and how explored both the motivations for it and the cognitive processes these factors might be that underpin it. modelled. Herron and Sapienza (1992) emphasise the primacy of the individual in the initiation. They go on to use ideas drawn from behavioural psychology and organisation theory to develop a model of the initiation decision. The primary inputs to the model are the individual’s values, personal traits and socio-economic context along with acquired skills, aptitutes and training. In combination, these lead to the individual having certain levels of aspiration that may or may not be met by their current circ*mstances. If the aspirations are not met, the individual will be dissatisfied and will start to explore alternatives. If the entrepreneurial option is attractive, then the individual will start to search for business opportunities. Once one or more opportunities have been identified, then the individual will evaluate those opportunities and estimate their value, and make a judgement about the opportunity’s equilibrium –

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the balance of rewards (inducements) against necessary costs in terms of monetary outlay, opportunities forgone and personal effort (contributions). If this equilibrium is satisfactory, then the venture is initiated. Mazzarol et al. (1999) develop a model that looks at the interaction of environmental factors (social networks, capital availability, political support, information availability) with personality factors (personal traits, social background, ethnicity and gender) to model the intentionality that is proximal to the initiation decision. Morrison (2000) suggests that the factors usually suggested as being influential in the initiation decision cannot be regarded separately, but must be considered holistically and the ‘construct’ of entrepreneurial opportunity should be thought of as a symbiotic relationship between entrepreneurial motivation and culture. Shaver et al. (2001) suggest a research approach and methodology for inquiring into an individual’s reasons for starting a business. Their approach is based on attribution theory, a field of social psychology that examines how individuals attribute events to causes and objects to classes.

5.7 The initiation process Actually initiating a business may be the start of the venture’s existence, but it is the end of a particular process as far as the Key learning outcome entrepreneur is concerned. The nascent entrepreneur must have An appreciation of the tasks first engaged in a number of ‘pre-launch preparation’ tasks such as involved in initiating a gathering and processing information, identifying a new opporventure and the question of tunity, imagining (and perhaps designing) an innovation to take how consistent different advantage of it, evaluation and valuation of the opportunity, entrepreneurs are in their initial contact with key supporters, acquisition of start-up capital, approach. and legal and contractual arrangements. Some of these tasks are independent of each other and may be conducted at the same time; some may have to wait until other tasks have been completed. A number of studies have examined whether the initiation process is relatively consistent or varies across different ventures (Carter et al., 1996). Alsos and Kolvereid (1998) examined how these tasks were organised by novice, serial and portfolio entrepreneurs, and found significant differences. Van Auken (2000) evaluated the relationship between start-up activity and the size of initial investment in ventures. A positive correlation was observed: the higher the investment, the greater the extent of, and detail in, start-up preparations. Pre-launch preparations in relation to the acqusition of investment capital have been studied by Van Auken (2000) and Kellye and Tullous (2002). Galbraith (1982) suggested a four-stage model of the product development phase for high-tech ventures: (1) a proof-in-principle stage in which the technology is demonstrated to have potential; (2) a prototype stage in which a working form of the technology is developed; (3) a model shop stage in which early production runs are undertaken; and finally, (4) the start-up stage where the product is produced in commercial quantities and delivered to the market. Kazanjian and Drazin (1990) extended this model into the post-start-up phase and considered (1) conception and development; (2) commercialisation; (3) early growth; and (4) stability in market phases. Complementing this, Hansen and Bird (1997) distinguished between ventures that develop and sell before taking on employees and those that take on employees, then develop and sell.

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Summary of key ideas • A wide variety of people can become entrepreneurs. Common backgrounds include inventors with new business ideas; managers unfulfilled by working in established organisations; displaced managers; and people excluded from the established economy.

• Whatever their background, successful entrepreneurs are characterised by being hard working and self-starting; setting high personal goals; having resilience and confidence in their abilities; being receptive to new ideas and being assertive in presenting them; being attuned to new opportunities, receptive to change and eager to learn; and being confident with power and demonstrating a commitment to others.

• Effective entrepreneurs use a variety of formal management skills combined with industry knowledge and personal motivation.

• The way entrepreneurs manage their ventures is dependent on the culture in which they operate. Effective entrepreneurs are sensitive to cultural values.

• The supply of entrepreneurs is determined by three sets of factors: pull factors which promote entrepreneurship as a positive option; push factors which drive people out of the established economy; and inhibitors which prevent the entrepreneurial option’s being taken up.

• Managers make the move to entrepreneurship after considering the way the option for an entrepreneurial career can satisfy economic, social and self-development needs.

• The initiation decision has come under continued scrutiny and is being explored from economic, social psychological and cognitive psychological perspectives. A number of models have been proposed.

• The pre-initiation phase is one that demands a number of activities on the part of the entrepreneur. Consistencies in the pattern of these activities across different types of entrepreneur are the subject of a growing number of studies. The extent of activity does seem to be correlated with the level of initial investment the venture requires.

Research themes Cognitive scripts and incubation Mitchell et al. (2000) describe the use of ‘cognitive scripts’ to establish entrepreneurs’ willingness to establish a new venture, their perceptions of their ability to drive those ventures and the availability of critical resources. Identify entrepreneurs (nascent and/or practising) for whom incubation with an organisation or business sector (both formal and

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Entrepreneurs’ motivations for starting a new venture The model developed in this chapter suggests that individuals are motivated to start a venture because of the utility they see in that option compared with alternatives. This utility is determined over the options’ different abilities to satisfy economic, social and self-development needs. Even if this balance is favourable to moving to entrepreneurship, then knowledge, possibility, risk and valence can act as inhibitors or encouragements to the move. An empirical test of this model might take the following form. Develop a questionnaire inquiring into what the entrepreneur sees (saw) as the positive and negative factors encouraging or discouraging the entrepreneurial option. Think of these questions as lying in the following grid:

Choice made (or planned)

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informal) has been important and entrepreneurs for whom it has been less important (i.e. entrepreneurs entering a sector in which they have prior managerial experience or not). Following Mitchell et al.’s methodology, establish the cognitive scripts for the entrepreneurs prior to start-up or in the early stages of the venture. How important a factor is incubation experience as revealed by the scripts? What are the implications for the development of formal incubation systems?

Reasons for choice of option Positives (encouragements)

Negatives (discouragements)

Entrepreneurial option Alternative option(s)

Encourage the entrepreneur to put in at least five reasons for each option. Have the entrepreneur rank these in order of importance so that valence can be tested. The survey sample might include a range of entrepreneur types, from nascent, through novice to more experienced singular, serial and portfolio entrepreneurs. Code the responses into the ability of the option to satisfy a particular level of need or its role in the knowledge, possibility, risk and valence factors. By way of analysis, compare the coded responses with the model outlined. Does the model provide a good framework for describing entrepreneurial motivation? How does it compare across different sorts of entrepreneur? Are nascent entrepreneurs more naive about what entrepreneurship can offer than practising entrepreneurs? Is Maslow’s (1943) prediction that the prioritisation of needs is in the order economic, social and self-development borne out?

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Key readings Two classic statements of entrepreneurial drive and character that fit with many people’s intuitive perceptions and make good starting points for discussion are: McClelland, D.C. (1987) ‘Characteristics of successful entrepreneurs’, Journal of Creative Behaviour, Vol. 21, No. 3, pp. 219–33. McClelland, D.C. and Burnham, D.H. (1976) ‘Power is the great motivator’, Harvard Business Review, Mar./Apr., pp. 100–10.

Suggestions for further reading Ahwireng-Obeng, F. and Piaray, D. (1999) ‘Institutional obstacles to South African entrepreneurship’, South African Journal of Business Management, Vol. 30, No. 3, pp. 78–85. Alsos, G.A. and Kolvereid, L. (1998) ‘The business gestation process of novice, serial and parallel business founders’, Entrepreneurship Theory and Practice, Summer, pp. 101–14. Amundson, N.E. (1995) ‘An interactive model of career decision-making’, Journal of Employment Counselling, Vol. 32, No. 1, pp. 11–21. Benacek, V. (1995) ‘Small business and private entrepreneurship during transition: the case of the Czech Republic’, Eastern Europen Economics, Vol. 33, No. 2, pp. 38–73. Blanchflower, D.G. and Oswald, A.J. (1998) ‘What makes an entrepreneur?’, Journal of Labour Economics, Vol. 16, No. 1, pp. 26–60. Busenitz, L.W. and Lau, C.M. (1996) ‘A cross-cultural cognitive model of new venture creation’, Entrepreneurship Theory and Practice, Vol. 20, No. 4, pp. 25–39. Campbell, C.A. (1992) ‘A decision theory model for entrepreneurial acts’, Entrepreneurship Theory and Practice, Fall, pp. 21–7. Carter, N., Gartner, W.B. and Reynolds, P.D. (1996) ‘Exploring start-up event sequences’, Journal of Business Venturing, Vol. 11, No. 3, pp. 151–66. Casson, M. (1994) ‘Enterprise culture and institutional change in eastern Europe’, in Buckley, P.J. and Ghauri, P.N. (eds) The Economics of Change in East and Central Europe. London: Academic Press. Danis, W.M. and Shipilov, A.V. (2002) ‘A comparison of entrepreneurship development in two post-communist countries: the cases of Hungary and Ukraine’, Journal of Developmental Entrepreneurship, Vol. 7, No. 1, pp. 67–94. Delmar, F. and Davidsson, P. (2000) ‘Where do they come from? Prevalence and characteristics of nascent entrepreneurs’, Entrepreneurship and Regional Development, Vol. 12, No. 1, pp. 1–23. Diochon, M., Menzies, T. and Gasse, Y. (2005) ‘Exploring the relationship between start-up activities and new venture emergence: a longitudinal study of Canadian nascent entrepreneurs’, International Journal of Management and Enterprise Development, Vol. 2, No. 3/4 , pp. 1–11. Drucker, P.F. (1985) ‘The discipline of innovation’, Harvard Business Review, May/June, pp. 67–72.

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El-Namaki, M.S.S. (1988) ‘Encouraging entrepreneurs in developing countries’, Long Range Planning, Vol. 21, No. 4, pp. 98–106. Feldman, D.C. and Bolino, M.C. (2000) ‘Career patterns of the self-employed: career motivations and career outcomes’, Journal of Small Business Management, July, pp. 53–67. Fitzgerald, E.M. (2002) ‘Identifying variables of entrepreneurship, privatization and competitive skills in central Europe: a survey design’, CR, Vol. 12, No. 1, pp. 53–65. Galbraith, J. (1982) ‘The stages of growth’, Journal of Business Strategy, Vol. 3, No. 1, pp. 70–9. Gallagher, C. and Miller, P. (1991) ‘New fast-growing companies create jobs’, Long Range Planning, Vol. 24, No. 1, pp. 96–101.

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Eisenhauer, J.G. (1995) ‘The entrepreneurial decision: economic theory and empirical evidence’, Entrepreneurship Theory and Practice, Summer, pp. 67–79.

Galt, V. and Moenning, C. (1996) ‘An analysis of self-employment using UK census of population data’, International Journal of Entrepreneurial Behaviour and Research, Vol. 2, No. 3, pp. 82–8. Gilad, B. and Levine, P. (1986) ‘A behavioural model of entrepreneurial supply’, Journal of Small Business Management, Oct., pp. 45–53. Green, R., David, J., Dent, M. and Tyshkovsky, A. (1996) ‘The Russian entrepreneur: a study of psychological characteristics’, International Journal of Entrepreneurial Behaviour and Research, Vol. 2, No. 1, pp. 49–58. Hansen, E.L. and Bird, B.J. (1997) ‘The stages model of high-tech venture founding: tried but true?’ Entrepreneurship Theory and Practice, Vol. 22, No. 2, pp. 111–22. Herron, L. and Sapienza, H.J. (1992) ‘The entrepreneur and the initiation of new venture launch activities’, Entrepreneurship Theory and Practice, Fall, pp. 49–55. Jones-Evans, D. (1996) ‘Technical entrepreneurship, strategy and experience’, International Small Business Journal, Vol. 14, No. 3, pp. 15–39. Katz, J.K. (1992) ‘A psychosocial cognitive model of employment status choice’, Entrepreneurship Theory and Practice, Fall, pp. 29–37. Kazanjian, R. and Drazin, R. (1990) ‘A stage contingent model of design and growth for technology based new ventures’, Journal of Business Venturing, Vol. 5, pp. 137–50. Kellye, J. and Tullous, R. (2002) ‘Behaviours of pre-venture entrepreneurs and perceptions of their financial needs’, Journal of Small Business Management, Vol. 40, No. 3, pp. 233–48. Khandwalla, P.N. (1984) ‘Pioneering-innovative (PI) management’, International Studies of Management and Organisation, Vol. XIV, No. 2/3, pp. 99–132. Khandwalla, P.N. (1985) ‘Pioneering-innovative management: a basis for excellence’, Organization Studies, Vol. 6, No. 2, pp. 161–83. Kouriloff, M. (2000) ‘Exploring perceptions of a priori barriers to entrepreneurship: a multidisciplinary approach’, Entrepreneurship Theory and Practice, Winter, pp. 59–79. Kuznetsov, A., McDonald, F. and Kuznetsov, O. (2000) ‘Entrepreneurial qualities: a case from Russia’, Journal of Small Business Management, Vol. 38, No. 1, pp. 219–33.

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Lee, S.S. and Oysteryoung, J.S. (2001) ‘A comparison of the determinants for business start-ups in the US and Korea’, Journal of Small Business Management, Vol. 39, No. 2, pp. 195–200. Maggina, A.G. (1992) ‘SMEs in Greece: towards 1992 and beyond’, Journal of Small Business Management, Vol. 30, No. 3, pp. 87–90. Maslow, A.H. (1943) ‘A theory of human motivation’, Psychological Review, July, pp. 370–96. Mazzarol, T., Volery, T., Doss, N. and Thien, V. (1999) ‘Factors influencing small business start-ups’, International Journal of Entrepreneurial Behaviour and Research, Vol. 5, No. 2, pp. 48–63. Miner, J.B. (1997) ‘The expanded horizon for achieving entrepreneurial success’, Organizational Dynamics, Winter, pp. 54–67. Mitchell, R.K., Smith, B., Seawright, K.W. and Morse, E.A. (2000) ‘Cross-cultural cognitions and the venture creation decision’, Academy of Management Journal, Vol. 43, No. 5, pp. 974–93. Morrison, A. (2000) ‘Entrepreneurship: what triggers it?’, International Journal of Entrepreneurial Behaviour and Research, Vol. 6, No. 2, pp. 59–71. Olson, S.F. and Currie, H.M. (1992) ‘Female entrepreneurs: personal value systems and business strategies in a male dominated industry’, Journal of Small Business Management, Jan., pp. 49–57. Phizacklea, A. and Ram, M. (1995) ‘Ethnic entrepreneurship in comparative perspective’, International Journal of Entrepreneurial Behaviour and Research, Vol. 1, No. 1, pp. 48–58. Rotefoss, B. and Kolvereid, L. (2005) ‘Aspiring, nascent and fledgling entrepreneurs: an investigation of the business start-up process’, Entrepreneurship and Regional Development, Vol. 17, No. 2 , pp. 109–27. Puffer, S.M., McCarthy, D.J. and Peterson, O.C. (2001) ‘Navigating the hostile maze: a framework for Russian entrepreneurship’, Academy of Management Executive, Vol. 15, No. 4, pp. 24–36. Schaper, M. (1999) ‘Australia’s aboriginal entrepreneurs: challenges for the future’, Journal of Small Business Management, Vol. 37, No. 3, pp. 88–93. Schaper, M. (2002) ‘The future prospects for entrepreneurship in Papua New Guinea’, Journal of Small Business Management, Vol. 40, No. 1, pp. 78–83. Shaver, K.G., Gartner, W.B., Crosby, E. Bakalarova, K. and Gatewood, E.J. (2001) ‘Attributions about entrepreneurship: a framework and process for analysing reasons for starting a business’, Entrepreneurship Theory and Practice, Winter, pp. 5–32. Tan, J. (1996) ‘Characteristics of regulatory environment and impact on entrepreneurial strategic orientations: an empirical study of Chinese private entrepreneurs’, Entrepreneurship Theory and Practice, Vol. 21, No. 1, pp. 31–44. Trulsson, P. (2002) ‘Constraints of growth-orientated enterprises in the southern and eastern African region’, Journal of Developmental Entrepreneurship, Vol. 7, No. 3, pp. 331–9. Van Auken, H.E. (2000) ‘Pre-launch preparations and the acquisition of start-up capital by small firms’, Journal of Developmental Entrepreneurship, Vol. 5, No. 2, pp. 169–82.

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Witt, P. (2004) ‘Entrepreneurial networks and the success of start-ups’, Entrepreneurship and Regional Development, Vol. 16, No. 5, pp. 391–412. Zapalska, A. (1997) ‘Profiles of Polish entrepreneurship’, Journal of Small Business Management, April, pp. 111–17. Zapalska, A.M. and Edwards, W. (2001) ‘Chinese entrepreneurship in a cultural and economic perspective’, Journal of Small Business Management, Vol. 39, No. 3, pp. 286–92.

Selected case material CASE 5.1

1 February 2006

Chapter 5 Taking the entrepreneurial option

Williams, A. (1985) ‘Stress and the entrepreneurial role’, International Small Business Journal, Vol. 3, No. 4, pp. 11–25.

FT

Why buy-out terms mean you should watch your back JONATHAN GUTHRIE You’re a big executive. But you’re out of shape for a boardroom punch-up. For private equity investors, however, it’s a full-time job. They may chuck you off the buy-out without compunction. Just be grateful they don’t fling you from a multi-storey car park too, like Michael Caine did to that heavy in Get Carter. I mention this only because John Chisholm, chairman of Qinetiq, the defence research company, stands to make £26m when the business floats. That is not a bad reward for four years’ work and a £129,000 investment. But there is an envious ring to current criticism. Stock market investors rejected the mooted float in 2002. Since then, Mr Chisholm has revamped the group with Carlyle, a private equity firm that bought a stake via an auction. Mr Chisholm’s success must make itchysoled executives more tempted than ever to take the shilling of private equity firms. It falls to me, the Ancient Mariner, to beckon with a wizened finger and recount two cautionary tales of buy-outs where crew members were forced to walk the plank. Let’s talk first to my acquaintance ‘Bill’. You may not recognise him pictured as a silhouette

and with his voice disguised. But all the legal wrangling has made him shy. He joined a management team that was buying out a manufacturer for £6m, ‘assuming I would walk away wealthy’. Instead, he got ‘two years of hell and personal debts of £100,000’. Bill borrowed £35,000 to buy a 10 per cent stake in the company, which he joined as finance director from outside. The private equity backer suggested Bill would make more than a million at exit. It engineered his dismissal four months later when real cash flows fell short of the independent predictions used for the business plan. Bill says: ‘I was the scapegoat for forecasts I had not even prepared.’ He was entitled to reclaim his investment, or the value of his shares, whichever was lower. When he tried, he says the company wrote off assets previously valued at £700,000, making the shares worthless. When he took the business to court, it went into administration. Another contact we’ll call ‘Ted’ had a similar experience. He bought out the services company he had run for many years for £8m with colleagues and a private equity firm. He says:

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CASE 5.1 CONT. ‘Our backers described it as a medium-term investment, but at the celebration lunch they were already talking about a three-year exit.’ Trading was disappointing. The nonexecutive chairman supplied by the private equity firm asked Ted to step down to a secondary role, and then to leave. Ted had paid £100,000 for a 20 per cent stake. He got back £50,000 for half his shares when he was demoted. But an ‘adjustment for poor performance’ meant the remaining 10 per cent stake shrank to 2 per cent after he left. ‘I walked away after 20 years service with six month’s salary and statutory redundancy,’ says Ted. I have not bounced Bill and Ted’s complaints off the relevant private equity firms. This is not because I am lazy. No one enjoys doing that self-righteous Roger Cook thing more than I do, except Roger Cook. But I can guess what the private equity people might justifiably say: that the services of Bill and Ted were far from excellent and that they were replaced for the good of the businesses. Besides, the arguable details of these disputes matter little. More importantly, both cases point to the existence of an army of disgruntled and disappointed former members of buy-out teams. As with failed entrepreneurs, we hear little from them, because they have nothing to celebrate publicly. Andrew Morris, chief executive of the National Exhibition Centre, is a better advertisem*nt for private equity. He made £61m for his family and a ‘few bob’ for himself through the £245m sale of Earls Court and Olympia in 2004. The Morrises had bought the exhibitions business in 1999 for £183m with private equity backing, installing Mr Morris as chief executive. Mr Morris says: ‘The world of private equity is very exciting and I had a great experience.’

But he warns: ‘Pressure is heavy, the pace is stressful and it does not suit everyone. You have to concentrate hard on returns because people have invested heavily in you.’ A private equity man once told me he operated to a rule of thirds: he made acceptable profits if one-third of his deals flew, even if one-third were mediocre and one-third flopped. By that reckoning there would have been more than 1,000 such flops in the UK in the past five years, as there have been over 3,000 buy-outs. And buy-out directors also have to realise investors may defenestrate them to ‘refresh the team’, even if the company performs acceptably. ‘If backers lose confidence, they act decisively,’ says Peter Linthwaite of the BVCA, which represents private equity firms. The balance of risk for executives in these transactions is not at all bad, since they get the opportunity to become millionaires. The downside only looks horrifyingly steep for those whose chance of upside has passed. Would-be buy-out managers should examine the articles of the company critically, says Alan Jones of Averta, an employment law firm. These will set out how directors will be dealt with if they leave. Terms may be poor for a ‘bad leaver’, typically someone who goes after a disagreement, but better for a ‘good leaver’. However, as Mr Jones points out, under many buy-out contracts you are only likely to depart as a ‘good leaver’ if men in sombre suits carry you out in a pine box. And that is a fate only marginally preferable to being propelled off the top of a Gateshead car park by Michael Caine. Source: Jonathan Guthrie, ‘Why buy-out terms mean you should watch your back’, Financial Times, 1 February 2006, p. 14. Copyright © 2006 The Financial Times Limited.

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21 December 2005

FT

A venture born of ignorance ANDREW WARD When Roger Andresen abandoned a well-paid job with Nortel Networks three years ago to pursue his entrepreneurial ambitions, he could have drawn from his mechanical engineering background to set up a technology company. Instead, he opted to start a business that would help tackle American ignorance of geography. Mr Andresen’s company, A Broader View, produces puzzles and games designed to teach people about countries of the world. He got the idea after reading a survey in National Geographic magazine that showed how little Americans knew about other countries. Among the nationalities surveyed, only Mexicans performed worse. As a keen traveller who has visited 44 countries ranging from Kenya to Costa Rica, Mr Andresen was horrified by the findings and had an idea about how to change them. ‘I remembered learning the states of the US with a wooden puzzle and wondered if anyone had produced something similar for the whole world,’ he recalls. To find the answer, Mr Andresen attended a New York toy fair disguised as a buyer. He went from stall to stall asking suppliers whether they offered a world map puzzle. By the end of the day, he was convinced that no such product existed in the US. Mr Andresen’s next step was to test demand. He spent several days on the streets of Atlanta, his home city, quizzing people about geography and asking two additional questions: ‘Would you like to improve your geography skills?’ and ‘Would you pay $20

for an educational aid to help you do it?’ Nearly everyone answered yes to the first question and 83 per cent to the second. The research gave Mr Andresen the confidence to resign from Nortel and borrow $50,000 from his family to develop the product. Colleagues at Nortel were supportive. ‘They understood the appeal of the American Dream – to think of a new idea and take it to market,’ he says. Mr Andresen had developed a passion for travel and geography as a student, when his father’s job with NorthWest Airlines allowed him to fly anywhere in the world for free. ‘I would turn up at the airport with my bags packed not knowing where I was going and get on whichever flight had seats available,’ he recalls. His global travel exposed him to places that few Americans could name let alone locate on a map. ‘For most Americans, their idea of travel is to cross the state line,’ he says. ‘I wanted to do something to open people’s eyes to the world beyond America.’ Mr Andresen used some of his start-up capital to buy licences from map companies and design the puzzle. Next came the search for a manufacturer and then the process of customising the production line, which cost $8,000. An initial order was placed for 10,000 puzzles – the minimum required to make a profit. But he soon regretted having been so ambitious. ‘My advice to any entrepreneur would be: “Don’t do your first product run economically”,’ he says. ‘There are always going to be

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CASE 5.2 CONT. glitches in the first run, leaving you with stock you are not happy with.’ His mistake had been to dedicate a separate jigsaw piece to every country in the world. ‘I started getting e-mails complaining that the puzzle was too complicated,’ he recalls. The problem was solved in future editions by grouping together smaller nations. Simpler puzzles limited to a single continent were also introduced. But first he had to sell the flawed products. ‘The first two years were difficult and slow,’ he says. ‘There were times when I almost gave up. It took six months to sell the first 10,000. Now we’re selling 10,000 a month.’ Mr Andresen had little experience of marketing before leaving Nortel. ‘I used to think: “If you make a good product, people will come”,’ he says. ‘It didn’t take long to learn how important marketing was but it took 10 different formulas to get it right.’ First, Mr Andresen had to decide who his customers were. ‘I found over time that my market was not children but parents and educators,’ he explains. ‘A kid is not going to say: “Buy me a geography puzzle”. But a mother will buy it for her children.’ Advertising in newspapers and magazines was the most obvious means of reaching potential customers but it was not the most efficient. ‘I have not had a single print advertisem*nt give a return on investment,’ he says. ‘So, we refocused on marketing to retailers. If you get buyers excited about your product, they do the marketing for you.’ Mr Andresen’s puzzles are sold in about 900 stores, with a retail price of $14.95. About 80 per cent of sales are made in the US and the rest in Canada, South Africa, Australia and New Zealand. He is looking for distribution

channels in Europe but the main goal is gaining access to large US retail chains. ‘At the moment, we are mostly in mom and pop stores and small chains,’ he says. ‘What would put us over the edge would be distribution through a big chain, such as WalMart or Toys R Us,’ he says. Borders is stocking the Global Puzzle on a trial basis and the product is being tested by Wal-Mart in Atlanta. ‘Wal-Mart is famous for its ability to make or break a small company,’ says Mr Andresen. ‘You need to ramp up production to meet its needs. If the product does well you are an instant success. If it fails you are left with massive over-capacity.’ The company’s greatest marketing success has been through an international geography quiz on its website. More than 1.5m people from 192 countries have taken part, with the results used to rank countries according to geographical knowledge. The quiz has promoted sales through the website and attracted worldwide media attention. Last year, A Broader View generated $500,000 of sales, with a 20 per cent profit margin. Revenues were up about 15 per cent in the first 10 months of this year – but more than half of annual sales are made in the two months before Christmas. ‘We are doing great now but it is still a constant struggle,’ he says. ‘We pay ourselves what we need to live and reinvest the rest. Once you start having lots of money in your bank account it is easy to let expenses run out of control. Managing expenses is critical to an emerging company.’ Costs are kept to a minimum by outsourcing almost every part of the business – from manufacturing in China to warehousing and shipping in Wisconsin. The company’s headquarters is Mr Andresen’s home office in Atlanta and the only full-time employees

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phy was the motivation behind A Broader View,’ he says. ‘That mission must remain at the heart of the business.’ Source: Andrew Ward, ‘A venture born of ignorance’, Financial Times, 21 December 2005, p. 9. Copyright © 2005 The Financial Times Limited.

Discussion point

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are his brother, who manages sales, and a webmaster. Several offers have been made to buy the business. A sale could happen eventually, concedes Mr Andresen, but only under strict conditions. ‘Increasing awareness of geogra-

1. Compare and contrast the issues in taking the entrepreneurial option between a new startup and a management buyout.

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CHAPTER 6

The economic function of the entrepreneur Chapter overview Entrepreneurs are, first and foremost, economic actors. The tasks they undertake, their social context and who they are as people are of course important. But we are primarily interested in these aspects because of the economic impact of entrepreneurial activity. This chapter is concerned with providing an overview of economic thinking about, and insights into, the entrepreneur and how it has developed. The first section considers the way in which the entrepreneur is recognised and how the effects they have are accounted for in different schools of economic thinking. It might be argued that the inability of the core neo-classical school of economics to address the issue of entrepreneurship is one of the main drivers for the development of alternative schools of thinking within economics generally. The second section considers how the economic picture of the entrepreneur is related, in broad terms, to their social and moral role within society. The final section considers how new developments in the economics of information can inform our understanding of entrepreneurs and their relation with other stakeholders in the venture. In looking at the broader implications of entrepreneurial activity, we are invited into a series of (often quite specialist) debates within a number of social science fields. A single chapter cannot do full justice to the concerns. By necessity, this chapter will raise more issues than it resolves. The aim is not a comprehensive account; it is to introduce the key issues and a flavour of the debates as reference points for the student of entrepreneurship. Further readings are suggested for the student who wishes to explore these issues in proper depth.

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6.1 The entrepreneur in economic theory

Key learning outcome Economics is (or at least aspires to be) the most ‘scientific’ of the social sciences. Yet this does not preclude a wide variety of approaches and differing theoretical perspectives within the field. To some extent, these different schools of economic thinking arise because of concerns with, and a relaxation of, one or more of the fundamental assumptions (inevitably challenged as being unrealistic) of the core neo-classical school of economic thinking. Part of their motivation is to account for the very existence of the entrepreneur as a distinct type of economic actor (an issue first raised in section 1.4). The schools considered here are not an exhaustive list. Some commentators may divide them up differently. There is debate about how the different schools might be linked or integrated. However, what follows does provide a broad account of different economic perspectives that concern themselves with entrepreneurship and its effects.

An appreciation of a number of different schools of economic thinking and a recognition of the ways in which they see the entrepreneur and the entrepreneur’s function, and account for the entrepreneur’s economic effects.

The neo-classical school Economics has a long heritage. Its origins can be traced back to thinking in the fifth century BCE. This was not just in the Mediterranean with the classical Greek philosophers, but also in China (the social phjilosophy of K’ung Fu-tzu, known in the Latin world as Confucius) and India (the political insights of Kautilya, an advisor to the great Buddhist emperor Ashoka). Classical economics proper is really a product of the late seventeenth and eighteenth centuries, the industrial revolution and the insights of Enlightenment thinkers. Classical economics introduced concerns still familiar to modern economists: markets, supply and demand, productivity, prices and profits. Economics in its modern form is, however, more recent and can be traced to the mid- to late nineteenth century and what is referred to as the marginalist revolution. The marginalists sought to resolve a long-standing problem in classical economics: that the use value (usefulness) and the exchange value (price) of a good were often unrelated. The resolution came in recognising that exchange value was related to marginal utility – the additional benefit a buyer gains when adding goods to his or her existing stock of that good, not the absolute usefulness of the good. The dominance of this insight combined with traditional concerns justifies post-marginalist economics being referred to as neo-classical economics – new classical economics. The idea of marginal utility immediately suggested the use of mathematical functions to model demand and especially the use of calculus as a mathematical technique. This is sometimes referred to as economics’ ‘mathematical turn’, as an extensive use of mathematics is a feature of much modern economic thinking. Neo-classical economics does not challenge the assumptions made by classical economics. Indeed, it might be argued that it attempts to develop more sophisticated insights from them. These assumptions have been expressed in various ways. The following summary is intended to represent the fount from which many strands of economic thinking emerge. It should be noted that not all these assumptions are formally required as some may be derived from others, but it is useful to be explicit here. Two assumptions are about the way sell–buy transactions work:

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A further four are about the nature of human beings: 2.1 All individuals in an economy are rational and aim to maximise their personal satisfaction (utility) from the goods they might obtain. 2.2 All individuals are perfectly efficient processors of information. 2.3 All individuals know all there is to know, know what others know and know that others know what they know . . . ad infinitum. This is referred to as common knowledge. 2.4 Humans demonstrate marginal utility; that is, an individual’s demand for a particular good (and hence the price they are willing to pay to gain an extra unit of that good) will decline as his or her possession of that good increases. Four are about the nature of industries: 3.1 Within an industry, all goods are hom*ogeneous; that is, the goods from one firm within an industry can be swapped for those of another firm within the same industry without the buyer noticing a difference (the goods have exactly the same utility). 3.2 Within an industry there are an infinite number of firms. 3.3 Between industries all goods are heterogeneous; that is, no two goods from different industries can be switched in any way, they do entirely different jobs as far as the buyer is concerned. 3.4 It is costless for the buyer to swap between suppliers within the same industry.

Chapter 6 The economic function of the entrepreneur

1.1 Supply and demand for goods is a function of their price. 1.2 Markets are costless to set up and run: transactions are ‘free’ and ‘frictionless’.

Five assumptions are about the nature of the firm: 4.1 Every firm is independent of every other firm (no contact between them when making decisions). 4.2 Every firm makes one, and only one, product. 4.3 Individual firms are ‘atomic’: they have no internal structure (of interest). This assumption really claims that all transactions are through the market mechanism. All the firm’s resources (including labour) are provided through market exchanges. 4.4 A firm entering an industry does not face any costs in excess of those faced by firms already within the industry. 4.5 A firm leaving an industry can sell the assets it has been using without loss. Taken together, it can be demonstrated that an economy based on these assumptions will, inter alia, have open, efficient markets (supply and demand will be equalised), resources will be used in the most efficient way possible and total wealth will be maximised. Individual firms will take a market-determined price for their product and will increase production until marginal revenues equal marginal costs. These assumptions are clearly unrealistic. They do not paint a convincing picture of the world as we know it and many critiques of neo-classical economics are based on pointing this out. The term hom*o œconomicus (economic man) is sometimes used with a hint of sarcasm to suggest that economists are talking about a species different from hom*o sapiens. However, the realism of the assumptions is not really at issue. What matters is: do they lead to theories that provide a good description of the way in which the world works? The best answer is: in broad terms, yes. Classical economic theory does lead to a successful generalised picture of human exchange relationships. But there is a lot of

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detail that cannot be accounted for. There are such things as markets and they do seem to optimise the use of resources (as political experiments in eliminating markets quickly demonstrate). Economies with open and free markets tend to be wealthier and grow faster. However, neo-classical economics cannot explain the existence of entrepreneurs as a distinct class of economic actor. The reason is transparent: entrepreneurs are human beings, and neo-classical theory collects together all human beings under one set of assumptions. So all human beings are the same. It is pointless to talk about any distinct set of human beings. We are, if you like, all entrepreneurs. It is worthwhile here to reflect back on section 1.3, where we faced difficulties in attempting to distinguish entrepreneurs from other sorts of economic actor such as managers and investors. Yet we intuitively see entrepreneurs as a distinct class, different from ‘ordinary’ managers and, more importantly, we recognise that they have a distinct role to play in making economies work. One motivation for diversions from neo-classical economics is to try to take account of this.

Austrian School economics Shortly after the neo-classical school’s inception, a group of economists seceded from it. This new school got its name from the fact that many of its leading thinkers, such as Carl Menger (1840–1921), Friedrich von Wieser (1851–1926) and Eugen BohmBawerk (1851–1914) were based in Vienna. Major contributions to the school’s thinking include those by von Mises (1949), Hayek (1948) and Kirzner (1979, 1982, 1985, 1997). The central critique of classical thinking was not so much about its assumptions as with the conclusion that economies were in equilibrium and so essentially timeless. A neo-classical economy cannot go anywhere: its equilibrium ‘freezes’ it into a perfected end-state from which ‘it’ cannot depart (even if ‘it’ wanted to, which ‘it’ would not). Neo-classical economics does not really have any use for the notion of time. In the real world, of course, economies change constantly. Innovations come along. Economies tend to grow in value over time, with many ups and downs along the way. Austrian School economics should be regarded as a broad church of differing economic ideas rather than as a single approach. However, enough commonality (especially in disagreements with the neo-classical school) justifies the different ideas’ being united under a single heading. The key idea in Austrian economics is that competition is an ongoing process rather than a force that sustains an economy at a static equilibrium. Economies, it suggests, are inevitably out of equilibrium. This equilibrium was a perfected end-point towards which the economy might progress over time, but it never got there, because the equilibrium itself was constantly shifting. Conception of human nature was also different. Rather than the perfected, satisfied, information processor, humans are seen as essentially unsatisfied and limited in their intellectual capacity. We are not content, we can imagine better worlds and we do seek changes to achieve them. In an important respect, Austrian School economics brings the individual (and individual attitudes) back into economics and it emphasises the exchanges individuals make rather than the equilibrating outcomes of large numbers of impersonal exchanges. If competition is a process driven by individuals then the role of the entrepreneur becomes clear. Economies are out of equilibrium, leaving some individuals unsatisfied. The entrepreneur emerges because of the opportunity to offer goods and services that satisfy these outstanding needs. In doing so, the entrepreneur moves the economy a little closer to

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equilibrium, increasing its value. It is from this additional value that the entrepreneur gains his or her rewards. Of course, the entrepreneur is not aware of this in a grand sense. Entrepreneurs rarely think at such a level. Rather, they are motivated by the possibility of addressing their own needs through the entrepreneurial option. Another way of thinking about this is that entrepreneurs must seek out and exploit information about new opportunities that is not being used (a neo-classical economy uses all possible information). However, this knowledge is not perfect. There is always an element of uncertainty in what to offer, where and when. Entrepreneurs make decisions at a local level, seeking out proximal opportunities in their immediate environment. No one entrepreneur could be aware of all the opportunities that an economy might present. This is why there is room for a great number of entrepreneurs. Even acting collectively, though, they can never deliver an unattainable equilibrium. So entrepreneurial activity creates, it does not exclude, possibilities for future entrepreneurs. The Italian economist Attilio da Empoli (1904–48) made an important, and largely independent, contribution to this line of thinking with his 1926 work (translated to English, 1931) The Theory of Economic Equilibrium. Interestingly, da Empoli’s views (as recounted by Wagner, 2001) argue that ‘competition’ should not be regarded as an adjective (a tag we apply to an organisation denoting its type) but as a verb (what the firm does).

Heterogeneous demand theory One of the assumptions in neo-classical economics is that of product hom*ogeneity within industries and product heterogeneity between industries (assumptions 3.1 and 3.3 above). This implies that the products offered by all firms within an industry are perfect replacements for each other and so are effectively identical as far as the buyer is concerned. Products from different industries are totally different and cannot replace each other in any way. Because there are only a finite number of industries, there are a finite number of products. A number of economists have taken issue with these assumptions (Chamberlin, 1933; Robinson, 1933; Smith, 1956; Alderson, 1957, 1965; McCarthy, 1960; Myers, 1996 are of particular note). Heterogeneous demand theory points out that firms within a particular industry do not offer hom*ogeneous products at a market dictated price. Rather, they actively market products by distinguishing them to appeal to particular groups of buyers, often with the intention of sustaining a price premium over market norms. So the products supplied by a particular industry may vary greatly. Think about automobiles, travel or beauty products, for example. These are clearly not commodities. From the perspective of a particular buyer, different products within these categories are not perfectly substitutable. The driver of a Porsche may not feel like swapping with the owner of a small family car. A six-month cruise has different appeal from a weekend break. A premium branded beauty lotion makes different claims from an own-label product from a discount store. Differentiating products (either by adding features and/or by branding) aims to reduce the product’s substitutability with other products – not to the level found between products from different industries, but certainly to the level where buyers will actively choose between them. Ultimately each producer’s product is different from that of any competitor: a situation commonly encountered, especially among branded consumer goods. In a sense, each producer seeks a monopoly. This is not as strict a monopoly as found when a single supplier dominates an industry, because buyers can ultimately go somewhere else and new producers can move in. It is just that they

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decide not to. For this reason, Chamberlin (1933) labelled such a situation monopolistic competition. Similar ideas were developed in the German tradition by von Stackelberg (1933) and in the Italian tradition by da Empoli (1931) (see Keppler, 2001). Smith (1956) suggested that differences between products offered within an industry depended on five things specific to the supplier: knowledge of markets, production process, the firm’s wider resources, product research and development capabilities, and quality control standards. Differential demand theory suggests that the entrepreneur is fundamentally a marketer. He or she looks for what particular groups of buyers want from a product, identifies how existing products fail them and innovates new products that will serve them better. The entrepreneur does not just invent. He or she positions products within a market to maximise their difference from competiting products and to appeal to targeted buyer groups. To sustain this, the entrepreneur must innovate within and manage effectively the five factors Smith points out.

Differential advantage theory Heterogeneous demand theory offers an explanation as to why firms differentiate their products but it leaves us with a rather static picture. Once all firms have differentiated to their (and their buyers’) satisfaction, why should they make any changes? It says nothing about the process of competition in a dynamic sense. Clark (1940) developed heterogeneous demand theory and initiated a strand of economic thinking known as differential advantage theory. Clark’s notion of generic competition has three fundamental aspects. First, buyers and seller do not associate randomly; rather they seek to pair up on a more permanent basis with specific firms seeking to serve the needs of specific buyer groups. Second, firms are limited in their ability to increase prices because, ultimately, buyers can go elsewhere if they feel prices are too high. Third – and this is the aspect that adds dynamism – firms are rivals for buyer’s purchases and constantly seek to improve products to make them more attractive than those of competitors. The way in which such rivalry takes place depends on several factors, such as the number of firms relative to the number of buyers, how easy it is to make products different and how much it costs a firm to enter and exit a market. The heterogeneous demand thinkers were, in general, suspicious of differentiated products. It was initially seen as just another attempt to create monopolies. It was even suggested, as monopolies reduce total social welfare, product differentiation should be restricted by law. Clark, on the other hand, asked what exactly does a society want from competition, given that the abstract notion of welfare maximisation is not attainable? Clark emphasised the importance of people being able to get the products they wanted, firms surviving and innovating new products, economic growth, job creation and freedom for entrepreneurs to start new ventures. If these were being achieved to a society’s satisfaction (a political and moral judgement, not just an economic one), then we should be happy with the competition we have. Clark also made the point that firms are not profit maximisers in the classical sense. They certainly sought profits and would normally seek to increase them if they could. But not so at any cost. Firms might sacrifice short-term profits for a variety of reasons, including the need to reduce uncertainty, reinvestment for growth or to take on wider community responsibility. Alderson (1957, 1965) developed Clark’s ideas with a particular emphasis on growth. What concerned managers most, he suggested, was the survival of the firm rather than profit maximisation. Gaining profits was a way to achieve this, but was not an end in itself. Profits

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Industrial organisational economics Different firms, and different industries, make different levels of profits. This is something neo-classical economics cannot explain. Industrial organisational economics (IOE) is essentially based on the idea that excess profits (those above and beyond those necessary to keep a firm in business) arise due to market imperfections. Market imperfections occur when classical assumptions fail to occur. Important instances are when there are only a small number of suppliers, giving rise to monopoly, costs associated with entering and exiting a new market, economies of scale, product differentiation and buyers substituting products from one industry with those of another. IOE represents an approach that is important in management thinking. It has been highly influential in the development of business strategy theory. The school has had three main stages of development. The first stage, initiated largely by Bain (1968) suggested that any firm was in a position where its competitive context presented a different mix of market imperfections. This market structure presented opportunities for managers to exploit these imperfections. But they could only do this if they built up the right sort of resources and ran the firm in a particular way, so-called managerial conduct. If they did so, then the firm’s performance would be maximised. This structure–conduct– performance relationship is specific to each firm. The second stage is particularly associated with the work of Porter (1980, 1985). Porter inverted Bain’s idea. Rather than firms finding themselves in a structural position and then having to adjust their conduct to improve performance, Porter suggested that managers might actively seek out unexploited structures (market positions) that, given current conduct, or conduct that might be developed, would lead to superior performance. Put metaphorically: Bain suggests that if you are feeling cold, put on a coat; Porter suggests moving to somewhere warmer. Porter has been eloquent and effective in communicating his ideas. His books are among the very few economics texts that have mass-market appeal. Part of the attraction is that he talks in ways managers can readily understand and presents issues that they feel empowered to manage. A central suggestion is the idea of ‘five forces’ that dictate an industry’s abilities to make profits: industry competition: the way in which firms compete with each other (especially on price); entry barriers: the costs faced by new firms when they enter a market in excess of those already present; power relative to suppliers and buyers: the ability to dictate terms to suppliers and the inability of buyers to go elsewhere; and availability of substitutes: the possibility of the buyer switching to an alternative product from a different industry. Given these factors, a firm will, ideally, seek out a position where competition is not on price, new entrants are restricted, power can be gained over suppliers and buyers, and few substitutes are available. In effect, the firm seeks out a (competitive) monopoly position. Porter’s monopoly concept is much richer and more detailed than that provided by the neo-classical school, which limits it to market share dominance.

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were gained so as to preserve the firm’s ability to maintain its differences from competitors, to keep buyers coming back and to grow the business. The differential advantage approach resonates with the way in which entrepreneurs actually manage their businesses. Entrepreneurs do innovate to make their offerings different to competitors. They are interested in building and maintaining a buying community. Survival is often an explicit objective (especially in the early stages of the venture’s life). Entrepreneurs are usually longer-term growth rather than immediate-profit orientated.

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The third stage in the development of IOE reflects a change in both perspective and methodology. The change in perspective has been from the (implicit) assumption of the static, ‘given’ nature of structural market imperfections that surround a firm or sector to a recognition that such imperfections are dynamic and result from interacting decision making by competitors, buyers and suppliers. The shift in methodology has been from studies based on cross-sectional analysis of a number of industries to game-theoretical analysis of single industries. This is sometimes referred to as new industrial organisational economics to distinguish it from the ‘old’ organisational industrial economics of Bain and Porter. Ghemawat is a leading thinker in the field and has produced a good account of it (Ghemawat, 1997). Game theory is quite mathematical, but in essence it concerns itself with situations in which managers make decisions knowing that managers in competing firms will make further decisions in response to their decisions, and so on (see section 20.4). New industrial organisational economics is particularly powerful when dealing with competition between small numbers of firms in oligopolistic situations. The role of the entrepreneur is seen slightly differently at each stage of IOE. In the first stage, the entrepreneur is someone who perceives an opportunity to acquire, mould and manage resources in a way that supports the right conduct given the structural imperfections in the markets in which his or her venture is situated. The second stage suggests that entrepreneurs recognise their conduct possibilities and seek out the opportunities presented by available market imperfections. These are, it might be argued, the ends of a spectrum of possibilities. In practice, entrepreneurs might undertake a mix of these options. New industrial organisational economics does not dissent from this. Rather, it adds the idea of the entrepreneur being not just a decision maker, but also a predictor of competitors’ (and others’) decisions and a refiner of strategic approach given their likely responses.

Resource-based theory Thus far, relaxing one or more of the core assumptions of the neo-classical model has allowed a far more realistic picture of economic activity in general and competition in particular to be painted. However, all of the schools considered share a feature in common. They do not concern themselves, overtly at least, with what goes on inside the firm. Their main emphasis is with the context in which the firm operates. They do not explicitly challenge the notion of firms’ being atomic. Resource-based theory (and the competence-based and resource-advantage theories below) share an emphasis on internal aspects of the firm as determinants of performance. The central claims of resource-based theory, initiated by the work of Penrose (1959), are that: (a) resources are not inputs to production but collectively provide services that support production (resource bundles); (b) different firms have different resources available to them (resource heterogeneity); and (c) that there is some difficulty in transferring resources between firms (resource immobility). Resource heterogeneity suggests that some firms may perform better than competitors if their resources (strictly the services available from those resources) are better able to serve the competed market. Heterogeneity can be maintained only if the better-performing firm retains its resource base and competitors cannot imitate it. Imitation may be restricted by a number of mechanisms. A critical resource may be unique (sole access to a critical input, unique managerial talent or exclusive access to a distribution channel). It may be legally bound (a patent or copyright). More subtly, the causal relationship

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between a complex resource bundle and the resulting performance may not be clear (why, and in what way, does organisational ‘culture’ enhance performance? Wilcox-King and Zeithaml (2001) explore this issue). Further, resources differ in the ease with which they may be traded. Tangible assets such as production machinery may easily be sold. But organisational learning and a firm’s reputation cannot be traded (other than by buying the entire organisation). A competitor may be able to buy tradable resources quickly in the marketplace. But non-tradable resources can only be built up (accumulated) over time. And time is all that a better-resourced competitor needs in order to gain, and maintain, a winning edge. Dierickx and Cool (1989) propose that this winning edge can be sustained if non-tradable resources have one or more of five properties. They must be: (a) difficult to build up quickly (a good reputation, for example, cannot be built overnight); (b) easier to add to than to start, so a firm with them can move forward faster than a competitor trying to obtain them (for example, a firm that already has a strong brand name finds it easier to extend that brand to new products than to start a brand from scratch); (c) the resources work better when combined with existing resources (marketing works better for a firm that has good research and development capabilities than one that does not); (d) the resource can be maintained through further investment (for example, training of staff in good distributors to keep them committed); and (e) why the resource works is ambiguous (why, for example, does an ‘entrepreneurial attitude’ help a firm?). The examples here will make it clear that the proponents of the resource-based theory take a broad view of what constitutes a resource. Barney (1991), for example, defines resources as: All assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a firm to conceive of and implement strategies that improve its efficiency and effectiveness. Managers may recognise all these things as resources and may try to manage them. The problem is that such a broad conceptualisation of resources runs the risk of making resourcebased theory self-fulfilling. It predicts that resources lead to performance, but when presented with a firm with unique resources (and all have some unique resources) that is performing well, it is not difficult to retrospectively account for its performance through some description of its resource uniqueness. Comparisons between firms do not help, because each firm is, by assumption, unique. If it falls into this trap, the theory can be no more than rhetoric. This critique aside, resource-based theory does suggest a particular role for the entrepreneur. When faced with an opportunity, he or she must access and acquire relevant resources and then co-ordinate and configure them in a particularly appropriate way so that collectively they deliver value in a unique and inimitable manner. And this goes beyond just gaining the right assets and using them efficiently. It includes the management of operational process and ‘higher-order processes’ such as organisational learning and culture and network relationships (see section 12.5). Alvarez and Barney (2002) provide a general reviews of resource-based theory in entrepreneurship. Bergmann-Lichenstein and Brush (2001) study how resource bundles develop over time in an entrepreneurial business.

Competence-based theory Competence-based theory shares many features with the resource-based theory but it has a slightly different emphasis and defines a ‘competence’ more narrowly than resource-based

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theory does ‘resource’. This approach has developed largely within the field of strategic management. It is nascent in early works within the field (e.g. Selznick, 1957; Andrews, 1971) and has been an undercurrent since. The approach places less emphasis on resource inimitability (which it sees as essentially static) and more on the dynamic replenishment of quickly erodible advantages. Put metaphorically, if resource-based theory sees the winners as those who reach mountain peaks before others, competence-based theory sees them keeping ahead in a (never-ending) race that they could fall back in and lose at any time. Prahalad and Hamel (1990) suggest that competitiveness ultimately comes from producing better (more demanded) products more quickly. Such products should be unanticipated by competitors. Once competitors see such products are in demand, they will imitate them. But by the time they do, the succeeding firm will have the next round of unanticipated winners in place. To keep ahead, a firm uses its core competences. A core competence is anything that: (a) allows access to a wide variety of markets; (b) offers real and perceivable benefits to buyers; (c) is difficult (expensive) for competitors to imitate; and (d) is extendable to other product/markets in the future. There is a temptation to define core competences in a broad way and, as with resourcebased theory, run the risk of making the theory tautological. But given the characteristics of core competences, a more limited list of proximal capabilities seems relevant. In particular, core competences deliver an ability to source, process and act on information about opportunities in the marketplace (know what buyers want), develop new products quickly and effectively, produce those products profitably, and distribute them cost-effectively to a high number of buyers better than competitors. Foss (1997) gives a full account of resource- and competence-based thinking within strategic management). Yu (2001) discusses small-firm performance from a capabilities perspective. Jones and Tilley (2003) provide a thorough account of competences and competitive advantage in small businesses. In a sense, competence-based theory offers more hope to the entrepreneur than resourcebased theory. Given the characteristics of inimitable resource bundles suggested by resourcebased theory, it would seem that advantages lie with incumbents rather than with entrepreneurs who try to enter a new market. This is because the bundles are better managed in an incremental way than by trying to invent them quickly. While core competences must be managed incrementally, they may, on the other hand be obtained through a radical and unanticipated innovation. The entrepreneur’s responsibility, then, is to recognise what core competences are necessary to exploit a particular opportunity, to innovate in their achievement and to sustain them.

Transaction cost economics The theories considered so far have prioritised the role of the firm’s external environment (heterogeneous demand theory, differential advantage theory, industrial organisation economics) or the firm’s internal aspects (resource-based theory, competence-based theory) as determinants of performance. However, none addresses (directly at least) a central issue that neo-classical economics could not explain: why do firms exist at all? The problem is this. A firm is an economic organisation within which market mechanisms are inhibited. A firm is a firm (an organisation) because it has some permanence. The resources a firm has are not traded within it (attempts to introduce internal markets within firms (see, for example,

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Cowen and Parker, 1997) do so to generate information, not real trading opportunities). The members of the firm agree to long-term contracts (though what constitutes ‘long’ varies enormously) that will not be buffeted by market forces. After all, a contract of employment has some duration. The members of the firm do not offer their services in a spot market every day. Why should such institutional arrangements exist at all? This is an issue: because markets generate price information they are the best mechanism for allocating resources to where they can best be used (a neo-classical notion, but none of the theories we have considered so far seriously challenges this). Internally, firms lack this information. This is why one of the main tasks of strategic management theory is to develop guides (portfolio methods) that tell managers how resources should be shared among the numerous projects available to the firm in the absence of clear price guidance. So why do firms exist when they should be less effective than the market nexus? Transaction cost economics addresses this issue directly. Its origins can be traced to Coase (1937), but its full fruition in organisation studies has come largely from the work of Williamson (1996 gives a good summary of his numerous contributions). The fundamental idea of transaction cost economics is that market transactions have a cost associated with them that is additional to the value of the good exchanged. Prosaically, when we pay a price for a good, that price must include the cost of the transaction, not just the final value of the good. Markets are not ‘free’ and ‘frictionless’ (assumption 1.2 in the neo-classical model). This additional cost arises from the need to search out suppliers and then negotiate, maintain and enforce contracts with them. Williamson (1994) defines it fully thus: [The] ex ante costs of drafting, negotiating and safeguarding an agreement [to transact] and more especially the ex post costs of maladaption and adjustment that arise when contract execution is misaligned as a result of gaps, errors, omissions and unanticipated disturbances. The key point here is that if a contract is not made, or fully specified, then there could be a cost if the transaction does not result in what the buyer expected (either because of genuine misunderstanding or fraudulent behaviour on the part of the supplier). Such contracts could potentially exist wherever there are technologically separable boundaries between inputs. However, if the cost of establishing and sustaining such contracts become too high, then there is a temptation to forgo the market and bring the production of such components ‘inhouse’, i.e. within an organisational structure, where the transaction is agreed on a long-term basis and can be fully monitored using organisational mechanisms. Price information is lost, but the cost of this (in reduced decision-making capability) is less than the value gained from reducing contract costs. In the transactional cost view, the entrepreneur is responsible for bringing together a set of transactions within an organisation. He or she will look for transactions where the marginal cost of contracting is greater than the marginal cost of using an organisational lock-in to ensure transaction integrity – in short, make-or-buy and sell-oradd-more-value decisions. What would encourage an entrepreneur to bring an activity into the venture? Transactional cost economics predicts that priority would be given to transactions that: (a) would have a high cost if they went wrong; (b) had a high probability of going wrong; and (c) were difficult or costly to police (using market mechanisms). Entrepreneurs who were more acute in judging these factors and managing the organisational changes necessary to absorb the transactions would be more successful.

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Evolutionary economics ‘Evolution’ is a commonly encountered word. It entered the modern consciousness as a result of the work of Charles Darwin in the nineteenth century, through which he suggested a mechanism – natural selection – that led to changes in the form of living organisms over millions of years. Living things are adapted to their environments. Their body forms, biochemistry and behaviour are right for the type of life they live. Natural selection explains this in the following way. First, given any population of the same type of organism (a species), individuals within that species will vary (to some degree) in their ability to gain essential resources (food, water, the chance to reproduce). Given this variation, some individuals within the species will be more successful than others. Second, living organisms reproduce themselves. Genetic mechanisms allow the organism to make (potentially many) copies of itself. Given the chance, the number of individuals (the population) would increase exponentially. However, this copying is not perfect. Reproduction generates further variation. Third, the resources the organism needs are limited (or quickly become so as population increases). Given limited resources, the organisms with variations that allow them to gain resources better will tend to survive and reproduce further. Those without those variations will not, and will not live to see copies of themselves in the next generation. Natural selection not only keeps the population in check, but also ensures that each generation will have individuals slightly different (better adapted) than the previous generation. This digression into evolutionary theory is necessary because it provides the founding metaphor for evolutionary economics. It uses the natural selection model to explain the variety of, survival of and changes within economic populations. As with the Austrian School, evolutionary economics represents a broad church of ideas rather than a single theory. But what they all have in common is a set of assumptions: • Individual entities within an economy come in particular types, but that there is some variation between individuals within those types. • The entities reproduce themselves in a sequence of generations. • Variation between entities leads to different abilities to reproduce into the next generation. • Selective forces eliminate those (types or forms) that are less well able to reproduce themselves. Different strands within evolutionary economics differ in what they see as entities, the nature of the variation they exhibit, the way in which the entities ‘reproduce’ themselves and the source of selective forces. What constitutes an entity? Is it an individual (for example, an entrepreneur), a firm, a network of firms, an industry or a whole economic system? How should variation between individuals be described? In terms of personal capabilities, market position, resource endowments or performance? What do we mean by reproduction? Economic entities clearly do not reproduce in the same way living organisms do. Is it just surviving (i.e. still being present in the next generation or time period? Is it represented by business growth? Is it spawning new products and entering new markets? And what are the selective forces? They must be linked to the (in)ability to gain the resources necessary for survival. But, as seen in the discussion of resource-advantage theory, the meaning of resources is not precise. Does it mean external resources (customers’ money, investment capital) or does it mean internal resources (inimitable resources, core competences)? Any combination of these factors could, in principle, lead to a distinct evolutionary theory, although the theories would not necessarily exclude each other.

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Figure 6.1 Johnson and Van de Ven’s model of evolutionary theories (with modifications)

It is at this point that any evolutionary view of entrepreneurship faces a decision: how close to the Darwinian metaphor does it wish to stick? Living organisms can change neither themselves nor their environment. They are passive markers of evolutionary change, not active participants within it. Further, Darwinian evolution suggests no overall design or direction of progress. Evolution is blind and acts at instants. Here the metaphor starts to break down. Can the entities in an economic system (individuals or collections of individuals) not make sense of their world and actively participate in it, or even change it? Do they not change themselves in response to new information? Do they not have goals that suggest progress? After all, in Darwinian evolution individuals do not adapt, succeeding generations do. Individuals are fixedly adapted from the moment they are born. This can lead to confusion. An example of this is Nelson and Winter (1982) who infer that adaption is ‘all regular and predictable behaviour patterns of firms’ (p. 14) and that these should be regarded as the equivalent of ‘genes’ in evolutionary biology. An animal cannot change its genes, but a firm can be unpredictable and change its behaviour patterns. Johnson and Van de Ven (2002) suggest that ‘evolutionary’ theories of organisations fall into one of four types depending on the extent to which they allow for (a) individual organisations to change themselves – organisational inertia and (b) the extent to which the individuals can change their environment – environment exogenicity. This scheme is illustrated in Figure 6.1. Given that each of these approaches uses (some might suggest misuses) the evolutionary metaphor in quite different ways, it is worth considering them and their implications for understanding entrepreneurship.

Population ecology theory Ecology is the study of systems of interacting living organisms using the Darwinian paradigm. Because it suggests that economic entities (usually taken as firms) can change neither themselves nor their environment, it represents the closest reading of the Darwinian metaphor. Hence, the word ‘ecology’ in population ecology theory is (analogously) literal. Firms within a sector are hom*ogeneous and are, at best, able to choose which markets to enter and whether to co-operate with each other. But, in essence, a firm’s form, strategy and

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behaviour are fixed and result from its founding characteristics. The number (and total capacity) of firms within the sector is limited by its carrying capacity: the level of (competed for) resources made available, including, critically, the capital customers will provide through purchases. Clearly, within this model the role of the entrepreneur is quite limited. Aside from imparting some founding character, the entrepreneur can only select which markets to operate within and whether to co-operate with other firms. The success or failure of businesses is a result of there being sufficient, or too limited, a carrying capacity within the sector. This is not something under the control of the entrepreneur. However, the survival, or not, of individual firms is not really the concern of the theory; rather, the theory is concerned with the structure of populations of firms within industries. A leading early work in this area is that of Hannan and Freeman (1977).

New institutional economics New institutional theory, like population ecology theory, maintains that firms are limited in the degree to which they are able to modify their internal constitution, but does suggest that firms can modify their environments. Firms are not supposed to modify their environment in any way they wish, of course. Rather, the theory supposes that firms act individually, or collectively, to modify their legitimacy. The origins of new institutional economics can be traced back to the work of Hamilton (1932) and Commons (1924). A modern exponent of the view is Hodgson (1993). Within institutional economics, the term ‘institution’ has wider meaning than that of ‘organisation’. According to Hamilton (1932) an institution is: A way of thought or action of some prevalence and permanence which is embedded in a group or the customs of a people . . . [and which fixes] the confines of and imposes form upon the activities of human beings. In these terms, an institution is akin to the anthropological concept of ‘culture’. It is a social phenomenon that defines the latitude of what individuals are allowed to do, specifies what they should do and tells them what they cannot do. Although there are several shades of interpretation within this framework, an organisation’s resources are regarded as cultural capabilities, not just productive assets. An entrepreneur moving into a new sector (or establishing an entirely new one) will not so much adapt the firm to fit with new opportunities, but seek to build legitimacy with stakeholders such as investors, customers, employees and suppliers and beyond to government and society as a whole. One way of creating legitimacy is for the entrepreneur to present his or herself as an ‘outsider’ who is challenging (and perhaps being repressed by) an ‘old guard’ of established businesses that seek to maintain their dominance and hence their ability to exploit their customers, and so is worthy of support. This is certainly a common narrative in press and biographical accounts of entrepreneurs. Ultimately the entrepreneur is not just a creator of firms but also the architect of a new institutional system of beliefs and values.

Organisational evolution theory Organisational evolutionary theory regards the unit of evolution as the individual firm, rather than the industry of population ecology. The environment is a given, managers cannot

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change it in any way. But firms can, and do, change themselves. This is consistent with the heterogeneous demand, resource and capability perspectives discussed above. Where it parts company is in the way it views the process of firms’ achieving the right resources or capabilities. Those outside the evolutionary framework (discussed above) imply that making an organisation right for the opportunities it exploits is a matter of design. The entrepreneur (in particular) constructs the organisation to some sort of strategic blueprint. Organisational evolutionary theories deny the possibility of such a design being available in advance. Rather, entrepreneurs learn to structure their organisations and enhance their strategies in a gradual – incremental – way as a result of learning that arises from success and failure feedback. Quinn (1978) gives a good account of this manner of strategy formation. In this view, entrepreneurs are repositories and facilitators of organisational learning. An effective entrepreneur is not one who, from the outset, is able to plan a particularly effective organisational end form, but one who is able to make an organisation responsive to new information and reactive towards new opportunities. Different strands of organisational evolution theory allow for and prioritise the evolution of different aspects of the organisation. The most extensive allow for the entrepreneur to modify the organisation along a large number of dimensions simultaneously, thus making organisational learning a challenging and complex task. Nelson and Winter’s Evolutionary Theory of Economic Change (1982) is seminal in this area. Organisational evolution theory removes the need for design in organisational structuring just as Darwin’s theory of evolution removed the need for an external designer of living organisms, but, unlike conventional evolutionary theory, it makes the individual firm not adapted but adaptable in a way that living organisms are not. Because firms can change, selection is between organisations that can learn and those that cannot learn to modify themselves in light of changing environmental (resource-providing) conditions.

Industrial community theory Industrial community theory is the most general evolutionary theory in that it allows for firms to change both themselves and their environments. This approach gives the richest picture of how entrepreneurs compete, but with some loss of theoretical specificity. Firms are regarded as heterogeneous. Every firm is individual and firms may vary in terms of their industry position and/or their internal capabilities. In this respect, the industrial community view is similar to the organisational evolution view. However, the approach shares the perspective of the new institutional view that firms can actively adapt their environments. They do this by forming mutually supporting coalitions or communities of businesses that have an interest in supporting each other. This network of relationships provides conduits along which pass key resources such as productive labour, financing and information. A clear exposition of this perspective is given by Van de Ven and Garud (1989). Within this view, one of the entrepreneur’s key roles is to build and maintain this network of relationships, which is critical to resource provision.

Economic sociology Thus far, all of the perspectives on the role of the entrepreneur have been drawn largely from the economic tradition within the social sciences. Economic sociology casts its net wider to

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include traditions within sociological thinking as well. This tradition has a long history. The works of pioneering social theorists such as Max Weber (1864–1920), Emile Durkheim (1858–1917) and Karl Polyani (1886–1964) are frequently cited. More recent contributors include Talcot Parsons (1902–79), N.J. Smelser (b. 1930) and Granovetter (see Granovetter, 1985). Its more radical strands are influenced by the work of Karl Marx (1818–83). One of the key claims within the economic sociology view is that economics (both neo-classical and the views derived from it) cannot account for the realities of organisational life because it takes as its starting point the assumption that human beings are (essentially) self-interested and (to a greater or lesser degree) rational. It ignores the role of socialisation and the influence of social structures on human behaviour. In general terms, these are the mechanisms that govern human behaviour and inculcate cultural and moral norms within a society. Some argue these social forces impede pure competitive behaviour and this must be accounted for. Entrepreneurs sometimes seem to hold off on intense competition if they feel such would break social taboos. Others argue that socialisation may actually increase competitive behaviour as some types of socialisation provide legitimacy for aggressive business actions. The society sets harsher rules for the game. All economic sociologists agree, though, that sociology (with its theoretical approaches and methodology) brings these forces back into perspective. This view places much emphasis on social relationships, group and organisational cultural values and the role of trust. Within this view, the entrepreneur is not just a manager of a business organisation. He or she is one who is both subject to, and in turn creates, cultural norms through business practice. Examples of study of entrepreneurship within this sociological perspective are those by Mumby-Croft and Hackley (1997) and by Zafirovski (1999). It might be argued that all of the things these different schools of economic thinking say about the entrepreneur are true, but that each discusses a different aspect of the entrepreneur. Further, integrating the perspective of different schools might provide a more complete picture. There have been many attempts in this direction (see, for example, co*ckburn et al., 2000; Makadok, 2001). Of particular interest currently is integration of industrial organisational economic and resource-based perspectives. There are, however, three caveats when considering integration. First, many proponents of the different schools would argue that they have no intention of creating a complete picture; rather they are prioritising the fundamental aspect of entrepreneurs’ activity. Integration subsumes this issue of priority. Second, integrating different perspectives suggests a more complex role for the entrepreneur and this creates methodological problems in testing the predictions of such integrations. Third, different perspectives are often based on different theoretical assumptions. Theoretically sound integration demands the coherence of such assumptions, which may not always be the case.

6.2 Entrepreneurship: wealth, utility and welfare Entrepreneurs, wealth creation and distribution The world is getting richer. The western world (western Europe plus North America) is the global economic powerhouse (over 70 per cent of total world economic output). Global prosperity has been added to greatly by the growth (albeit with a recent stall) in Southeast Asia, China and, to a lesser degree, India, and (with some recent economic crises) Latin America.

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Some growth has occurred in sub-Saharan Africa, especially Southern Africa, though generally economic growth in Africa is a cause for concern. The question of what drives this increase in An introduction to some of the global wealth is an issue that engenders not just economic but broader moral and political also political and moral debate. We may attribute this increase issues surrounding in wealth (wholly, or in part) to one or more of three economic entrepreneurship. An institutions: entrepreneurial activity (in smaller firms), large, appreciation of the economic established corporations or government. notions of wealth maximisation, While the contribution to wealth creation of private enterprise wealth distribution and seems transparent, the role of government is questionable. Most individual utility maximisation. economists would now agree that while government plays an A recognition of the political important part in regulating business (setting out the playing field, and moral stances that are as it were), managing macroeconomic stability (keeping the playcritical of these notions and the ing field level) and redistributing wealth (sharing the rewards distinction between utility and for the game), it is not primarily a generator of wealth. Rather, human welfare. An insight into government must be regarded as a cost, properly paid for (via the debate about whether taxation) for the services it delivers. The failure of the communist economic behaviour is system in central and eastern Europe (and parts of the emerging determined by our evolutionary world), which prioritised government over enterprise, adds weight heritage or by more immediate to this argument. The role of global corporations (of particular social factors, and an concern to the environmental and anti-globalisation lobbies) is introduction to the issue of important. Undoubtedly, they have a critical function in mainwhat determines the morality taining wealth levels and driving investment into the developing of an action: motives for the world. This said, most economists would agree that entrepreneurs act, the act itself or the create a significant degree of new wealth, not least because consequences of the act. entrepreneurs challenge the ‘old order’ by introducing new and innovative products, by driving competition and by challenging monopolies. The answers to these debates lie in economics. The trend towards an increasingly formal mathematical language for economics has led some economists to regret its emergence from, and particularly its distinction from, its historical form, political economics. Political economics was concerned not only with the resource allocation consequences of economic transactions and the arrangement of economic institutions that maximise wealth (the key concerns of modern economics), but also their political implications, ethical justification and moral necessity. Historically, these domains were not seen as essentially distinct. Modern economics, its critics argue, takes for granted the priority of (and, without challenge, the ethical superiority of) individual wealth maximisation, rather than the distribution of wealth. Pareto optimality is a good example of this trend in modern economics. Pareto optimality is a criterion introduced into many mathematical models. It is achieved when an economy is in a state where total wealth is maximised and the wealth of any one individual cannot be increased without reducing the wealth of another individual. Pareto optimality is essentially a mathematical formulation about the properties of an economy in equilibrium, when demand equals supply and all markets clear. This criterion does not foreclose the possibility that one individual is very rich but all others are very poor. Pareto optimality says a lot about the total wealth of an economy but nothing about how such wealth ought to be distributed within that economy. It can be argued that Pareto optimality is simply a description of the

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final state of an economy (with certain assumptions allowed). It is not a recommendation that that is how a society should be. However, it does imply that any attempt to spread that individual’s wealth more evenly (say through government intervention via taxation) will actually reduce the overall wealth of the system and it is hard to disentangle this proposition from political and moral judgements. So be it, critics argue. Better a poorer, but more equitable world! We would prefer to be less well off in a just world than slightly richer in an unjust world. Such choices take us beyond the formal domain of economics into political and ethical debates. An excellent account of these is provided by Little (2002). These are choices about the kind of world we want. Socialism has traditionally argued that equality is an end in itself, an end that should have priority over wealth creation. Libertarians (who believe in the right of individuals to make choices (and so create free markets) unencumbered by governmental intervention) would argue that, while a more equitable world may be preferable to some, its cost in terms of the restriction of individual liberty is a cost too much. Eco-radicals would claim that conventional economic thinking devalues the natural world because it fails (as they see it) to take account of things for which there are no markets and hence no price. Some feminists criticise conventional economics because it does not account for the value of women who work as home-keepers, only for men who sell their labour in a conventional labour market (again, there are no conventional markets within family life). The philosopher John Rawls (1971) has presented an alternative to the notion of Pareto optimality. He suggests that an economic system is morally optimal if it fulfils three conditions. First, each individual should have a right to the greatest liberty compatible with a like liberty for all others; second, individuals should, ideally, have equal access to opportunities; and third, this liberty itself should be restricted only if it improves the welfare of the worst off to a level not above that of the second worst off. Government intervention may be necessary to see these three things happen. Hausman and McPherson (1996) provide a general discussion of the moral implications of different avenues of economic analysis.

Entrepreneurs and social welfare An idea that is fundamental to economics is that of utility. Utility can be defined (somewhat redundantly) as being the usefulness of a resource or situation or the degree of satisfaction it brings. Modern economics regards utility as the thing rational decision makers maximise. The revealed preference school of economics thinks of utility as being revealed through the preferences of decision makers. Many philosophers find this circularity unsatisfactory. Utility, they argue, must be defined in its own terms as the difference it makes to the quality of individual and collective lives. They would argue for a primarily moral, as opposed to economic, foundation of utility. Some would prefer that the term utility were left to economics and let moral philosophers talk about welfare instead. Welfare is difficult to define and moral philosophers still debate its exact meaning (for the interested student, Sumner (1996) provides an accessible account of this debate). Some argue that welfare is a property of the external objects that humans consume. Others argue that it is internal to the human mind and is the effect that consumption has. But most agree it means more than just wealth or possessions. Most would agree that issues such as the quality of life, intellectual and political freedom and opportunity are also important. The economist Amartya Sen recently won the Nobel Prize for his work in this area. His superbly written books (such as Inequality

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Re-examined (1995) and Development as Freedom (1999)) make complex ideas in welfare economics understandable and are highly recommended further reading. The responsibility of entrepreneurs to create welfare, rather than just wealth, is of course a view that one might take a number of different positions on, depending not least on one’s political and ethical perspective and the resulting belief as to what constitutes welfare. Perspectives range from the idea that entrepreneurs’ social responsibilities are prior to and should take priority over economic interest, to the suggestion that entrepreneurs are responsible purely for creating commercially successful business organisations and rewarding investors and have only minimal (if any) wider social responsibility, other than their compliance with legal and basic social norms (the issue of social responsibility will be considered further in section 9.5). The role of business organisations, not least entrepreneurial organisations, as the harbingers of change, as social entities and in relation to their ethical responsibilities to stakeholders other than investors is an area of growing interest. Some economists suggest we must be wary of the idea of compromise over welfare values. Just because we are aware of our own welfare, it does not mean that the collective welfare of a group of individuals is easy to achieve. A number of so-called impossibility theorems suggest that it is not possible to achieve a collective agreement between democratic individuals (all are equal and no one’s welfare is given priority over another’s) as to what is the best compromise (so-called unanimity) in welfare delivery given that small changes in welfare are unimportant. Put prosaically, democracy cannot deliver a result that pleases everybody. But, as Winston Churchill would have added, democracy is the worst system of government except for all the rest!

The determinacy of entrepreneurial behaviour The debate over the moral rectitude of different economic systems is leavened by debate over the extent to which human behaviour is determined by evolutionary imperatives. Social scientists are divided over the contrary views that human behaviour is (largely) consequential on cognitive-psychological patterns established early in our evolutionary history or is much more recent and results from immediate social drivers. This debate was raised in the discussion of evolutionary psychology in section 3.2. It is worth noting that the debate is not just one about scientific evidence; it is very much one about the political and moral implications of the beliefs that such views (might?) engender. While we may regard entrepreneurial behaviour as being something essentially modern (in evolutionary terms) and motivated by the particular opportunities that modern economies present to aspiring individuals, it seems entrepreneurial opportunities may have a deep history. The notion of a ‘caveman’ (though our ancestors rarely lived in caves) chipping away at a stone tool for his own use, perhaps as part of a small family group, is appealing. However, modern palaeological research suggests that our ancestors were very sophisticated in their social arrangements. Even deep in the Palaeolithic era (the Old Stone Age, roughly half a million years ago, when we should talk about our predecessor species, hom*o erectus) there is archaeological evidence that tools were not produced by all. Rather, they were the product of specialists who worked at ‘factory sites’. Toolmakers presumably exchanged the tools they produced for food gathered by ‘specialist’ hunters. The numerous innovations in stone tools that feature as we move to the invention of agriculture some ten thousand years ago can then be properly regarded as entrepreneurial innovations, encouraged as tool

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producers competed with each other. This suggests that not only are our economic arrangements a consequence of an evolutionarily endowed psychology, but that our psychology is a product of an evolutionary drive for economically motivated social organisation. Ofek (2001) explores this issue at length.

Moral judgements about entrepreneurs What does all this mean for modern entrepreneurs, the way in which we regard them and the role we see as proper from them? There is no doubt that task differentiation is economically efficient, that specialism creates wealth. It also seems clear that many aspects of our psychology have evolved to maintain economically valuable relationships (this is a point that we shall return to when we discuss game theory in section 20.4). But we should be cautious in concluding that just because a certain mode of behaviour has an evolutionary imperative we must accept it without question or must regard such behaviour as economically or morally correct. We are not slaves to our behavioural inheritance; our behaviour is flexible and we use it to make our way in the world. Our judgement of the ethical content of what entrepreneurs, specifically, do (and, more generally, what all ethical agents do) is not confined to consideration of the actions they take. Our judgement is also based on the motivation that agents have when acting and the consequences of those acts. Different moral theories are based on differing emphasis on each of these factors. Moral theories that emphasise the motivation of acts are motivist theories. We are taking a motivist position if, for example, we judge a business more harshly if it pollutes in an attempt to maximise profits than if it had created exactly the same pollution (and caused exactly the same environmental damage) as a result of an accident that it had tried to avoid. Ethical theories based purely on the act itself are referred to as deontological theories. A deontological theory says that some act or other is moral (or otherwise) as a result of the act itself, nothing else. Someone who insists that it is wrong in any circ*mstances to test a new medical product on animals is taking a deontological position. Such a position would insist that no matter what benefits it might bring, testing products on animals is, in itself, inherently and simply wrong. A consequentialist position prioritises not the motivation for an act, or even the act itself, but the consequences of that act. We may feel it is wrong for a business based in the West to employ (exploit?) ‘cheap’ labour in a developing country, even if high local wage rates (but low compared with the home country) are paid. If we are swayed by the argument that the employees are better of with the pay on offer than they would be without it, and so the firm is acting ethically, then we are taking a consequentialist position. All of these positions have problems. Motivist theories are based on the belief that we can actually observe (or at least feel the consequences of) someone else’s motivation. (Can we? Why should we judge exactly the same act and consequences to ourselves differently if we suddenly find someone’s historical motivation to be different from what we believed to be the case?). Deontological theories are inflexible. We tend to ameliorate our judgement in light of the circ*mstances in which people act (which we do: given any moral rule we can usually find circ*mstances in which it will not, or should not, hold). Consequentialism assumes that we can predict all the consequences of an act and attribute back to it the future effects it causes (the cause and effect relationship is not that simple, nor is predicting the future). This book is not the place in which to pursue these concerns too far. Rather, the aim of this section is to raise awareness of them as an issue and to recognise the difficulty in making

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6.3 Entrepreneurship and information In section 6.1 the fundamental assumptions of neo-classical economics were discussed. These include the belief that indiKey learning outcome viduals are rational and utility maximising, that individuals are A recognition of the basic ideas perfectly efficient in processing information and that information of information economics, a is freely available. By ‘freely available’ it is meant that gaining qualitative understanding of information has no cost, that all individuals know all that there the concept of informational is to be known and all individuals know what every other indiasymmetry and principle–agent vidual knows. Formally, economists refer to these four features as contracts under conditions information being frictionless, perfect, symmetric and common. of moral hazard, adverse Clearly, these assumptions are unrealistic. Information does selection and signalling, and have a cost, no individual can possibly know all that there is to be an appreciation of the way known and different individuals know different things. We rarely these insights contribute know, exactly, what others know. Nascent entrepreneurs all too to an understanding of quickly become aware of the cost of (even basic) market research. entrepreneurship and the If all that was to be known were known, there would be nothing entrepreneurial process, for entrepreneurs to innovate about, and if entrepreneurs knew, particularly entrepreneur– and knew only, exactly what their competitors know (and vice investor relationships. versa), there would be no point in the entrepreneur’s competing at all. So what happens if we drop the assumptions that information is frictionless, perfect and symmetric? What happens is perhaps the most important revolution in economics of the twentieth century: a field known as information economics. The impact of this discipline on economic thinking and discovery cannot be overstated. The interested student is referred to the review by Stiglitz (2000) for a good, accessible account of how this subject has developed and how it has led to an entirely new series of economic perspectives. Relaxing assumptions about perfect information allows economics to develop a much more realistic picture of the world. This has had considerable importance for economic considerations of entrepreneurship. Like much of modern economics, information economics is highly mathematical. It was born at a time when economics was well into its mathematical turn. Although its understanding requires only some knowledge of (albeit at times quite advanced) algebra, it is impenetrable to the mathematically uninitiated. This is unfortunate because it offers a great deal to the understanding of entrepreneurship. This section develops a non-mathematical overview of the main ideas in information economics and the entrepreneurial situations in which it might be applied. The more mathematically confident student who wishes to explore the subject in depth might try a standard work in the field. Macho-Stadler and David Perez-Castrillo (2001) is excellent.

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simple (or simplistic) ethical judgements about entrepreneurs and about what moral philosophers refer to as aretaic issues: what entrepreneurs must do, could do and ought to do. We shall return to the issue of the discretionary responsibilities of entrepreneurs in section 9.5, where our concerns will be more limited, and address the personal motivations of the entrepreneur and the tactical adoption of different ethical values.

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Informational economics has a number of connections to another revolutionary twentiethcentury development in economics: game theory. Some aspects of game theory and its significance to entrepreneurship will be discussed in section 20.4.

Types of informational asymmetry Information economics takes as its starting point a simple model of the interaction between two economic actors: the principal, the individual (or organisation) who wants a project undertaking and contracts an agent, an individual (or organisation) who undertakes that project on behalf of the principal; that is, accepts the contract. In our context, this represents the investor and the entrepreneur accepting investment to progress the venture. Both of these parties anticipate the way the world will turn out due to events outside either’s control in the expectation that both will gain some benefit (utility) from working together. Both face risk or uncertainty. Neither can fully anticipate the events that will occur (their information is not perfect) though they might or might not know the probability with which certain things will happen. This is actually equivalent to saying that not all information is available. We will assume that both are utility maximising, that is, both wish to maximise what they gain from the arrangement. After the contract is fulfilled and the events have occurred, both the principal and the agent gain separate outcomes that have a value (or loss) to them. This basic model is depicted in Figure 6.2. This model may appear quite simple compared to real-world economic arrangements, but most real-world situations can be reduced (with some assumptions) to a set of such interactions. Now we can introduce the idea that information not only is not perfect but also is asymmetric, that is, the principal and the agent know different things – they do not share common knowledge of issues relevant to the project. This is particularly significant when the agent knows something the principal does not. There are four basic variations on this theme. In the first, when the agent undertakes some project, the principal is not able to observe what the agent does. The agent can put in a level of effort that only he can observe. (It is traditional in information economics to refer to the principal as ‘she’ and the agent as ‘he’.) In the second, the agent discovers something of relevance to the project that the principal does not know after the contract is completed, but before the project (venture) is started. Both of these situations are referred to as moral hazard. They may look different but in fact they are variations on a theme. Their mathematical treatment is the same. In the third, the agent knows

Figure 6.2 The contractual arrangement between the principal and the agent

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Figure 6.3 Types of informational asymmetry

something that the principal does not know, but this time before the contract is agreed. This problem is known as adverse selection. In adverse selection, we are usually concerned with the agent (but not the principal) having information on his abilities, or the type of agent he is, that is not shared with the principal. In the fourth, like the third, the agent knows something that the principal does not know but this time decides to inform the principal of what he knows. This is known as signalling. Note here that signalling is not the agent simply telling the principal what he knows, as this would just reduce the problem to a classical one of symmetrical information. These four variations are depicted in Figure 6.3. In each of these situations, the problem is one of how the principal designs an agreement – a contract – that will maximise her outcomes given that the contract must be attractive to the agent (given that he can find other projects to dedicate his effort to). Solving this contracting problem under various conditions of informational asymmetry is the central concern of information economics, and its relevance to entrepreneurship will be immediately evident. Remember the original meaning of the word ‘entrepreneur’: an individual who takes on a contract on behalf of an investor. In practice, an entrepreneur may play the role of either principal or agent depending on the situation. A venture capitalist offering money as an investment in a venture is acting as a principal to the agent entrepreneur. A customer accepting a supply contract from an entrepreneur is in a similar position. An entrepreneur acts as a principal if she contracts the efforts of employees or services from a supplier. Moral hazard is now recognised as an important feature of venture capitalist– entrepreneur relationships. The venture capitalist must trust the entrepreneur to put in the highest amount of effort on behalf of the venture. Although the venture capitalist may

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put into play monitoring procedures to keep an eye on what the entrepreneur is doing (so reducing the moral hazard), monitoring is expensive and complete monitoring is impossible. In the end, the venture capitalist must let the entrepreneur get on with it. The entrepreneur who contracts in services from an individual or firm faces the problem of adverse selection. She can check a person’s CV and experience and obtain references, but that individual’s real ability to do the job demanded can only be tested on the job, after he is taken on. The same applies to a supplier: no matter how good the sales pitch, the quality of the supplier is only tested if a contract is agreed. The same applies in reverse to the entrepreneur as a supplier. An application of this idea can be found in de Meza (2002), who considers the role that informational asymmetry plays in driving the ‘funding gap’ that many entrepreneurs experience when attempting to raise investment. The use of signalling is of growing interest in management theory, finance and beyond. Put simply, signalling occurs when an agent tells a principal that he is of a particular type (say, an entrepreneur telling an investor ‘I am a good entrepreneur and my business will be successful’). Signalling must go beyond simply stating ‘I am of this particular type’. Why should he be believed? Anyone can say, ‘I am a going to be a successful entrepreneur’. No matter how heartfelt, there is no guarantee that it is true. To be effective, a signal must be unambiguous (no point if the principal misreads it), and if it is to be believed it must be the case that only an agent of the type that sends the signal ‘I am of this type’ can send it. One way to ensure this is to make the signal costly to the agent in some way. A good example of signalling that should clarify this comes not from management theory but from animal behaviour. Alco*ck (1993), an ethologist (a biologist who studies animal behaviour), noticed something apparently odd about the behaviour of gazelles being hunted by lions on the Serengeti plains of Africa. Lions hunt, kill and eat gazelles that graze in herds. When a lion approaches a herd of gazelles we would expect the gazelles to run away. And indeed they often do. But before they do so, some of the gazelles jump up and down vigorously – behaviour known as ‘stotting’. This is odd, because the animal is wasting energy and time that would be better dedicated to making its escape. Why they do this becomes clear only when we appreciate the ‘cost–benefit’ analysis that both gazelles and lions undertake (unconsciously, of course – it is an evolved behaviour due to natural selection). The lion needs to eat in order to survive, but the more they must chase a gazelle in order to make a kill, the more energy they waste (and so must hunt more to replenish it). The frequency of lion kills is quite low. A lion may have to make several chases before succeeding. The gazelle is also interested in conserving energy. Running away from a lion consumes a lot of energy that must be replaced by more grazing. So the lion will prefer to hunt the weaker and sicker animals in the herd, as they are more easily caught. Hence the healthy gazelle can gain (not be hunted) by signalling to the lion ‘Don’t hunt me – I’m healthy and fit. Try another member of the herd.’ Of course, a gazelle cannot say this directly to a lion, and even if one could, why should the lion believe it? It is in the interest of weak animals to lie. But, by stotting, the gazelle is, in effect, saying ‘Look! I am fit and healthy – and I can prove it – I am so confident that I can outrun you, I am prepared to waste time and energy now, and still beat you. So pick on someone else.’ A weaker animal cannot take this risk. So the lion ‘decides’ it is better to hunt a gazelle that does not stott – exactly the effect the healthy gazelle wanted. Healthy gazelles are often so confident that their signal has been seen and properly read that they do not bother to run even when the lion charges at the herd. The parallels to entrepreneurship will soon become clear.

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We will assume that the contract offered by the principal is one that is rational to her (she maximises her utility) and is just attractive enough to attract a rational (also utility maximising) agent. That is, it is just valuable enough to attract him from the alternatives he has available. To understand the agent’s behaviour we must also assume that his effort presents a cost (a disutility) to him that reduces his reward. So he will maximise his returns based not only on what he might gain, but also in terms of how much effort it will cost him to gain it. This disutility of effort is not a suggestion that people are inherently lazy, rather that even a very hard-working person will try to spread his effort in an attempt to maximise his income – less effort on this project might mean that another (with additional rewards) can be taken on as well. Under conditions of symmetric information it is relatively straightforward for the principal to design such a contract. It is simply a fixed sum, just large enough to attract the agent from taking up any alternative project on offer. As the principal knows what type of agent the agent is, can observe (and so police) the effort he puts in, and know what will result from that effort, this maximises the principal’s return given that the project goes ahead. Under conditions of moral hazard, adverse selection and signalling, however, contract design is not nearly so straightforward. We will avoid the mathematics of the contract design, save to say that the optimisation problems they present are technically difficult to solve and further simplifying assumptions are often necessary in order to resolve them. If moral hazard is present, the contract offered must be one in which the payoff to the agent is dependent on his effort. If it is not, then he will simply put in the lowest amount of effort possible. His effort will make no difference to what he gains as a reward and the less effort he puts in, the less that effort costs. So he must be rewarded for putting in a higher effort. This cannot, of course, be based on the principal seeing what he does, because the terms of the moral hazard problem are that she cannot see (monitor) what he does. So they must be based on the outcomes of the project: the value it creates. However, the project’s outcomes are not just based on the agent’s efforts, they are also based on (unpredictable) events outside the control of the agent or principal (this is a very realistic assumption). Both parties face a risk. Making the reward to the agent dependent on the outcome of the project is, then, a way for the principal to offset risk – to ‘sell’ some of it – to the agent. So, technically, the contract rewards the agent not for his effort but for the the probability that his effort will produce a good result. This result fits with the observed nature of contracts between investors and entrepreneurs. Contracts through which the investor agrees to put a sufficiently large fixed sum of capital into the venture to allow the entrepreneur to take an amount as personal income whatever the business performance, would be exceptional. Indeed, it would negate the agent as an entrepreneur. He would simply be an employee. Entrepreneurs must accept some of the risk and be rewarded based on performance. Of course, an entrepreneur might put in minimal effort and still be lucky with the success of the venture. But success here is less probable than success achieved with high effort. The entrepreneur must assume that higher effort brings (more likely) rewards. Adverse selection (where an agent may be one of several types and the principal cannot find out which in advance) presents a different contracting problem. The solution here is for the principal to offer not one but a menu of contracts each offering a different reward based on the type of agent at which it is aimed. Of course, only the agent knows what type he is. The trick is for the principal to arrange incentives so that the agent will take the contract that

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is best for his type. The principal is inclined to offer the ‘better’ (to her eyes) agent the most rewarding contract and a less attractive contract to an agent who is not of the best type. To prevent all agents (whatever their type) simply taking the best contract, she must introduce incentives for an agent who takes on a contract that fits his type and penalties for an agent that takes on a contract that does not fit his type (something only he knows). The contracts must be self-selecting. Such contract types are common in insurance. For example, an insurance company offering cover does not know the type of customer being sold to: whether the person buying the cover is a ‘good’ customer (one who will make an effort to protect himself from the risks present), and is less likely to make a claim, or is a ‘poor’ customer (one who thinks ‘I have insurance so I may as well take a few risks’), who is more likely to make a claim. A solution offered by many insurance companies is to offer a reducing rate of insurance charge – a ‘no-claims bonus’ – for customers who do not make a claim for an increasing period. So at any one time, a customer has a choice between two contracts: making a claim and losing a no-claims bonus, and not making a claim so as to retain it. Such menus of contracts can apply in sophisticated financing deals for entrepreneurial ventures where the risk is offset (in effect, insured against) through a variety of complex financial deals involving mixtures of investment (equity) and loan financing. Entrepreneurs and venture capitalists find themselves in an exactly parallel situation to that of gazelles and lions when it comes to signalling. (Like all good analogies this should not be pushed too far, though some entrepreneurs may nod sagely at it!) Venture capitalists want to invest in the best entrepreneurs. Entrepreneurs want to tell venture capitalists ‘I am the best – invest in me’. So entrepreneurs must signal this to venture capitalists but in a way that they could only do if indeed they are the best. The signal must have a cost. There are many ways in which entrepreneurs can send such costly signals. They may offer the investor a higher than market normal return (this is important in market flotations). The entrepreneur may spend a lot of money calling in consultants and market researchers to back up the claims in the business plan. Certo et al. (2001) consider how board structure at initial public offerings may signal confidence in future performance. The most usual way, though, is for the entrepreneur to put their own money into the deal. Prasad et al. (2000) develop a formal model of the entrepreneur’s own contribution as a decision signal. The investor may demand this more as a signal than as a substantive contribution. The cost (both in terms of opportunity and risk) to the entrepreneur is then transparent. I once put the question, ‘Given a particular total level of investment, what percentage do you expect to be contributed by the entrepreneur personally?’, to a venture capitalist. She thought deeply and then replied: ‘I don’t think about percentages. I want just enough so it hurts!’ Lee (2001) considers the change of a business name to include ‘dotcom’ as a signal to investors. She finds that investors reward the firm with an increased stock price, especially if the name change is accompanied with announcements on changes in strategic direction (though this was before the burst of the dotcom bubble; I suspect a similar study might have different findings now).

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• The entrepreneur is, first and foremost, an agent of economic activity. • The neo-classical school of economics has little room or use for the idea of entrepreneurs as a distinct class of economic agent.

• Alternative schools of economic thinking do see entrepreneurs as distinct. Important schools include the: – Austrian School – heterogeneous demand theory – differential advantage theory – industrial organisational economics – resource-based perspective – competence-based perspective – transaction cost economics – evolutionary theories – economic sociology.

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Summary of key ideas

• These schools often highlight particular (and sometimes complementary) aspects of entrepreneurial activity.

• Economics makes assumptions about the nature of man and his social responsibilities. Many find these assumptions not only wrong but also offensive if they are taken as recommendations about how people should behave (a libertarian position). Socialist, eco-radical and feminist ideologies are particularly critical of this view.

• Whether (or to what extent) the behaviour of entrepreneurs is ‘hard wired’ and determined by evolutionary forces or is learnt within a social and cultural setting is controversial.

• Ethical judgements about entrepreneurs are sensitive to whether we are taking a motivist, a deontological or a consequentialist position on moral value.

• Classical economics assumes that all parties to a contract have the same knowledge. This assumption is not sustainable with real entrepreneur–investor (agent–principal) agreements.

• Informational economics has revolutionised thinking about contracts when one party knows something the other does not – information asymmetry.

• Information asymmetry leads to one of three situations: moral hazard, adverse selection and signalling.

• Theory suggests that each of these situations is best resolved by different types of contract that share risk between the investor and the entrepreneur. Such contract types are observed in the real world.

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Research themes This chapter has raised a number of issues that cut across a wide range of social science disciplines. Debate on these issues is increasingly technical. However, there are a number of interesting research projects the specialist (or generalist?) in entrepreneurship might tackle.

Entrepreneur’s folk-economics Most economics is theory led. These theories are then tested by empirical observation. The term ‘folk-economics’ refers not to economists’ views of economics, but to ‘ordinary’ people’s (i.e. those with no formal training in economics) beliefs and attitudes. Entrepreneurs are usually such. The project might devise a survey to test entrepreneurs’ own beliefs about what their economic functions, effects and responsibilities are. Relevant propositions might be devised by considering the different schools of economic thinking and distilling out some key ideas. These can then be put to practising entrepreneurs (or people who hope to become entrepreneurs) and their agreement with the proposition tested (agree strongly to disagree strongly). A surveying technique such as Delphi analysis would be useful here. By way of analysis, the way agreement corresponds to the different schools of economic thinking could be established. Do entrepreneurs’ folk-economic beliefs match strongly with any one school? Do they cut across schools? Do all entrepreneurs think their economic role to be the same?

Entrepreneurs and moral judgements about them The study of corporate responsibility (and its impact on financial performance) is a fast growing area of research. But it has, traditionally, concerned itself with a largely deontological view of moral value: it looks at the acts entrepreneurs take (such as expression of belief in social responsibility; the employment of minorities and provision of child-care facilities). This rather ignores the motivist and consequentialist aspects of moral judgement. An interesting project would be to take some descriptions of entrepreneurial ventures that raise moral issues and contain information on the entrepreneur’s motives, what they actually did and the consequences of their actions (Financial Times articles are a good source; you may want to construct short case studies yourself so you are sure all the issues are covered). Select a small group of people, let them read the article/cases and then lead a brainstorming session on the issues, with subjects indicating their views about the ethical issues in the situation and why they hold those beliefs (be careful not to bias the debate). Afterwards analyse the results, coding statements as making moral judgements on a motivist, deontological or consequentialist basis. Are judgements usually based on a single basis or on more than one? Which, if any, dominates? A good conclusion would be to highlight the implications in terms of what moral criteria future studies of corporate responsibility and performance should include.

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Informational economics is a (mathematically) technical area. The more mathematically confident student may wish to look into this (Macho-Stadler and Perez-Castrillo, 2001, is a good start). However, there are still some useful contributions that depend only on qualitative descriptions of contract types and do not require a high degree of mathematical understanding or analysis. Get some good descriptions of entrepreneur–investor deals (venture capital deals are particularly useful). These may be obtained from Financial Times articles and published case studies. Gompers and Lerner (2002) give a good account of some deals; follow their references through. By way of analysis, ascertain the nature of the informational asymmetry between the entrepreneur (agent) and the investor (principal) (for example, are they moral hazard or adverse selection?) and see what sort of contract would be predicted. Does the deal reflect this type of contract? How are risks being shared? How are details such as monitoring and compensation used to resolve the asymmetry? Did the entrepreneur resort to signalling? If so, how did this signal reassure the investor and why was it expensive to the entrepreneur? A solid methodological justification for such case-based studies is offered by Ghemawat (1997).

Chapter 6 The economic function of the entrepreneur

Entrepreneur–investor contracts under informational asymmetry

Key readings The literature on economic approaches to entrepreneurship is extensive and often quite technical. Two accessible readings that make an interesting contrast (one old, one new; one taking a positioning perspective, the other a resource-based perspective) are: Alvarez, S.A. and Busenitz, L.W. (2001) ‘The entrepreneurship of resource-based theory’, Journal of Management, Vol. 27, pp. 755–75. Smith, C.C. (1956) ‘Product differentiation and market segmentation as alternative marketing strategies’, Journal of Marketing, Vol. 21, pp. 3–8.

Suggestions for further reading Alchian, A.A. (1950) ‘Uncertainty, evolution and economics’, Journal of Political Economy, Vol. 58, pp. 211–21. Alco*ck, J. (1993) Animal Behavior: An Evolutionary Approach. Sunderland, MA: Sinauer. Alderson, W. (1957) Marketing Behaviour and Executive Action. Homewood, IL: Irwin. Alderson, W. (1965) Dynamic Marketing Behaviour. Homewood, IL: Irwin. Alvarez, S.A. and Barney, J.B. (2002) ‘Resource-based theory and the entrepreneurial firm’, in Hitt, M.A., Ireland, R.D., Camp, S.M. and Sexton, D.L. (eds) Strategic Entrepreneurship: Creating a New Mindset. Oxford: Blackwell. Andrews, K.R. (1971) The Concept of Corporate Strategy. Homewood, IL: Irwin. Bain, J.S. (1968) Industrial Organisation (2nd edn). New York: Wiley.

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Barney, J. (1991) ‘Firm resources and sustainable competitive advantage’, Journal of Management, Vol. 17, No. 1, pp. 99–120. Ben-Nur, A. and Putterman, L. (1998) Economics, Values and Organization. Cambridge: Cambridge University Press. Bergmann-Lichenstein, B.M. and Brush, C.G. (2001) ‘How do “resource bundles” develop and change in new ventures? A dynamic model and longitudinal exploration’, Entrepreneurship Theory and Practice, Vol. 25, No. 3, pp. 37–58. Certo, S.T., Daily, C.M. and Dalton, D.R. (2001) ‘Signalling firm value through board structure: an investigation of initial public offerings’, Entrepreneurship Theory and Practice, Winter, pp. 33–50. Chamberlin, E. (1933) The Theory of Monopolistic Competition. Cambridge, MA: Harvard University Press. Clark, J.M. (1940) ‘Towrds a concept of workable competition’, American Economic Review, Vol. 30, pp. 241–56. Coase, R.H. (1937) ‘The nature of the firm’, Economica, Vol. 4, pp. 368–405. co*ckburn, I.M., Henderson, R.M. and Stern, S. (2000) ‘Untangling the origins of competitive advantage’, Strategic Management Journal, Vol. 21, pp. 1123–45. Commons, J.R. (1924) Legal Foundations of Capitalism. New York: Macmillan. Cooper, A.C. (2002) ‘Networks, alliances and entrepreneurship’, in Hitt, M.A., Ireland, R.D., Camp, S.M. and Sexton, D.L. (eds) Strategic Entrepreneurship: Creating a New Mindset. Oxford: Blackwell. Cowen, T. and Parker, D. (1997) Markets in the Firm: A Market-Process Approach to Management, Institute of Economic Affairs Hobart Paper No. 134. Da Empoli, A. (1931) Theory of Economic Equilibrium: A Study in Marginal and Ultramarginal Phenomena. Chicago: Christiano & Catenacci. De Meza, D. (2002) ‘Overlending’, Economic Journal, Vol. 112, pp. F17–F31. Dierickx, I. and Cool, K. (1989) ‘Asset stock accumulation and the sustainability of competitive advantage’, Management Service, Vol. 35, pp. 1504–11. Foss, N.J. (ed.) (1997) Resources, Firms and Strategies: A Reader in the Resource-based Perspective. Oxford: Oxford University Press. Ferguson, P.R. and Ferguson, G.J. (1998) Industrial Economics: Issues and Perspectives (2nd edn). Basingstoke: Palgrave. Ghemawat, P. (1997) Games Businesses Play: Cases and Models. Cambridge, MA: MIT Press. Granovetter, M. (1985) ‘Economic action and social structure: the problem of embeddedness’, American Journal of Sociology, Vol. 91, No. 3, pp. 481–510. Gompers, P. and Lerner, J. (2002) The Venture Capital Cycle. Cambridge, MA: MIT Press. Hamilton, W.H. (1932) ‘Institution’, in Seligman, E.R.A. and Johnson, A. (eds) Encyclopaedia of the Social Sciences, Vol. 8. Guildford, CT: Dushkin. Hannan, M.T. and Freeman, J. (1977) ‘The population ecology of organisations’, American Journal of Sociology, Vol. 82, No. 5, pp. 929–64.

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Hayek, F.A. (1948) Individualism and Economic Order. Chicago: University of Chicago Press. Hodgson, G.M. (1993) Economics and Evolution. Ann Arbor, MI: University of Michigan Press. Hunt, S.D. (2000) A General Theory of Competition. Thousand Oaks, CA: Sage. Johnson, S. and Van de Ven, A.H. (2002) ‘A framework for entrepreneurial strategy’, in Hitt, M.A., Ireland, R.D., Camp, S.M. and Sexton, D.L. (eds) Strategic Entrepreneurship: Creating a New Mindset. Oxford: Blackwell. Jones, O. and Tilley, F. (2003) Competitive Advantage in SMEs. London: Wiley. Keppler, J.H. (2001) ‘Attilio da Empoli’s contribution to monopolistic competition theory’, Journal of Economic Studies, Vol. 28, No. 4/5, pp. 305–23. Kirzner, I.M. (1973) Competition and Entrepreneurship. Chicago: University of Chicago Press.

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Hausman, D.M. and McPherson, M.S. (1996) Economic Analysis and Moral Philosophy. Cambridge: Cambridge University Press.

Kirzner, I.M. (1979) Perception, Opportunity, and Profit: Studies in the Theory of Entrepreneurship. Chicago: University of Chicago Press. Kirzner, I.M. (1982) ‘Uncertainty, discovery and human action’, in Kirzner, I.M. (ed.) Method, Process and Austrian Economics: Essays in Honor of Ludwig von Mises. Lexington, MA: Lexington Books. Kirzner, I.M. (1985) Discovery and the Capitalist Process. Chicago: University of Chicago Press. Kirzner, I.M. (1997) How Markets Work: Disequilibrium, Entrepreneurship and Discovery, Institute of Economic Affairs Hobart Paper No. 133. Lee, P.M. (2001) ‘What’s in a name? The effects of ‘.com’ name changes on stock prices and trading activity’, Strategic Management Journal, Vol. 22, pp. 793–804. Little, I.M. (2002) Ethics, Economics and Politics. Oxford: Oxford University Press. Lydall, H. (1998) A Critique of Orthodox Economics: An Alternative Model. London: Macmillan. Macho-Stadler, I. and Perez-Castrillo, J.D. (2001) An Introduction to the Economics of Information: Incentives and Contracts (2nd edn). Oxford: Oxford University Press. Makadok, R. (2001) ‘Towards a synthesis of the resource-based and dynamic capability views of rent creation’, Strategic Management Journal, Vol. 22, pp. 387–401. McCarthy, E.J. (1960) Basic Marketing: A Managerial Approach. Homewood, IL: Irwin. McDaniel, B.A. (2005) ‘A contemporary view of Joseph A. Schumpeter’s theory of the entrepreneur’, Journal of Economic Issues, Vol. 39, No. 2, pp. 485–489. Minniti, M. and Bygrave, W. (1999) ‘The microfoundations of entrepreneurship’, Entrepreneurship Theory and Practice, Vol. 23, No. 4, pp. 41–52. Mumby-Croft, R. and Hackley, C.E. (1997) ‘The social construction of market entrepreneurship: a case analysis in the UK fishing industry’, Marketing Education Review, Vol. 7, No. 3, pp. 87–94.

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Myers, J.H. (1996) Segmentation and Positioning Strategies for Marketing Decisions. Chicago: American Marketing Association. Nelson, R.R. and Winter, S.G. (1982) An Evolutionary Theory of Economic Change. Cambridge, MA: Belknap Press. Ofek, H. (2001) Second Nature: Economic Origins of Human Evolution, Cambridge: Cambridge University Press. Penrose, E.T. (1959) The Theory of the Growth of the Firm. London: Basil Blackburn & Mott. Porter, M.E. (1980) Competitive Advantage. New York: Free Press. Porter, M.E. (1985) Competitive Strategy. New York: Free Press. Powell, T.C. (2001) ‘Competitive advantage: logical and philosophical considerations’, Strategic Management Journal, Vol. 22, pp. 875–88. Prahalad, C.K. and Hamel, G. (1990) ‘The core competencies of the corporation’, Harvard Business Review, May/June, pp. 79–91. Prasad, D., Bruton, G.D. and Vozikis, G. (2000) ‘Signalling value to business angels: the proportion of the entrepreneur’s net wealth invested in a new venture as a decision signal’, Venture Capital, Vol. 2, No. 3, pp. 167–82. Quinn, J.B. (1978) ‘Strategic change: Logical Incrementalism’, Sloan Management Review, Fall, pp. 1–21. Rawls, J. (1971) A Theory of Justice. Cambridge, MA: Belknap Press. Robinson, J. (1933) The Economics of Imperfect Competition. London: Macmillan. Rosen, S. (1997) ‘Austrian and neo-classical economics: any gains from trade?’, Journal of Economic Perspectives, Vol. 11, No. 4, pp. 139–52. Sandler, T. (2001) Economic Concepts for the Social Sciences. Cambridge: Cambridge University Press. Selznick, P. (1957) Leadership in Administration. New York: Harper & Row. Sen, A. (1995) Inequality Re-examined. Oxford: Clarendon Press. Sen, A. (1999) Development as Freedom. Oxford: Oxford University Press. Smith, C.C. (1956) ‘Product differentiation and market segmentation as alternative marketing strategies’, Journal of Marketing, Vol. 21, pp. 3–8. Stiglitz, J.E. (2000) ‘The contribution of the economics of information to twentieth century economics’, Quarterly Journal of Economics, November, pp. 1441–78. Sumner, L.W. (1996) Welfare, Happiness and Ethics. Oxford: Oxford University Press. Van de Ven, A.H. and Garud, R. (1989) ‘A framework for understanding the emergence of new industries’, Research on Technological Innovation, Management and Policy, Vol. 4, pp. 195–225. Von Mises, L. (1949) Human Action: A Treatise on Economics. New Haven, CT: Yale University Press. von Stackelberg, H. (1933) Marktform und Gleichgewicht. Vienna: Springer. Wagner, R.E. (2001) ‘Competition as a rivalrous process: Attilio da Empoli and the years of high theory that might have been’, Journal of Economic Studies, Vol. 28, No. 4/5, pp. 337–45.

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Williamson, O.E. (1994) ‘Transaction cost economics and organization theory’, in Smelser, N.J. and Swedberg, R. (eds) The Handbook of Economic Sociology. Princeton, NJ: Princeton University Press, pp. 77–107. Williamson, O.E. (1996) The Mechanisms of Governance. Oxford: Oxford University Press. Yu, A.F. (2001) ‘Towards a capabilities perspective of the small firm’, International Journal of Management Reviews, Vol. 3, No. 3, pp. 185–97. Zafirovski, M. (1999) ‘Probing into the social layers of entrepreneurship: outlines of the sociology of enterprise’, Entrepreneurship and Regional Development, Vol. 11, No. 4, pp. 351–71.

Selected case material CASE 6.1

21 December 2005

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Wilcox-King, A. and Zeithaml, C.P. (2001) ‘Competencies and firm performance: examining the causal ambiguity paradox’, Strategic Management Journal, Vol. 22, pp. 75–99.

FT

An alternative energy supply swimming against the tide KEVIN ALLISON This winter, a team of engineers at Verdant Power, a small clean energy start-up, will spend hours huddled in a used shipping container on a small sliver of land between Manhattan and Queens, counting fish as they swim by in New York’s East River. Such is the lot of a small but dedicated band of entrepreneurs who are trying to sell the world – and Wall Street – on the benefits of tidal power. ‘We are going to spend in excess of $1m just watching the fish,’ says Ronald Smith, Verdant’s chief executive. The study, run by Verdant with help from the state of New York and several research and development groups, is designed to assuage the concerns of some environmentalists, who fear the company’s experimental underwater turbines could harm local fish populations. Verdant says it has gone to great lengths to make sure its turbines are fish-friendly.

If all goes according to plan, Verdant could install up to 200 turbines in the tidal estuary that separates Manhattan and Queens over the next 12 to 18 months, in the biggest-ever field test of tidal turbine technologies in the US. There, acting like submerged windmills, the turbines will harness the natural ebb and flow of tidal currents to provide power to a local supermarket and a nearby parking garage. Verdant is looking for $15m to help fund commercial-scale production of its turbines. But industry experts say it faces an uphill struggle. Thanks to sky-high energy prices and growing concerns about global warming, clean energy has had something of a coming-out party this year. New Energy Finance, a clean energy consultancy, estimates that worldwide investment in clean energy will total about $42bn for 2005.

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CASE 6.1 CONT. But while demand for green technologies, from hybrid cars to wind turbines, is soaring, investment in tidal power has lagged behind. ‘The technology is not yet proven but the nature of the sector is such that it requires debt financing,’ says Michael Liebreich, chief executive at New Energy Finance. The problem is that debt financiers are put off by the risks of investing in untested technologies. ‘There is a financing “valley of death” between the moment when you think you have a promising technology and the moment when it is sufficiently proven to be project financed,’ says Mr Liebreich. ‘That sort of valley of death can generally only be bridged by some sort of long-term visionary capital, either with governmental support or on the balance sheet of a very substantial and long-term-oriented corporation.’ But visionaries seem to be in short supply after the US left tidal power off the list of technologies eligible for the renewable energy production tax credit, a subsidy widely credited with sparking recent interest in wind farms and solar power. New Energy Finance estimates that the tax credit, along with various state incentives, together account for up to 65 per cent of the cost of a typical wind power project, with the tax credit alone accounting for more than half. Without such support, tidal power projects have struggled to gain traction. In the UK, government support has brought Marine Current Turbines, a rival tidal power group, to the verge of completing a field test of its turbines off the coast of Devon in England’s southwest, but the technology has yet to be commercialised. In the long run, the success of companies such as Verdant will

hinge on whether they attract the investment needed to lower the cost of tidal systems to the point where they become economically competitive with wind and solar power projects. But that will be difficult without a higher public profile and greater political support. Roger Bedard at the Electric Power Research Institute, an energy industry research and development group that is working with Verdant on the East River projects, says political uncertainty has clouded the outlook for renewable energy in the US. ‘In Europe, the incentives are spelled out but no one will invest in the US because the future is so uncertain,’ he says. Mr Bedard says a recent EPRI study showed that if tidal turbines could be produced on a commercial scale, tidal power systems could be more efficient than on-shore wind power in certain areas. One reason is predictability. Whereas wind patterns change from day to day or hour to hour, tidal flows are directly related to the position of the sun and the moon and can be calculated years in advance. Still, large numbers of tidal turbines would be required to produce the same amount of power as an average wind turbine. ‘They need to have a whole farm of these things,’ says Bruno Mejean, senior vice-president of structured finance at Nord LB, the German bank. ‘The economies of scale aren’t there yet.’ ‘It’s the last of the big energy sources we haven’t looked at,’ Mr Bedard says, ‘and I think it’s time.’ Source: Kevin Allison, ‘An alternative energy supply swimming against the tide’, Financial Times, 21 December 2005, p. 9. Copyright © 2005 The Financial Times Limited.

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4 February 2006

FT

Breaking the mould in Notting Hill and beyond LAURA COHN In the heart of London’s Notting Hill, behind a modest grey gate and a traditional mews house, hides a building that is part minimalist marvel, part family home. A collaboration between UK property entrepreneur Johnny Sandelson and Londonbased architect Seth Stein, it is an unusual Lshaped building, dominated by a long glass wall, framed in fresh white paint. Its courtyard provides the contrast with two tables – a big one for adults, and a small one for children – surrounded by a smattering of brightly coloured toys. ‘A good house is one you enjoy living in and looks beautiful,’ says father-ofthree Sandelson. From the street, it’s hard to imagine something so modern existing in an area best known for rows of terraced Victorians. After passing through the nondescript gate and walking down a cobblestone footpath, visitors first come upon the original brown stone mews house, which is now home to an office and wine cellar. Aside from Sandelson’s 1972 white Alpha Romeo in the drive, the scene is decidedly historic. From there, though, things get much more new world. To the left of the mews house, is that long expanse of glass, with massive glass doors revealing an open kitchen and a living room at the short part of the ‘L’. Wellgroomed plants dot the wooden deck and part of the roof. Sandelson, who was born in Holland Park and studied history at the University of Buckingham, has long had a passion for modern architecture. His wife Mary, a writer, claims that she knew from the moment she

met him that some day he would have to build his own home. Property has also been a lucrative profession. Sandelson started his own development business by borrowing against a flat he inherited in Chelsea and using the £100,000 to buy a place in central London. Since then, he’s invested in more than 1,000 residential and commercial schemes, mostly in his hometown, and launched GuestInvest, a hotel with buy-to-let rooms. ‘You should back what you know,’ he explains, echoing the wellknown philosophy of investment guru Warren Buffett. He picked the site of his own home, which used to host four or five mews houses that once served as stables, for the same reason. ‘It’s a neighbourhood I’ve always felt comfortable with,’ he explains. But, working with Stein, Sandelson was determined to do something unexpected – modern but also fun – with the space. Walking along the length of the courtyard, he points to an example: a discreet square of dark wooden panels hides a small swimming pool. He installed it for the kids, but admits to using it himself once in a while. Another example: the shape of the building, along with its floor-to-ceiling glass doors and windows, means that inhabitants can see what’s happening elsewhere on the ground floor at all times. As if to emphasise the point, Sandelson sits down on his living room couch and waves through the glass to his 2-year-old son, Sacha, in the kitchen. The toddler, sporting messy blonde curls and tiny Ugg boots, comes bounding in to join the tour.

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CASE 6.2

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CASE 6.2 CONT. In a way, the living room is a microcosm of the entire residence. At first glance, it seems entirely minimalist. A high ceiling crowns the space. Three leather couches – two deep chocolate brown and one white – form a horseshoe around a brown shag carpet. A spartan gas fireplace interrupts a blank white wall. On an adjoining wall, four large square paintings are solid blocks of blue, yellow, red and orange. But on the next wall, behind the centre couch, a large white built-in shelf is full of family photos and books on Picasso, Persian art and 20th century architecture. Further breaking up the formality, Sandelson’s 7-yearold daughter, Florence, cruises in on roller skates to offer up chocolate cookies. The first floor is accessed from the living room, up stairs constructed from American walnut beneath a wall that’s been painted red. These lead to a narrow 120 ft corridor that branches off into several of the home’s six bedrooms. The master bedroom covers 800 sq ft and includes a bathroom with a skylight over a long limestone countertop with his-and-hers sinks. (Sandelson notes that the counter is higher than usual to accommodate his 6 ft 3 in frame.) Even the shower continues the house’s theme of transparency, incorporating a small window overlooking the foliage outside. ‘It’s nice in London to be able to see green,’ says Sandelson, who also has a Steindesigned weekend home in Cornwall. After passing through his daughter’s room, which is filled with delightfully anti-

minimalist Barbie pink furniture, he moves to the second floor. This level includes his wife’s office and another bedroom for his nine-yearold son Jacob. The aim, Sandelson explains, was to create a light-filled, airy home that also incorporates distinct spaces for each member of his clan; a place for adults and children; work and play. He commissioned Stein, with whom he’d worked on a number of projects, because he was a ‘family architect’ as well as a modernist, and the house was completed in 2000. Sandelson, whose Blackberry is virtually glued to his hand, says he tries to bring the same spirit of innovation to his business, both in his residential developments and in GuestInvest, a scheme in which companies and individuals ‘buy’ a hotel room to use for up to 52 nights a year and rent out for the rest, taking 50 per cent of the income. The second hotel in the chain, Nest, will be located near Paddington station and is scheduled to open in 2007. He expects to bring the concept to foreign cities, including Madrid and Mumbai, next. It all sounds fairly glamourous for a man who started his professional career at commercial surveyor Nelson Bakewell, measuring warehouses full of baked beans and making photocopies. But, as his own home shows, Sandelson’s come a long way since then. Source: Laura Cohn, ‘Breaking the mould in Notting Hill and beyond’, Financial Times, 4 February 2006, p. 13. Copyright © 2006 Laura Cohn.

Discussion point 1. Compare and contrast the economic function of an ‘innovating’ entrepreneur with that of a ‘trading’ entrepreneur. Is it possible to make such a clear-cut distinction in the modern business world?

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CHAPTER 7

Entrepreneurship and economic development Chapter overview Economic development, its achievement and its consequences, is one of the most important issues facing the world today. This chapter considers the role of the entrepreneur, entrepreneurship and the entrepreneurial process in delivering economic development. This chapter also consider the role of specific cultural factors on entrepreneurial inclination and performance.

7.1 Entrepreneurship, economic performance and economic growth Since the early eighteenth century and the start of the industrial revolution an inevitable trend (albeit with some ups and downs along the way) has been for the world to get richer. Development and production technology and social organisation have advanced to enhance productivity. We are all much wealthier than our grandparents, and they more than their grandparents. Generally speaking, economic growth is regarded as a good thing. It brings wealth, improved health, better education, longevity, lower rates of child mortality, and, perhaps indirectly, more democracy, greater sexual equality and enriched prospects for personal development. The branch of economics that addresses how and why this happens is called developmental economics. Developmental economics has three, intertwined, branches: a theoretical branch that considers why productivity grows and how this leads to wealth creation; an empirical branch, which calls upon econometric techniques to develop an insight into how input factors (such as technology, the number of entrepreneurs, access to resources, and so on) are connected (correlated) with economic growth; and a policy branch that sets out to advise local, government and supranational-agencies (such as the World Bank and International Monetary Fund) on the best policies to adopt if economic growth is to be achieved. Developmental economics is concerned with economic systems at many levels of analysis: it might concern a neighbourhood, a city, a region, a nation state, a collective of nation states or the entire global economic system. It may also focus on the development of a specific cultural or religious group, aim to address differential development within a

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particular region – say rural versus urban – or target the development of a specific industrial sector – manufacturing or retailing, for example. For a long period, developmental economics was somewhat neglected, but there has been a resurgence of interest recently. This is for a number of reasons. First, the collapse of the centrally planned economies of the former Soviet Union (and along with them, some economies in the developing world) has presented a challenge to policy makers on how those countries can best enter the global economy. Second, the failure of much of sub-Saharan Africa to join in the general trend of economic growth – Africa ‘left behind’ – has led to another policy challenge, for both national governments in the West and supra-national agencies. Third, the general desirability of economic growth has been challenged because of its supposed cost in terms of environmental degradation, ‘increasing’ inequality and the ravages of ‘globalisation’ (although it must be said that those who most object to economic growth are those who have most benefited from it already). This chapter cannot address all the issues associated with economic development. Its concern is limited to the role of the entrepreneur and the entrepreneurial process in economic growth. What, then, is the entrepreneurs’ role? In fact there is no simple, agreed answer to this question. This will be for, by now, familiar reasons. First, there is a lack of agreement as to what consititutes an entrepreneur. Second, social-economic systems are extremely complex. It is difficult to disentangle what is cause and what is effect and how they are connected. Third, in laying claim to being a cause of economic growth, the entrepreneur ‘competes’ (conceptually of course) with other forms of economic organisation (government, the large capitalist bureaucracy, social networks) as the prime driver of economic growth. Two extreme positions can be discounted at once. The idea that entrepreneurs are not necessary at all (as espoused by extreme forms of central planning) does not hold for the simple reason that central planning does not work. Without any entrepreneurs at all, economic growth is extremely sluggish and even negative. The centrally planned economies of the former Soviet Union collapsed under their own contradictions. The only remaining centrally planned economies – Cuba, Turkmenistan and North Korea – are hardly great advertisments for economic advancement. At the opposite pole, an extreme free market liberalism, in which the entrepreneurial model is the only form of economic organisation advocated, does not seem to work either (although its proponents often suggest it has not ever really been tried). The tendency here is for a powerful economic elite (sometimes called a plutocracy) to emerge and seek, not entrepreneurial competition, but monopolistic exploitation. Without some form of government to set out and enforce the rules as it were, entrepreneurship is discouraged. It would seem, therefore, that entrepreneurs are essential for economic growth, but that they operate within, and contribute to, an economic system with other actors involved. What, then, of the entrepreneurs’ role? The difficulty in defining the role of the entrepreneur has already been considered in section 1.3. It is useful, however, to revisit those ideas with a specific emphasis on the way in which developmental economists see the entrepreneur. As with most branches of economics, developmental economics traces its origins to the classical (and Austrian) traditions. As noted, classical economics has difficulty with the entrepreneur. Entrepreneurship, and economic development, are inherently dynamic economic concepts, they have meaning only in the sense that an economic system can change over time, whereas the classical model is essentially static. At most, the classical model makes entrepreneurship synonymous with ‘management’, hardly a discriminating perspective.

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Moving away from this static picture, different economists with an interest in development issues have suggested different role for the entrepreneur. Joseph Schumpeter (1934) and Isreal Kirzner (1973) emphasised the role of the entrepreneur in identifying unexploited opportunities. Frank Knight (1921) suggested that entrepreneurs’ key role was one of accepting risk. John Harris (1973) proposes that entrepreneurs increase the probability that a particular (economic-growth-delivering) project will in fact be undertaken. Harvey Leibenstein (1968) emphasised the importance of entrepreneurs in creating markets where markets are lacking (technically, to correct market imperfections). The industrial organisational economic perspective (see section 6.1) focuses on the role of entrepreneurs in undermining and policing monopolies that tend to reduce social welfare. Econometric studies tend to show a correlation among the level of entrepreneurial activity, national wealth and economic growth. Such studies are difficult and may be challenged on two counts. First, there is the issue of defining entrepreneurs. Many use self-employment as a criterion. But self-employment is not necessarily the same as entrepreneurship (as defined above). Further, self-employment rates are often distorted by taxation policies that offer an advantage in claiming self-employment when, in a different region, the same job would be classified as employment. This said, such studies are revealing something, especially when compared with more obvious explanations of national wealth. The possession of natural resources that can be sold on world markets, for instance, would be expected to be a major factor in determining national wealth and economic growth. Not so. Countries with vast natural resources can often be quite impoverished (Russia, Nigeria) whereas those with very modest natural resources can be quite rich (Switzerland, Iceland, Luxemburg). The second issue is one of causality. Are regions wealthy (and with growing wealth) because entrepreneurs operate? Or do entrepreneurs emerge because the region is wealthy and of growing wealth? Econometrics is good at identifying correlations, but identifying the direction of causality is much more difficult. To the extent that developmental economics is achieving a consensus (and, if truth be told, on many issues the consensus is limited), it is that a major factor on the path to economic growth is not the elimination of government but the role of government in delivering effective, stable, honest economic governance.

7.2 National governance and entrepreneurship Thinkers have argued for over two and a half thousand years as to what the proper role of government should be. The debate is very Key learning outcome much leavened by the fact that more than any other institution in Recognition of the role of society, government is in a position to define its own role. Looking open, effective, open and around the world, it is clear that governments have interpreted their honest national governance in role (rights as well as responsibilities) in many different ways. Even the stimulation of a vigorous with the liberal democratic West, government in the USA differs entrepreneurial sector. from government in England, which differs from government in France, Italy and Scandinavia in many subtle (and unsubtle) ways. It is becoming increasingly apparent that good governance is a necessary (though perhaps not sufficient) condition for the emergence of a vibrant entrepreneurial class. There are a number of aspect to such governance, to which we now turn.

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Legalising entrepreneurship First and foremost, entrepreneurship must be legal. Centrally planned economies past and present made the entrepreneur a criminal – though not monolithically; Hungary, for example, was far more receptive to (discrete) entrepreneurs than was, say, Czechoslovakia. Even in regions where entrepreneurs are quite legal, legislation (for example, bankruptcy laws) still sends signals as to what is acceptable and what is not.

Size of the public sector Even in the ‘liberal’ democracies of Europe, the public sector still accounts for between 40 and 50 per cent of all national wealth spending. A high level of public spending discourages entrepreneurs in two ways. First, the public sector must be paid for, and that means taxation. High levels of taxation are likely to demotivate entrepreneurship. Second, if the public sector is delivering a service (over which it usually claims monopology rights), then the entrepreneur cannot. Entrepreneurs are ‘crowded out’. One solution (or at least compromise) that many governments are attempting is to put public services out to competitive tender in order to encourage entrepreneurs in.

Tariffs and trade barriers The world is increasingly global in terms of goods and service distribution and capital flows (but not so much in labour flows). Increasingly, entrepreneurs see the world, not just their local region, as their market. Tariffs and trade barriers (in effect additional taxes on imports) reduce the size of entrepreneurs’ markets, limiting their opportunities. Most politicians recognise this and the World Trade Organisation has been set up to reduce trade barriers. Some argue that entrepreneurs actually benefit from trade barriers as they protect them while they establish a foothold in a local market and that the economic strength of the West is a consequence of its protecting itself in the early stages of its economic growth. This position is highly controversial and this is not the place to debate it, save to say that if one group of entrepreneurs is ‘protected’, then another is likely to suffer as the locked out region retaliates with tariffs of its own. Further, there is no real evidence that those industries that were protected in their early stages fare any better (look, for example, at shipbuilding, textiles and car manufacturing in the UK.)

Taxation policies Taxation has been noted above in relation to the size of the public sector. But the issue of the impact of taxation on economic activity is complex. The economist Arthur Laffer famously pointed out that if taxation levels were 0 per cent, then government revenues would be zero. Similarly, if they were 100 per cent on all economic activity, government revenues would also be zero – because no one would have any incentive to do anything. So, he suggested, government revenues against taxation level were represented by a upturned U-shaped curve (see Figure 7.1). If taxation levels were too high, government could have its cake and eat it – reduce taxation (electorally popular), stimulate economic activity – not least entrepreneurial activity – and increase government revenues. This idea, more than any other, stimulated the

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Figure 7.1 The Laffer curve

‘supply-side revolution’ in the economic policies of Ronald Reagan and in the USA and Margaret Thatcher in the UK. The extent to which Laffer’s ideas are legitimate is, even to this day, controversial. Taxation brings in a number of other issues. Who or what should be taxed? Individual earnings, companies, purchase of goods and services, inter-company transactions? There is no easy answer. Taxing individuals acts as a discouragement to economic activity. Too high a taxation level will drive entrepreneurial activity underground into the grey or even black economy, at its best reducing tax revenues and distorting entrepreneurs’ strategic priorities. Taxing goods and services reduces transaction volumes. What government spends its tax revenues on also matters. Spending on entrepreneurial incubation will benefit entrepreneurs directly. Disbursem*nt to consumers will increase their spending power and so indirectly create opportunities for (some) entrepreneurs. Subsidies to incumbent firms, on the other hand, will create barriers to entry for new entrepreneurs. The post-communist Baltic states are experimenting with a flat-tax rate: company profits are not taxed at all, and all economic transactions are taxed at exactly the same rate, with some apparent success in terms of economic growth.

Inward investment policies Money is money! The capital that entrepreneurs need to invest in start-up and growth need not originate within their own nation state. It can come from abroad. The recent spectacular economic growth in China, for example, is fuelled to a large extent by inward investment. However, some governments (claiming concern over ‘uncontrollable’ capital flows or ‘theft’

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of national assets) impose regulation on inward investment either directly, or indirectly (for example, by insisting that the controlling owner be a local business). The inevitable result is that capital is restricted and becomes harder for entrepreneurs to get hold of. This pushes up the price of capital and so discourages entrepreneurs from initiating projects that might otherwise be economically viable.

Finance supply Even within the local capital system, governments control the supply of capital, either directly, by restrictive legislation over the banking sector, or indirectly by implementing policies that lead to high inflation or (and this is related) high interest rates. High interest rates and inflation increase the cost of capital and discourage entrepreneurship. They also push down the value of the local currency, which may encourage exporting entrepreneurs but makes life hard for those that have to import factors.

Legislative environment It is in the nature of governments to legislate. Legislation provides their primary means of governing. Generally speaking, entrepreneurs find legislation a burden. ‘Red tape’ takes time, costs money and restricts activity. And it is a distorting burden. Entrepreneurs usually find it harder to deal with than do large, established players, who have the resources to manage legislation, find an economy of scale in dealing with it and (often) are in a powerful position to lobby against legislation they do not like. The level and impact of legislation vary enormously. If the legislative burden is too great, entrepreneurial activity will be driven into the grey and black sectors. Even if in the ‘white’ sector, it can influence an entrepreneur’s strategy quite fundamentally. For example, in some parts of the world (India is a prime example), firms with more than a certain number of employees are not allowed to make redundancies without government approval. This takes time and is costly. Entrepreneurs respond simply by keeping their firms just below the number of employees at which this legislation kicks in. Restricting the growth of the business becomes an explicit strategic objective.

Customs and excise policy Perhaps the oldest way for governments to raise capital is to put a duty (a tax) on goods entering (and sometimes leaving) their realm. It is mentioned in the Bible. Customs duties act as a brake on economic activity. They limit the effective size of the entrepreneur’s market (for goods the entrepreneur wishes to sell outside the realm) and increase costs (on goods the entrepreneur wishes to bring into the realm). Further, high levels of customs duty encourage smuggling. Some might argue that smugglers are in fact entrepreneurs. Perhaps so, but they are entrepreneurs with highly distorted strategic priorities (not getting caught rather than growing the business).

Ethnic and religious discrimination Although ethnic and religious discrimination is rarely an explicit policy of governments, it is one which some governments may encourage or exploit for reasons of populism. And it is

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Corruption If there is one single feature of bad governance that is certain to discourage entrepreneurial activity it is government corruption. Corruption is a matter of degree. In the West, a government official taking a free holiday in (supposed) return for a small favour may make big news. In other parts of the world, corruption is so rife and endemic that the governments are simply labelled kleptocratic – ‘rule by thieves’. Corruption distorts entrepreneurial activity in several ways and at several levels. First, bribes are usually charged on transactions or in return for government permission (to set up a business, for example ). Second, the money taken in the form of bribes is more likely to find its way into a safe foreign bank account. In both cases, the bribe acts exactly as a tax does: increasing costs, reducing the volume of transactions and reducing incentives. The chance that it will find its way to investing in local business is slim. Third, corruption distorts behaviour. Kleptocracies usually have a small, rich ‘in’ elite and an ‘out’, impoverished mass of citizens. An individual with entrepreneurial flair will find it more rewarding to dedicate their energies to breaking into the elite than to innovating and creating new enterprises.

Chapter 7 Entrepreneurship and economic development

the ethnic groups that are most entrepreneurial that are most likely to be targeted. The history of such discrimination is both tragic and terrible. The experience Jewish people throughout history is one of the most notable and appalling. Sometimes it is more subtle: the Ibo of Nigeria, Chinese in Southeast Asia, the Lebanese in West Africa for example.

For all of these reasons, good governance and the rule of fair, effective law are now seen as the single priority for economic development policy making. The stimulation of a vibrant entrepreneurial sector is not the only objective, but it is a critical one.

7.3 National culture and entrepreneurial inclination Entrepreneurs are not robots blindly fulfilling an economic function. They cannot pursue opportunities or strive for economic efficiency without exhibiting some concern for wider issues. EntreRecognition that the behaviour preneurs are human beings operating within societies which define, of entrepreneurs is influenced and are to an extent defined by, cultures. The analysis of culture by, but not determined by, a falls properly within the domain of anthropology. The insights wide range of cultural and gained by anthropologists are of increasing interest to those who social factors. study business behaviour and performance. One of the driving forces behind this growth in interest has been the impressive economic growth achieved by countries in various parts of the world. Of particular interest at present are the ‘tiger’ economies of the Pacific Rim. The contribution that a range of structural, social and cultural factors have made to their success is widely debated. This debate has been rekindled by the recent meltdown in many economies in the region. If cultural factors are called upon to explain long-term success, how might they be called upon to explain short-term collapse? How do ‘cultural’ and ‘economic’ fundamentals act together? Many observers are now suggesting that culture means little in the face of primary economic realities.

Key learning outcome

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An analysis of culture is not a straightforward matter since a culture is not something that can be placed under a microscope. It is something we construct in order to explain the world rather than something we experience directly. There is a gulf between those who think that a culture can be examined as an objective reality and those who think it must be interpreted as something that impresses on our experience at a personal level. There is a debate (often quite heated) within the social sciences community as to the extent to which cultural differences are important. At one extreme there are those who see a much diminished role for culture. It is, at most, the ‘icing on the cake’ of an underlying psychic unity for mankind. Such an argument is often based on the fact that human beings are all descended from a relatively recent common ancestor and there has been no time for any fundamental evolutionary distinction between different human beings to take place. At the other extreme are those who argue that culture is all and that human beings are largely determined by their cultures: human nature is culture specific. Most social scientists take an intermediate position. Clearly, culture plays a role in entrepreneurial behaviour. An American entrepreneur tends to act differently from a Japanese one, who, in turn, behaves differently from a Peruvian one. There are not only great differences between these cultures which influence the way that entrepreneurs work, there is also a wide variety of ways in which individual entrepreneurs work within these cultures. Culture is expressed in both the value judgements an individual makes and the value system of their wider community. What is at issue is the extent to which these differences reflect deep cultural factors or ‘mere’ social and economic local contingencies. George and Zahra (2002) explore this issue, and Busenitz and Lau (1996) develop a cognitive model of the effects of culture on new venture creation. Mitchell et al. (2002) examine three questions related to the link between entrepreneurship and national culture using a cognitive approach: Are entrepreneurs different in their cognition? Are these cognitions universal among entrepreneurs? And do they vary across national culture? They conclude that entrepreneurs (as a group) have a cognition distinct from non-entrepreneurs, and that this cognition is largely universal, but that there is some variation in some factors across different national cultures. Mitchell et al. (2000) undertook a cross-cultural study of entrepreneurial cognition based on the existence of three types of cognitive script. A cognitive script is a knowledge structure that a decision maker has access to. The types of script in this study were specified as: • arrangement scripts relating to knowledge of contacts, relationships, and asset and resource availability; • ability scripts relating to the individual’s assessment of their own technical and general managerial abilities; • willingness scripts relating to the individual’s commitment to starting or developing the venture and including knowledge of business opportunities, tolerance of ambiguity and confidence in success. While recognising the study’s limitations, the authors conclude that such scripts do account for variations in the start-up decision, that the scripts do vary (to a degree) by culture, and that cultural effects moderate the impact of the scripts on the start-up decision. Another study, by Hartenian and Gudmundson (2000), evaluates the benefits of cultural diversity within small firms and considers whether it should be an explicit objective for the entrepreneur. There is not scope within this book to consider all these issues in the depth they deserve. We must be content to note that entrepreneurs are necessarily the product of their cultures

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Language The exact number of languages in the world is debated and depends on where the boundary between languages and dialects is drawn. Most experts agree on a figure of around 6,500. These are collected into about ten or so major language families that share vocabulary and grammatical characteristics and that experts assume emerged from a common ancestral language. Different languages within a family are not necessarily mutually understandable (English and German, for example are from the same sub-family). Language is a logistical issue in entrepreneurship as language differences limit communication, prevent contracts being drawn up and so inhibit trade. However, the opportunity to trade between different language groups is often strong enough to encourage the formation of ‘pidgins’ and ‘creoles’ that provide a basic common language. These were important in European trade with the Caribbean during the seventeenth century, for example, and have been observed in many parts of the world. The growth of global lingua franca such as English reflects the benefits of a common tongue for entrepreneurs working on a global scale. Such logistical issues are evident. What is more controversial is the suggestion by some social scientists that language creates a human’s entire picture of the world (the Sapir–Whorf hypothesis) and so is fundamental to explaining cultural experience and differences. Thus, the argument might go, entrepreneurship is facilitated by the presence of words for concepts such as ‘risk’, ‘opportunity’, ‘investment’. Speakers of languages that do not have such words should not be expected to think about entrepreneurship (if they have such a word) in the same way as a speaker of English (or other European language that has equivalent words) might do.

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and that their cultures mould and influence their actions. What follows is meant to give a flavour of the factors which are significant to understanding entrepreneurship in a cultural setting and how they might be approached.

Religious beliefs Religious belief is an important factor in shaping a culture. It leads to a view of the world which influences the individual’s approach to entrepreneurship. The sociologist Max Weber famously associated the industrial revolution in western Europe and the USA with the attitudes engendered by Protestant religious beliefs known as the ‘Protestant work ethic’. Modern commentators speculate on the influence of Confucian ‘discipline’ to the success of Asian economies. Islamic belief disallows (or at least limits) the setting of interest rates. Such prohibitions on usury were a common part of Christian belief until quite recently. Modern economics sees interest rates not so much as a powerful lender exploiting a weaker borrower, but as something fundamental to setting the price of money and directing it to where it will work hardest. The Islamic banking system has adopted an alternative system of monetary charges to achieve this. Some religious systems set in place quite rigid social stratifications that dictate the class and even job that an individual may take up. Modernisation is providing one means for enterprising individuals to break out of this structure. In India, many entrepreneurs have emerged from the Jain community because their strict vegetarianism and historical refusal to work with animal products excluded them from most conventional occupations, hence they turned to trading. Refer to Devashis (2000) and Choudhury (2001) for excellent reviews of venture capital in India and the Islamic world, respectively.

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Personal relationships The type and scope of personal relationships that a culture encourages will be a critical factor in the way entrepreneurial behaviour is expressed. An important study by the Dutch sociologist of business, Geert Hofstede (1980a), analysed human relationships along four dimensions: • Power distance – the degree of authority that people expect between managers and subordinates, and their willingness to accept that power is not distributed equally. • Uncertainty avoidance – in essence, this is the desire to be in a situation where uncertainty is minimised. Its opposite is a willingness to take risks. • Collectivity – the need to feel that one is part of a group and that one’s actions are sanctioned by that wider group. Its opposite is a desire to exhibit individualistic behaviour. • Masculinity – the degree to which the culture emphasises ‘masculine’ values such as the acquisition of money, prioritising the material over the spiritual, a lack of concern versus a caring attitude, and so forth. According to Hofstede’s study, these four factors give a good account of how attitudes towards personal relationships give rise to different styles of entrepreneurial behaviour over a wide range of national cultures. Hayton et al. (2002) provide a review of 21 studies of how entrepreneurial characteristics vary across national cultures using Hofstede’s (and other) frameworks. They offer a useful discussion of the methodological difficulties in establishing the link between culture and entrepreneurship and suggest directions for future study.

Attitude towards innovation Innovation lies at the heart of entrepreneurship, yet to believe in innovation we have to see the world in a certain way. We have to believe in a future that will be different from the present. We have to believe that we can act so as to influence the world and change it by our actions. Further, if we are to be encouraged to innovate, we must believe that it is appropriate that we are rewarded for our efforts in developing innovation. Many west Europeans will regard these things as ‘obvious’. However, they are beliefs which are sensitive to culture. While a west European sees the future as something which brings uncertainties ‘towards’ them, many cultures, some in West Africa for example, have a different perspective. They draw a distinction between a ‘potential time’ which is full of things that must happen and a ‘no-time’ of things which might or might not happen. The potential time is here and now, a part of the present, whereas no-time is not really a part of time at all. From this perspective, there really is no such thing as the ‘future’ in the western sense. Even if we believe in a future, we may not believe that we can influence it. Physical science has often emphasised that the future is determined. Marxism is founded on a belief that the world evolves along a predestined path. If an innovation occurs, it occurs because it was meant to occur. Hence, it is not the result of personal inventiveness which might not have occurred, and if this is so, why then should we reward the innovator? Hence innovations belong to the world at large, not the individual entrepreneur. Mark Casson (1994) has suggested that such a cultural perspective might be significant to the development of entrepreneurship in the post-communist world.

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A network is the framework of individual and organisational relationships which form the stage upon which entrepreneurial performance is played. It is composed of personal and social contacts as well as economic relationships. A network is shaped by the culture in which it is formed. The network does not just provide a route for people to sell things to each other. It is a conduit for information. A well-developed network is crucial if entrepreneurial behaviour is to express itself. It defines the terrain in which new business opportunities might be identified and assessed, and it provides a means by which contracts are agreed and risk might be evaluated and shared. It offers an escape route for people who do not think their investments are safe. This occurs not only through formal structures such as stock markets but also through informal confidences and relationships. The structure and functioning of such networks is sensitive to a wide range of cultural factors. The extent to which cultural values strengthen links (so locking individuals together), the scope of linkage they allow (within family group or outside family group), the conditions under which links may be broken (and the penalties for initiating breakage), and the ease with which new links may be formed (new relationships built) are all, to a degree, culturally determined. It is neither possible nor particularly useful to draw hard and fast rules about managing within a particular culture. However, the idea that a culture provides a perspective within which individuals work might suggest an approach. The entrepreneur must recognise that an individual’s response to a particular situation will to some extent be shaped by cultural influences. This will affect the way they can be led and motivated. However, the entrepreneur must not forget that individuals are individuals with their own characteristics, and do not necessarily behave with a collective consciousness. Entrepreneurs will also recognise that their own decision making is the product of their cultural experiences. Recognition of these things is becoming increasingly important as the opportunities for entrepreneurial ventures become ever more international. In the global arena, the effective entrepreneur learns to use cultural differences to advantage rather than be impeded by them. Entrepreneurs who have built global concerns such as Rupert Murdoch (News International) and the late ‘Tiny’ Rowland (Lonhro) are renowned for their ability not just to manage people within one culture but to manage across cultures.

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Networks

Summary of key ideas • Entrepreneurs and the entrepreneurial process are recognised as playing a critical role in the economic development of regions and nations.

• There is lack of clarity as to the entrepreneur’s exact role due to: – disagreement as to what, exactly, constitutes an entrepreneur; – the function of the entrepreneur in an economic system (different economists prioritise recognising opportunities, taking risks, providing managerial expertise, creating markets, policing monopoly); – knowledge about how entrepreneurs interact with other aspects of the economic system: government, existing commercial bureaucracies, social networks;

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– difficulty in identifying the direction of causality: do entrepreneurs create wealth, or does wealth encourage entrepreneurship?

• Entrepreneurs thrive best where there is good, effective and open governance in relation to: – providing a supportive legislative environment; – restraint on the size of the public sector; – low and non-distorting taxation; – support for open and free international trade; – non-discrimination against ethnic and religious minorities; – a zero-tolerance attitude towards corruption.

• The influence of culture on entrepreneurial inclination should not be overstated (it seems to be a pan-human phenomenon). However, cultural nuances are provided by: – differing cognitive scripts; – language and religious beliefs; – different attitudes towards interpersonal relationships; – attitudes towards innovation; – the existence of different types of social networks.

Research themes Entrepreneurship and government economic development policy at an international level Select a sample of countries around the world (do not think just about the better known countries). This sample might include a representative mix of nations at various stages of economic development and regional location. Find government-sponsored websites that are dedicated to economic development. Select those that represent a reasonably clear statement of economic development policy, goals and strategy. Undertake a content analysis with an emphasis on how the terms ‘entrepreneur’ and ‘entrepreneurship’ are related, regarded and prioritised within that statement of development goals. Consider how the terms are represented at both a local and international level; look also at how the concepts are linked to ideas such as inward investment. Compare and contrast the findings. Is there any pattern across regional and/or stage of economic development level? How do your findings correlate with key economic indicators such as gross domestic product (GDP), per-capita GDP (GDP divided by population) and overall economic growth rate. You should find these on the government website you are investigating, but if possible use an independent standardised source (see below). P.S. Don’t forget to reflect on how the fact that the sites you have visited may not have been in the nations’ own language may have skewed your findings.

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An interesting issue is how the structure of the venture capital industry – the main buyer of entrepreneurs’ services – relates to economic development. Obtain information on GDP, per-capita GDP and GDP growth rate from a reliable source (see below). A good way to represent this information is to use a bubble plot with GDP along the horizontal axis (all converted to the same US dollars – don’t forget that comparing GDPs involves assumptions about exchange rates, but that should not complicate this project greatly), GDP growth along the vertical axis and the bubble itself representing population size. Undertake a comparative analysis of the venture capital industries in each selected country. This should be to a standardised procedure with quantitative figures (e.g. number and size of deals, number of firms), and semi-quantitative (e.g. industry ownership structure) and qualitative (e.g. relationship with government, management culture, etc.) factors considered. The more factors considered the better, but be prepared to discuss how comparisons between factors are being made. How does the venture-capital industry size, structure and complexity map against the bubble diagram? Again, think carefully about the criteria you are using to compare industries at the national level. What conclusions can you draw? Don’t forget to comment on the fact that many venture capital firms operate internationally and not just in their own national arena. A useful starting resource for this project is the list of reviews of national venture capital industries in section 20.1.

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Economic status, growth and venture capital structure

For both of these projects there are a number of sources of statistics on national economies on the internet. Ask your learning resource centre or library about the sources that your school or university subscribes to.

Key readings A classic statement of the problem of integrating ideas on entrepreneurship with theories of economic development is: Leff, N.H. (1979) ‘Entrepreneurship and economic development: the problem revisited’, Journal of Economic Literature, Vol. 17, pp. 46–64. A slightly more conceptual paper, but one with a good conceptual and historical perspective, is: Brouer, M.T. (2002) ‘Weber, Schumpeter and Knight on entrepreneurship and economic development’, Journal of Evolutionary Economics, Vol. 12, pp. 83–105.

Suggestions for further reading Acs, Z.J. and Storey, D.J. (2004) ‘Entrepreneurship and economic development’, Regional Studies, Vol. 38, No. 8, pp. 871–7.

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Mitchell, R.K., Smith, B., Seawright, K.W. and Morse, E.A. (2000) ‘Cross-cultural cognitions and the venture creation decision’, Academy of Management Journal, Vol. 43, No. 5, pp. 974–93. Mitchell, R.K., Smith, J.B., Morse, E.A., Seawright, K.W., Peredo, A.M. and McKenzie, B. (2002) ‘Are entrepreneurial cognitions universal? Assessing entrepreneurial cognitions across cultures’, Entrepreneurship Theory and Practice, Summer, pp. 9–32. Morden, T. (1995) ‘International culture and management’, Management Decision, Vol. 33, No. 2, pp. 16–21. Nijkamp, P. and Stough, R.R. (2002) ‘Special issue on entrepreneurship and regional economic development’, Annals of Regional Science, Vol. 36, No. 3, pp. 369–71. Puffer, S.M., McCarthy, D.J. and Peterson, O.C. (2001) ‘Navigating the hostile maze: a framework for Russian entrepreneurship’, Academy of Management Executive, Vol. 15, No. 4, pp. 24–36. Sage, G. (1993) ‘Entrepreneurship as an economic development strategy’, Economic Development Review, Vol. 11, No. 2, pp. 66–7. Schaper, M. (1999) ‘Australia’s aboriginal entrepreneurs: challenges for the future’, Journal of Small Business Management, Vol. 37, No. 3, pp. 88–93. Schaper, M. (2002) ‘The future prospects for entrepreneurship in Papua New Guinea’, Journal of Small Business Management, Vol. 40, No. 1, pp. 78–83. Schloss, H.H. (1969) ‘The concept of entrepreneurship and economic development’, Journal of Economic Issues, Vol. 2, pp. 228–32. Schumpeter, J.A. (1934) The Theory of Economic Development. Cambridge, MA: Harvard University Press. Sui, Wai-Sum and Martin, R.G. (1992) ‘Successful entrepreneurship in Hong Kong’, Long Range Planning, Vol. 25, No. 6, pp. 87–93. Tan, J. (1996) ‘Characteristics of regulatory environment and impact on entrepreneurial strategic orientations: an empirical study of Chinese private entrepreneurs’, Entrepreneurship Theory and Practice, Vol. 21, No. 1, pp. 31–44. Trulsson, P. (2002) ‘Constraints of growth-orientated enterprises in the southern and eastern African region’, Journal of Developmental Entrepreneurship, Vol. 7, No. 3, pp. 331–9. Wallace, S.L. (1999) ‘Social entrepreneurship: the role of social purpose enterprises in facilitiating community economic development’, Journal of Developmental Entrepreneurship, Vol. 4, No. 2, pp. 153–74. Wennekers, S., van Wennekers, A., Thurik, R. and Small, P. (2005) ‘Nascent entrepreneurship and the level of economic development’, Business Economics, Vol. 23, No. 3, pp. 293–310. Wrenn, C. (2004) ‘Entrepreneurship and economic development: a framework for policy’, International Journal of Entrepreneurship and Innovation Management, Vol. 4, No. 1, p. 1. Yu, T.F. (1987) ‘Adaptive entrepreneurship and the economic development of Hong Kong’, World Development, Vol. 26, No. 5, pp. 897–911. Zapalska, A. (1997) ‘Profiles of Polish entrepreneurship’, Journal of Small Business Management, April, pp. 111–17.

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Zapalska, A., Brozik, D. and Shuklian, S. (2005) ‘Economic system of Islam anmd its effect on growth and development of entrepreneurship’, Problems and perspectives in management, Vol. 1, No. 5, pp. 5–10.

Selected case material CASE 7.1

18 January 2006

FT

How start-ups are helping countries to catch up JONATHAN MOULES Alejandro Pitashny raised more than a few eyebrows when he left a comfortable job at Deutsche Bank in London to return to his native Argentina to start a business during the worst moment of the country’s financial crisis. Four years later, the strategy appears to be paying off. José, which Mr Pitashny created with two former school friends, exports luxury tea and herbal infusions to Britain, the US, continental Europe, the Middle East and Asia. Although sales were just $100,000 in 2004, they grew by about 500 per cent last year. That someone could forge such an entrepreneurial success in one of the world’s middle-income countries is not surprising to the authors of the Global Entrepreneurship Monitor, the world’s largest analysis of startup activity, which published its seventh annual survey this month. More than 150 academics, from 35 countries across five continents, helped compile the data, dividing the world into middleincome and high-income economies based on their per capita gross domestic product and economic growth rate. They found that middle-income countries had a larger share of individuals engaged in a business venture with high growth potential

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Zapalska, A. and Edwards, W. (2001) ‘Chinese entrepreneurship in a cultural and economic perspective’, Journal of Small Business Management, Vol. 39, No. 3, pp. 286–92.

as well as higher percentages of people starting businesses than in high-income countries. The survey, jointly led by Babson College in the US and London Business School, also noted a direct link between per capita growth rates in middle-income countries and the level of innovative entrepreneurial activity in these countries. Where Mr Pitashny is less typical of the GEM survey is in his use of technology, or lack of it. Probably the biggest innovation at José is its use of hand-tied muslin sacks rather than conventional bags to hold its tea. The GEM research found that entrepreneurs often help drive new technology adoption in middle-income economies. This, in turn, is helping to close the per capita income gap between middle- and high-income countries, according to Maria Minniti, GEM research director and associate professor of economics and entrepreneurship at Babson College. These technologies might not be cutting edge, Ms Minniti adds. But middle-income countries can get more out of them because they are starting from scratch. ‘China is growing by importing technology and combining it with its competitive advantage, which is cheap labour,’ she says. ‘A large

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CASE 7.1 CONT. proportion of the catch-up effect by such countries is due to entrepreneurship. The technologies they deploy are not new to the world but they are new locally and that is good enough to create this catch-up effect.’ Entrepreneurship does not have to be innovative to benefit an economy since the mere competitive threat of a new business can help drive down prices and raise quality of service, Ms Minniti notes. ‘Whether you are talking about the American guys in the garage who create a new kind of computer or the African woman who creates another basket-weaving business, entrepreneurship is good for an economy.’ However, she adds that the ideal for economies is to foster high-growth companies, which tend to be more innovative by nature. It is not enough just to have a large number of start-up businesses. Venezuela, where one-quarter of the working population is running start-ups, has the highest rate of start-up activity in the world. But most of these businesses will not survive six months. Federico Fernández, who compiled the GEM data for Venezuela, says: ‘The Venezuelan spirit has always been to look around and do something. But this has been driven by the bad economic situation and it does not produce economic growth.’ Entrepreneurs in middle-income countries can also lack the government support enjoyed in richer nations. Mr Pitashny at José recalls being laughed out of the Chamber of Tea and Coffee Producers in Buenos Aires after asking for help setting up. ‘To do business in Argentina is to overcome constant problems,’ he says. Early-stage entrepreneurs in high-income countries are more likely to become established business owners than those in poorer countries, according to GEM. This was linked

to the finding that people in richer countries tended to start opportunity-inspired businesses after spotting a gap in the market rather than necessity-based companies, needed to put food on the table. GEM’s data showed that countries with a higher share of opportunity-driven entrepreneurship have a lower share of early-stage business failures than countries with a high share of necessity-driven entrepreneurship. Entrepreneurs are good for rich nations but chiefly if they introduce cutting-edge technologies, says GEM. ‘For these countries, it is all about innovation,’ Ms Minniti says. An example of this is Olivia Lum, recently named south-east Asia’s richest businesswoman by Forbes magazine. Although Ms Lum was raised as an orphan in a tin-roofed hut in Malaysia, she made money in prosperous Singapore by spotting an opportunity in the water treatment industry. The challenge for the rich nations is to create effective capital markets to supply the money needed for research and development of new ideas, according to GEM. The good news is that the amount of venture capital investment in high-technology companies increased in 2004, the first time it had done so since the dotcom bubble burst in 2000. However, North America continues to have a significant lead in the use of venture capital. There, 84.1 per cent of venture capital is invested in high-tech companies, compared with just 20 per cent in Europe. Bill Bygrave, a professor at Babson and a member of the GEM co-ordination team, admits that venture capital funding is a necessary but not unique requirement for the growth of high-tech companies. ‘Venture capital accelerates commercialisation – it doesn’t fund inventions,’ he says. Mr Bygrave adds that the gap in investment between Europe and the US is worrying. ‘I just don’t see that gap closing.’

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CASE 7.2

bubble burst in 2000, you could almost hear the snigg*ring in Europe at all the money they felt had been wasted in the US. ‘However, on the 10th anniversary of Netscape’s IPO [initial public offering] last August, the market capitalisation of just four of the largest internet companies – Google, Yahoo!, eBay and Amazon – exceeded all the venture capital money that had gone into the dotcom market.’ Aversion to risk and fear of failure may be the greatest threat to developing highgrowth innovative companies in richer nations – for example, in Europe. Source: Jonathan Moules, ‘How start-ups are helping countries to catch up’, Financial Times, 18 January 2006, p. 11. Copyright © 2006 The Financial Times Limited.

24 January 2006

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It is not just differences in the total amounts of money invested. The average amount of venture capital pumped into an American company was $8.7m in 2004, compared with $2.7m for European companies and $537,000 for those in Japan. US companies took 61 per cent of the total venture capital invested in Europe, Japan and the US combined but only accounted for 27 per cent of the total. This implies US venture capitalists were more selective about where they invested but poured more money into companies that they backed. Mr Bygrave claims this is a sign that European investors are more ‘gun shy’ than their US counterparts, who show less risk aversion and are more willing to return to the stock market after a crash. ‘When the dotcom

FT

What China could learn from India’s slow and quiet rise YASHENG HUANG In an article published in 2003 called ‘Can India overtake China?’ Tarun Khanna of Harvard Business School and I argued that India’s domestic corporate sector – strengthened by the country’s rule of law, its democratic processes and relatively healthy financial system – was a source of substantial competitive advantage over China. At that time, the notion that India might be more competitive than China was greeted with wide derision. Two years later, India appears to have permanently broken out of its leisurely ‘Hindu rate of growth’ – an annual gross domestic

product increase of about 2 to 3 per cent – and its performance is beginning to approach the east Asian level. From April to June 2005, India’s GDP grew at 8.1 per cent, compared with 7.6 per cent in the same period the year before. More impressively, India is achieving this result with just half of China’s level of domestic investment in new factories and equipment, and only 10 per cent of China’s foreign direct investment. While China’s GDP growth in the last two years remained high, in 2003 and 2004 it was investing close to 50 per cent of its GDP in domestic plant and equipment – roughly equivalent to India’s

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CASE 7.2 CONT. entire GDP. That is higher than any other country, exceeding even China’s own exalted levels in the era of central planning. The evidence is as clear as ever: China’s growth stems from massive accumulation of resources, while India’s growth comes from increasing efficiency. The microeconomic evidence also casts India in a better light. While India’s stock market has soared in recent years, the opposite has happened in China. In 2001, the Shanghai Stock Market index reached 2,200 points; by 2005, half the wealth had been wiped out. In April 2005, the Shanghai index stood at 1,135 points. This sharp deterioration occurred against a backdrop of GDP growth exceeding 9 per cent a year. It is difficult to find another country with this strange combination of superb macroeconomic performance and dismal microeconomic performance. It is a matter of time before the two patterns converge. Why, then, is India gaining strength? Economists and analysts have habitually derided India’s inability to attract FDI. This single-minded obsession with FDI is as strange as it is harmful. Academic studies have not produced convincing evidence that FDI is the best path to economic development compared with responsible economic policies, investment in education and sound legal and financial institutions. In fact, one can easily think of counterexamples. Brazil was a darling of foreign investors in the 1960s but ultimately let them down. Japan, Korea and Taiwan received little FDI in the 1960s and 1970s but became among the world’s most successful economies. An economic litmus test is not whether a country can attract a lot of FDI but whether it has a business environment that nurtures entrepreneurship, supports healthy competition and is relatively free of heavy-handed political intervention. In this regard, India has done a better job than China. From India

emerged a group of world-class companies ranging from Infosys in software, Ranbaxy in pharmaceuticals, Bajaj Auto in automobile components and Mahindra in car assembly. This did not happen by accident. Although it has many flaws, India’s financial system did not discriminate against small private companies the way the Chinese financial system did. Infosys benefited from this system. It was founded by seven entrepreneurs with few political connections who nevertheless managed, without significant hard assets, to obtain capital from Indian banks and the stock-market in the early 1990s. It is unimaginable that a Chinese bank would lend to a Chinese equivalent of an Infosys. With few exceptions, the world-class manufacturing facilities for which China is famous are products of FDI, not of indigenous Chinese companies. Yes, ‘Made in China’ labels are still more ubiquitous than ‘Made in India’ ones; but what is made in China is not necessarily made by China. Soon, ‘Made in India’ will be synonymous with ‘Made by India’ and Indians will not just get the wage benefits of globalisation but will also keep the profits – unlike so many cases in China. Pessimism about India has often been proved wrong. Take, for example, the view that India lacks Chinese-level infrastructure and therefore cannot compete with China. This is another ‘China myth’ – that the country grew thanks largely to its heavy investment in infrastructure. This is a fundamentally flawed reading of its growth story. In the 1980s, China had poor infrastructure but turned in a superb economic performance. China built its infrastructure after – rather than before – many years of economic growth and accumulation of financial resources. The ‘China miracle’ happened not because it had glittering skyscrapers and modern highways but because bold economic liberalisation and institutional reforms – especially agricultural

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invest in rural education soon, it may lose its true competitive edge over India – a well-educated, skilled workforce that drives manufacturing success. Unless China embarks on bold institutional reforms, India may very well outperform it in the next 20 years. But, hopefully, the biggest beneficiary of the rise of India will be China itself. It will be forced to examine the imperfections of its own economic model and to abandon its sense of complacency acquired in the 1990s. China was light years ahead of India in economic liberalisation in the 1980s. Today it lags behind in critical aspects, such as reform that would permit more foreign investment and domestic private entry in the financial sector. The time to act is now.

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reforms in the early 1980s – created competition and nurtured private entrepreneurship. For both China and India, there is a hidden downside in the obsession with world-class infrastructure. As developing countries, if they invest more in infrastructure, they invest less in other things. Typically, basic education, especially in rural areas, falls victim to massive investment projects which produce tangible and immediate results. China made a costly mistake in the 1990s: it created many worldclass facilities but badly underinvested in education. Chinese researchers reveal that a staggering percentage of rural children could not finish secondary education and many rural primary schools closed due to lack of funds. India, meanwhile, has quietly but persistently improved its educational provisions, especially in the rural areas. For sustainable economic development, the quality and quantity of human capital will matter far more than those of physical capital. India seems to have the right policy priorities and if China does not

Source: Yasheng Huang, ‘What China could learn from India’s slow and quiet rise’, first published in the Financial Times, 24 January 2006, p. 17. Copyright © 2006 Yasheng Huang.

Discussion points 1. If you were a policy maker for entrepreneurship development in a middle-income country, what would be your three key policy moves to support entrepreneurship? 2. How do you see the partnership between government and entrepreneurs in attracting foreign direct investment (FDI)?

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CHAPTER 8

Not-for-profit and public entrepreneurship Chapter overview Entrepreneurship in the domain where the profit motive, and indeed the chance to make profits, is non-existent or very limited is an area of rapidly growing interest. Referred to as social entrepreneurship, it concerns the adoption of an entrepreneurial approach by managers in the not-for-profit (e.g. charities, non-governmental organisations, faith organisations) and public sectors. This chapter considers the potential of and limitations to applying ideas developed in the study of for-profit (commercial) entrepreneurship to social entrepreneurship, It considers the question of whether the social entrepreneur can be thought of as an entrepreneur proper and, if so, how he or she might be distinguished from the commercial entrepreneur. The chapter concludes that the ‘pure’ commercial entrepreneur and ‘pure’ social entrepreneur should be thought of as ends of a spectrum rather than as distinct, non-overlapping types.

8.1 The conceptual challenge of social entrepreneurship

Key learning outcome An appreciation of critical reasons why the study of traditional ‘commercial’ entrepreneurship has found difficulties in reconciling the idea of the not-for-profit and public sector – the ‘social’ – entrepreneur; how and why this integration is occurring; and the conceptual and managerial opportunities it presents.

The social entrepreneur – an entrepreneur who works with the objective of creating positive social change rather than ‘mere’ profit – seems to be an actor whose time has come. Hopes are high. A leading British politician said recently: ‘Just as business entrepreneurs have helped cure the British economic disease [the low growth, high inflation and high unemployment of the 1970s], so social entrepreneurs can help cure Britain’s social malaise.’ Traditionally, entrepreneurship, as an activity, has been intimately associated with the world of business and making profits. However, the picture of entrepreneurship we have developed so far has insights that can go beyond purely profit-motivated activity. In particular, we have seen that: • entrepreneurship is a style of management; • entrepreneurs are managers who are very effective at pursuing opportunity and creating change;

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• entrepreneurship is a social as well as an economic activity; and • the motivations of the entrepreneur are varied and go beyond a desire to make money; they also involve a desire to create a new and better world.

Chapter 8 Not-for-profit and public entrepreneurship

Figure 8.1 The hierarchy of entrepreneurship in its wider social context

From this it is clear that we might take a much wider view of ‘entrepreneurship’ and consider many activities outside the world of business as ‘entrepreneurial’. For example, a great cultural, artistic or political endeavour could be entrepreneurial. It is not uncommon to hear talk of ‘entrepreneurial’ artists or politicians. This is not meant to imply that such people are simply interested in making money out of being artists or politicians (though, of course, many do); rather, it is to imply that such people approach their careers with drive, ambition and a clear vision of what they want to achieve. In order to fulfil their ambitions they are willing to develop and use entrepreneurial skills such as effective communication and leadership. A hierarchy of entrepreneurial activities functioning in different social areas can be constructed as shown in Figure 8.1. At the core is what we conventionally understand to be entrepreneurship, namely managing the profit-making venture. At the next level is management of non-profit-making organisations such as charities. Above this we might place endeavours in the social and cultural arena such as sporting and artistic ventures. At the top of the hierarchy there are activities aimed at creating wholesale social change such as political activity. These levels are not completely separate, of course, and there will be some overlap. Even though we can recognise entrepreneurship in these wider social arenas it is wise to keep management of the profit-making venture as the central concern for entrepreneurship. If we fail to do so, the subject could become so wide as to be in danger of losing its coherence as a field of study. Therefore, this book will concentrate on profit-motivated activities. However, this does not mean that insights gained from the management of the profit venture cannot be used to help achieve success in not-for-profit ventures, or, conversely, that an understanding of success outside the business sphere cannot be used to illuminate the ways in which entrepreneurship might be improved within that sector. In a narrow sense, many not-for-profit activities may still demand a managerial approach. They often involve managing money. Thus the charity still has to attract financial resources to distribute to its clients; sport may involve financial sponsorship; artists must still sell their creations; political parties must attract money from supporters if they are to function. All these activities can call upon insights from other business areas such as marketing and human resource management. In a broader sense, though, entrepreneurship, perhaps more than many other management disciplines, goes beyond the mere management of money. Money is

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just a means to an end for the entrepreneur, and the end is the creation of a better world. We may offer a description of entrepreneurship at a fundamental level by claiming that it is about

creating and managing vision and communicating that vision to other people. It is about demonstrating leadership, motivating people and being effective in getting people to accept change. This description reflects entrepreneurship as a management skill practised and perfected in a human setting. As such, it can play a crucial part in driving any venture forward, whether that venture be in the business, social, cultural or political domain. The previous chapters have emphasised the difficulty in defining ‘the entrepreneur’ as an economic and social actor. As discussed, different (complementary) approaches place different emphasis on the economic, managerial and psychological aspects of entrepreneurial behaviour and effect. Despite this eclecticism, it remains difficult to disentangle the entrepreneur from the manager. Two things that all economic approaches seem to agree on, whether they take a classical, Austrian or competitive monopoly stance (see the review in Chapter 6) are that, firstly, the entrepreneur is motivated by creating new profits by the exploitation on new opportunities, and that consequently, the entrepreneur acts in a commercial setting where those profits can be accumulated. This creates a great tension within the discipline of entrepreneurship studies. As has been discussed in Chapter 5, the motivations of the entrepreneur are many, and although making a profit may be requisite to the survival of the entrepreneur’s organisation, it is far from being their sole motivation. Economic approaches are quite myopic to the distinction between the entrepreneur and the manager. Managers work in many areas that are not purely commercial: the public sector, charities, non-governmental organisations, religious organisations and aid agencies are notable examples. The tension, then, is this: if entrepreneurs are managers, and if not all managers work for profit-motivated organisations and institutions, are economic approaches to the study of entrepreneurship that emphasise profit guilty of excluding many types of entrepreneur – the title social entrepreneur is becoming established – from the feast? This issue resolves itself into four questions. First, how widely would we wish to cast the net in applying the term ‘entrepreneur’? This is not just a matter of flattery. It draws in the question of how the resources used to both support and study entrepreneurship are used. Second, given that the net is cast quite wide, how would we distinguish between the classical ‘commercial’ and the ‘social’ entrepreneur? This leads on to the third question: in what ways might for-profit and social entrepreneurs differ in their economic, managerial and psychological aspects? Fourth, how might the two types of entrepreneur learn from, and support each other (if they wished to)?

8.2 Is the social entrepreneur really an entrepreneur? Ultimately, including or excluding the social entrepreneur is a question of definitions and how we wish to use words. As has been pointed out at several times previously, the word ‘entrepreneur’ lacks strict definition and different people use it in different ways. At one extreme lies those that would argue that entrepreneurship is about pursuing the profit motive

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and making money, and so the term should be restricted to the classical entrepreneur. Such a position is less frequently advocated in the modern study of entrepreneurship. In great part, this trend An understanding of some of has resulted from both a widening interest in entrepreneurship with the issues in drawing the social academics trained in non-economic fields of the social sciences entrepreneur into the wider entering into the study of entrepreneurship (see, for example, entrepreneurship fold and a Zafirovski, 1999; Bygrave and Minniti, 2000; and Downing, 2005, proposal for its resolution. for discussions of this development) and also (and this works in concert) from the development of ‘third way’ political philosophies that emphasise the importance of the development of social capital as well as financial. This is happening throughout the world. Such philosophies seek to reconcile the dynamic engine of economic growth provided by the free market enterprise system with concerns over social stability engendered by collectivising political policies. With these two concerns in place, the idea of the ‘social’ entrepreneur becomes an attractive proposition. A third factor is the growing number of people from the not-for-profit and public sector entering business schools and seeking to add an entrepreneurial flair to their management style. Mort et al. (2003), for example, define social entrepreneurship as the ‘entrepreneurship leading to the establishment of new social enterprises and the continued innovation within existing ones’, and develop this as:

Key learning outcome

[A] multidimensional construct involving the expression of entrepreneurially virtuous behaviour to achieve the social mission, a coherent unity of purpose and action in the face of moral complexity, the ability to recognise social-value creating opportunities and key decision making characteristics of innovativeness, proactiveness and risk-taking. Should social entrepreneurs be excluded from the study of entrepreneurship? I see no reason why they should. As has been made clear, entrepreneurship is, first and foremost, a style of management. And it is certainly a style that is seen in many areas outside the purely commercial. If someone manages in an entrepreneurial way, there is no reason not to go the whole hog and refer to them as an entrepreneur.

8.3 Distinguishing the social entrepreneur from the classical entrepreneur

Key learning outcome An understanding of how the social entrepreneur might be distinguished from the classical entrepreneur.

Given that the social entrepreneur is as much an entrepreneur as the classical, how, then, to distinguish them? Seven aspects are critical in the distinction: • • • • • • •

personal motivation sector of activity organisational form created strategies adopted definition of, and relationship with, stakeholders interaction with wider social environment ethical reflections.

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Table 8.1 Distinguishing the social entrepreneur from the commercial entrepreneur Pure ‘classic’ entrepreneur

Pure ‘social’ entrepreneur

Personal motivation

Maximise personal wealth

Maximisation of ‘social value’

Sector of activity

Commercial

Not-for-profit/public

Organisational form created

Traditional business hierarchy with entrepreneur taking leadership role

Non-traditional organisational form with an emphasis on egalitarianism rather than efficiency

Strategies adopted

Focused on competition and maximising return to entrepreneur/investors

Avoid competition; focused on creating and delivering social value

Definition of, and relationship with, stakeholders

Relationship with investors considered critical; relationship with customers seen as means to end

Stakeholders defined over wide and broadly defined groups

Interaction with wider social environment

Aspires to no wider social legitimacy

Seeks broad based social legitimacy with wide group of parties

Ethical reflections

Self-interested; not altruistic. Ethically neutral or unethical?

Altruistic at expense of self-interest. Ethical?

Table 8.1 summarises how the commercial and social entrepreneur might (or might be seen to) differ on each of these criteria. Humans have an innate tendency to classify things. When it comes to the natural world, this is usually a matter of facts (although these might be disputed). When it comes to classifying people, though, values, philosophical stances and personal perspectives come into play. Classifications of people always run the risk of caricature. This can be overcome by recognising that the ‘pure’ entrepreneurial forms described in Table 8.1 represent the ends of a spectrum rather than distinct types. Real entrepreneurs – be they commercial or social – fall somewhere along that continunm. For instance, few commercial entrepreneurs are interested solely in maximising personal wealth; they seek other rewards both for themselves and for others. Such non-pecuniary rewards may also be sought (legitimately) by social entrepreneurs. The commercial entrepreneur may aspire towards profit, but social entrepreneurs cannot ignore the need for effective financial management of their resources. The boundaries between the commercial, not-for-profit and public sectors are becoming increasingly blurred. For a spirited discussion of this blurring of ‘social’ and ‘commercial’ entrepreneurship, see Oppenheim (2005) on

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Fairtrade brands. Business organisations are seeking non-traditional structures as a source of competitive advantage as the not-for-profit and public sectors investigate what they can learn from the efficiency offered by traditional business organisational forms. One of the main themes in modern strategic thinking is that of the balanced scorecard approach, which encourages managers to think about a wide range of stakeholders as notfor-profit organisations are encouraged to think of their clients as customers. As discussed in Chapter 2, one economic sociological perspective on the (for-profit) entrepreneur sees him or her as a seeker of social legitimacy as well as of capital. This leaves the issue of ethical reflection. Are social entrepreneurs more ethical than their commercial counterparts? This is a complex question that has already been touched upon in section 6.2. It brings into focus a number of issues: whether humans are altruistic or not, whether the motivations of the entrepreneur, the actions they take or the effects of their actions should be emphasised in moral debate, and so on. It also touches on the issue of corporate social responsibility. There are no simple answers, and this book cannot do justice to the intricacies in the debates concerned. At the end of the day, it is a matter of personal values. Nonetheless, few would say that commercial entrepreneurship is entirely bad in all its effects, nor social entrepreneurship entirely good (see, for example, Rieff (2005) on the 1985 Live Aid project to raise money for Ethiopia). In summary, all entrepreneurs, commercial or social, lie along a continuum of motivation, strategy, organisational building and social effect. This is not to decry from what social entrepreneurs, or indeed commercial entrepreneurs, do, or try to do. What is does mean is that there is no need for a science of social entrepreneurship distinct from that of commercial entrepreneurship. The same tools can be used; just the emphasis is different.

Summary of key ideas • As style of management, there is no reason why the concepts of entrepreneur and entrepreneurship should be restricted to the for-profit sector.

• The ‘social’ entrepreneur can be distinguished from the ‘commercial’ entrepreneur along a number of dimensions including: – personal motivation – sector of activity – organisational form created – strategies adopted – definition of, and relationship with, stakeholders – interaction with wider social environment – ethical reflections.

• However, these dimensions represent continua rather than all-or-nothing categories. • Different sorts of commercial, social and public entrepreneur can be characterised by the stakeholder group to which they give priority in delivering rewards, focusing communication and creating strategy.

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Research themes Growth in interest in social entrepreneurship Using an internet search engine, assess by year (say starting in 1990) how many articles include the term ‘social entrepreneur’ (in the article title as well as the text). Break your analysis down into different sources, say: newspapers, general magazines, business magazines and academic articles. Sample some (you will not be able to do them all, I promise!). Think about your sampling regime. Analyse your findings. What is the pattern of growth? Who is driving the debate about social entrepreneurship – and in what terms?

Review and commentary Undertake a review of the academic literature on social entrepreneurship. The readings suggested below are an excellent start. Develop a commentary on the theme: ‘Strategic management techniques developed for commercial entrepreneurs are concerned primarily with generating profits and so are not effective for guiding the social entrepreneur’. Develop arguments to support and/or criticise this proposition. An alternative project would be to organise a tutorial group into two groups, one briefed to support the argument, the other to challenge it and organise a debate. Deliver a summarising commentary of your own at the end. (You may even wish to video the debate as a formal project submission.)

Key readings Two readings that explore the meaning of the term ‘social entrepreneur’ and its relationship to conventional ‘for-profit’ entrepreneurship. Both consider future developments and possible research agendas. Mort, G.S., Weerawardena, J. and Carnegie, K. (2003) ‘Social entrepreneurship: towards conceptualisation’, International Journal of Non-profit and Voluntary Sector Marketing, Vol. 8, No. 1, pp. 76–88. Roberts, D. and Woods, C. (2005) ‘Changing the world on a shoestring: the concept of social entrepreneurship’, University of Auckland Business Review, Autumn, pp. 45–51.

Suggestions for further reading Barendsen, L. and Gardner, H. (2004) ‘Is the social entrepreneur a new type of leader?’, Leader to Leader, No. 34, pp. 43–50. Boyett, I. (1977) ‘The public sector entrepreneur – a definition’, International Journal of Entrepreneurial Behaviour and Research, Vol. 3, No. 2, pp. 77–92.

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Downing, S. (2005) ‘The social construction of entrepreneurship: narrative and dramatic processes in the coproduction of organizations and identities’, Entrepreneurship: Theory and Practice, Vol. 29, No. 2, pp. 185–204. Hibber, S.A., Hogg, G. and Quinn, T. (2002) ‘Consumer response to social entrepreneurship: the case of the Big Issue in Scotland’, International Journal of Non-profit and Voluntary Sector Marketing, Vol. 7, No. 3, pp. 288–301. Hibber, S.A., Hogg, G. and Quinn, T. (2005) ‘Social entrepreneurship: undestanding consumer motives for buying the Big Issue’, Journal of Consumer Behaviour, Vol. 4, No. 3, pp. 159–72. Johnson, V.R. (2002) ‘Competition, conflict and entrepreneurial public managers: the legacy of reinventing government’, Public Administration Quarterly, Vol. 26, No. 1/2, pp. 9–34. Lasprogata, G.A. and Cotten, M.N. (2003) ‘Contemplating “enterprise”: the business and legal challenges of social entrepreneurship’, American Business Law Journal, Vol. 41, pp. 67–113.

Chapter 8 Not-for-profit and public entrepreneurship

Bygrave, W. and Minniti, M. (2000) ‘The social dynamics of entrepreneurship’, Entrepreneurship: Theory and Practice, Vol. 24, No. 3, pp. 25–36.

Oppenheim, P. (2005) ‘Fairtrade fat cats: guilt-stricken consumers are boosting supermarkets’ profits’, The Spectator, 5 Nov., p. 28. Pepin, J. (2005) ‘Venture capitalists and entrepreneurs become venture philanthropists’, International Journal of Non-profit and Voluntary Sector Marketing, Vol. 10, No. 3, pp. 165–73. Rieff, D. (2005) ‘Dangerous pity’, Prospect Magazine, No. 112, July, p. 34. Thompson, J., Alvy, G. and Lees, A. (2000) ‘Social entrepreneurship: a new look at the people and the potential’, Management Decision, Vol. 38, No. 5, pp. 328–38. Turner, D. and Martin, S. (2005) ‘Social entrepreneurs and social inclusion: building local capacity or delivering national priorities’, International Journal of Public Administration, Vol. 28, No. 9/10, pp. 797–806. Wempe, J. (2005) ‘Ethical entrepreneurship and fair trade’, Journal of Business Ethics, Vol. 60, No. 3, pp. 211–20. Zafirovski, M. (1999) ‘Probing into the social layers of entrepreneurship: outlines of the sociology of enterprise’, Entrepreneurship and Regional Development, Vol. 11, pp. 351–71.

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Selected case material CASE 8.1

31 January 2006

FT

Private providers offered fresh opportunities in health shake-up NICHOLAS TIMMINS Private sector and not-for-profit providers of care will be given fresh opportunities under the government’s white paper on care outside hospitals. Boots, Bupa, Care UK, Netcare, BMI, United Health, Nuffield, Alliance Medical and many others are likely to become providers to the National Health Service, both in the high street and in the new ‘super surgeries’, diagnostic centres and community hospitals. Some may also become commissioners of care for the NHS, operating on contract to primary care trusts. There will also be new entrants in the growing market, including groupings of NHS and enterpreneurial GPs, which will be able to set up in business with financial help and advice from the ‘social entrepreneurs’ unit in the Department of Health. Big hospitals face a challenge. As services are moved out, they and their staff will have to adapt, with the likelihood of mergers, reconfigurations and, in some cases, potential closures. Bernard Ribeiro, president of the Royal College of Surgeons, warned that ‘patient convenience must not be promoted at the expense of patient safety’, a point underlined by the Healthcare Commission, the NHS inspectorate, which said patients needed the same assurances on quality and standards whether treated in a hospital clinic or supermarket surgery. The private finance initiative will also have to adapt. Some £5bn worth of PFI hospitals

have been built or are under construction. Another £6bn are out to tender and a further £6bn have had their strategic outline case approved. As the Financial Times revealed last week, all plans for ‘major capital procurement’ will have to be reviewed to ensure they are compatible with a future in which resources and activity will move into primary and community settings. ‘Positive endorsem*nt of major capital proposals will happen only where this compatibility clearly exists,’ the White Paper says. Patricia Hewitt, the health secretary, said that after this ‘reappraisal’ it was still estimated that the PFI programme going forward would be bigger than those so far built or under construction – an ‘estimated’ £7bn to £9bn. But this is still a 25 to 40 per cent reduction on plans for the future. Stephen Ratcliffe, chief executive of the Major Contractors Group, said PFI providers would be seriously concerned if the big projects nearing financial close, including Birmingham, Leicester and Barts in London – a decision on which is expected this week – were pulled or reconfigured. He said many contractors were more comfortable with schemes in the £300m range than the £700m to £1.1bn ‘mega projects’ such as Barts, Birmingham, Leicester and the abandoned St Mary’s, Paddington, rebuild.

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CASE 8.2

necessarily true’ that there would be hospital closures, she added. Source: Nicholas Timmins, ‘Private providers offered fresh opportunities in health shake-up’, Financial Times, 31 January 2006, p. 3. Copyright © 2006 The Financial Times Limited.

30 January 2006

FT

Course choices that help MBAs make the world a better place

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Ms Hewitt said it was ‘an interesting question’ whether NHS hospitals and foundation trusts would expand into primary and community care. ‘That will need to be judged on a case-bycase basis to ensure we are getting the best services for patients,’ she said. It was ‘not

ANDREW BAXTER The teaching of social enterprise or entrepreneurship as an option in MBA programmes is putting down new roots in Europe and broadening its focus in its original home, the US. Old assumptions – in particular, that the only way for people to be ‘do-gooders’ was through a career at a non-profit organisation – are being challenged by 21st century realities. Thus the narrow definition of social enterprise within MBA programmes – preparing students who may always have had an interest in the non-profit sector to join or return to it with their management antennae switched on – is being subsumed into something much bigger: recognition that the chance to make the world a better place can come from many vantage points and at any time in a student’s career. In this new world, people and organisations can make a positive social impact via all sorts of organisations in the non-profit, private and public sectors, and social responsibility has become a byword in many organisations. Confusingly, perhaps, this broader definition of the environment that business schools seek to address is called social enterprise or social entrepreneurship almost interchangeably. Even so, what is clear is that, as Herman

‘Dutch’ Leonard, co-chair of Harvard Business School’s Social Enterprise Initiative, puts it: ‘Most schools have a more expansive picture these days of what they are offering.’ For many of the US schools offering social enterprise electives in their MBAs, the more restricted definition – preparing more effective managers for the non-profit sector – was the starting point. Columbia’s Social Enterprise Programme, for example, has its roots in an earlier Public and Non-profit Management Programme, established in 1981. Ray Horton, director of the Social Enterprise programme, says its antecedent operated on the premise that any student interested in serving the public good would seek a career in a non-profit organisation or a government agency. ‘While we shepherded many bright and talented students off to work in the social sector, we were overlooking the majority of MBA students who could contribute to society in meaningful ways through their positions in the public sector,’ says Prof. Horton. This is not to say that schools have lost interest in preparing MBA students for senior roles in the non-profit sector. Allen Grossman, a key member of HBS’s social enterprise faculty,

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CASE 8.2 CONT. teaches two courses, on entrepreneurship in the social sector and effective leadership of a social enterprise, which build on his own experiences running a non-profit organisation, Outward Bound USA, in the 1990s. ‘In the business world there was a huge amount of theory for practitioners,’ says Prof. Grossman, ‘but it didn’t exist in the not-forprofit world, except scantily. Historically people would say ‘run this place like a business and everything will be fine’. That’s no more rational than telling someone to run a plant in China the same way as in New Jersey.’ The crux of the issue for non-profits, he says, is the ‘double bottom line’ – the need to avoid losses in conventional terms and the broader imperative to improve the lives of intended beneficiaries. ‘If you are terribly successful financially as a non-profit, are you successful? No, not necessarily. So what is success and what does it look like? What does high performance look like and how do you achieve it?’ The double bottom line of profitability and social impact has now – to a large extent, and varying from sector to sector – entered the mainstream of business, and business schools are responding. Thomas Cooley, dean of NYU Stern School of Business, says thinking about how business can be a positive force for social change is a key role for the school, and one that has become part of its identity. ‘People don’t often appreciate what an incredibly powerful, transformative thing [business] can be, how it can lift people out of the mire of poverty and on to the ladder of success.’ So it is important, he says, to train business people to be socially responsible and develop new ways to bring out their sociallyresponsive instincts. Judging by the outcomes at Harvard Business School [HBS], which created its Social Enterprise Initiative in 1993, the schools that have introduced such electives are succeeding

in their triple role of training people directly for a career in the non-profit sector, of imparting knowledge to those who want some way of participating in activities that have a social impact, and of instilling a sense of citizenship in those who spend the rest of their careers in the private sector. Professor Leonard notes how a commitment to the non-profit sector increases as the careers of alumni develop. One illustration of the importance for alumni of social enterprise, he says, is their funding for the Service Leadership Fellows Programme, enabling new HBS MBA graduates to spend a year gaining management experience at a non-profit organisation or public agency. Similarly, NYU Stern has benefited from the launch in 2004 of the Steward Satter Social Entrepreneurship Programme, supported by alumnus Stewart Satter. The programme oversees curriculum development and provides management help and $500,000 a year in seed funding to social entrepreneurs. Professor Grossman at HBS notes that, in contrast to 20 years ago when career aspirations were simpler, students almost without exception will have multiple careers. ‘Many of them aspire to go into the social sector at some point in their career, so this is a real opportunity for them to learn about it.’ Recent alumni surveys suggest that, at any given time, more than one-third of HBS MBA alumni are actively serving on non-profit boards. European schools have a much shorter history in this field, but the very few schools that have added social entrepreneurship electives to their MBA programmes have started with a broad interpretation of the theme and a desire to be different. ‘As a professor thinking about doing a course, the first thing you do is try not to reinvent the wheel,’ says Johanna Mair, the Iese Business School professor who designed its social entrepreneurship course. The Spanish school claims it was the first in Europe to have such a course in its MBA.

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giving people the management education they need to be effective. The arrival of the first Skoll Scholars was preceded in March 2004 by the school’s first annual Skoll World Forum on Social Entrepreneurship, underlining how the school wants to be seen as a hub for discussion of social entrepreneurship. The next forum is to be held on 29–31 March this year. ‘The forum is hugely popular, it’s the largest event in the school,’ says Ms Young. ‘That and the uptake of the electives have demonstrated that there really is strong demand for this.’ In the first year, 54 students or one-third of the cohort took one or more of the three social entrepreneurship electives. Ms Young says that students who take all three, choose wisely from other electives with some social context, and pick relevant topics for their two practical business projects can tailor half their MBA to social entrepreneurship, without compromising the core modules of the Oxford MBA. Perhaps the most encouraging aspect of all these programmes is the activity around them. As with Saïd’s World Forum, these are among the busiest and most popular at their respective schools – from the Oxford Social Entrepreneurship Network to the US student clubs and student-run venture funds and competitions. These ensure that social enterprise initiatives have an impact on many more students than those who take the electives.

Chapter 8 Not-for-profit and public entrepreneurship

Prof Mair is encouraged by the take-up for the course, which is held in the second year of the MBA after students have grasped the functional basics. Numbers have risen from 22 in the first year for the course to 45 in the third, a quarter of all students doing the MBA and including a broad international mix as well as students with conventional finance or marketing ambitions. The course has a strong strategic angle, she says, examining the implications of the social entrepreneurship phenomenon for established companies. ‘The main object is not to turn them all into social entrepreneurs,’ she says. ‘But it does aim to put a seed in their minds, so that when they are in marketing or finance positions, they see the possibilities of working together with social entrepreneurs.’ Iese’s debut was followed in the autumn of 2004 by Saïd Business School in Oxford, the first school in the UK to have social entrepreneurship electives in its MBA. The Skoll Foundation, which was set up by Jeff Skoll, the first president of eBay, to advance the cause of social entrepreneurship, has provided £4.4m for the creation of a Centre for Social Entrepreneurship and for five Skoll Scholars to take part in the school’s one-year full-time MBA. Rowena Young, director of the centre, sees an increasing need for entrepreneurial approaches to social problems, and says the centre is designed to help bring legitimacy to the whole field of social entrepreneurship, partly by laying down a knowledge base through a research programme and partly by promoting enhanced leadership through

Source: Andrew Baxter, ‘Course choices that help MBAs make the world a better place’, Financial Times, 30 January 2006, p. 6. Copyright © 2006 The Financial Times Limited.

Discussion points 1. ‘Only government can create opportunities for not-for-profit entrepreneurs.’ Discuss. 2. ‘Not-for-profit entrepreneurs need different skills to profit motivated entrepreneurs.’ Discuss.

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Success, stakeholders and social responsibility Chapter overview Entrepreneurship is about success. This chapter is concerned with defining success and the ways in which it can be measured. Business success is considered not only in financial terms but also in a broader social context. The issue of social corporate responsibility is considered. The chapter concludes with an exploration of the converse of success: failure. Failure is not seen as completely negative but rather is viewed as an experience which is occasionally necessary and which presents an opportunity for the organisation and the entrepreneur to learn.

9.1 Defining success Entrepreneurs aim to be successful. It is the possibility of success that drives them on and success is the measure of their achieveKey learning outcome ment. Success is, however, quite a difficult concept to define An understanding of what because it is multifaceted. Both individuals and organisations entrepreneurial success actually enjoy success. It may be measured by hard and fast ‘numbers’ but means. also by ‘softer’, qualitative criteria. Success is something which is both visible in public and experienced at a personal level. Success can be best understood in terms of four interacting aspects: • • • •

the performance of the venture; the people who have expectations from the venture; the nature of those expectations; and actual outcomes relative to expectations.

The performance of the venture is indicated by a variety of quantitative measures. These relate to its financial performance and the presence it creates for itself in the marketplace. The indicators can be absolute and compared with the performance of competitors. Such performance measures relate to the organisation as a whole. However, an organisation is made up of individual people, and success, if it is to be meaningful, must be experienced by

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Figure 9.1 A model of entrepreneurial success

those individuals as well as by the organisation. Organisational success is a means to the end of personal success. The organisation creates the resources which interested individuals can use to improve their lives. The individuals who have an interest in the performance of the venture are its stakeholders. Thus the success of a venture must be considered in relation to the expectations that its stakeholders have for it (see Figure 9.1). The entrepreneurial venture has six groups of stakeholders, each of which has its own interest and expectations from the venture. The entrepreneur (and their dependants) expects the venture to be a vehicle for personal ambitions; employees expect reward for their efforts and personal development; suppliers expect the venture to be a good customer; customers expect the venture to be a good supplier; investors expect the venture to generate a return on the investment they have made; and the local community expects the venture to make a positive contribution to the quality of local life. The performance of the venture as an organisation provides the means by which individual stakeholders can fulfil their own goals. Personal goals are manifest at three levels: • the economic – monetary rewards; • the social – fulfilling relationships with other people; and • the self-developmental – the achievement of personal intellectual and spiritual satisfaction and growth. Success experienced at a personal level is not absolute. Success is recognised by comparing actual outcomes with prior expectations. At a minimum, success is achieved if outcomes meet expectations, and success is assured if expectations are exceeded. If expectations are not met, however, then a sense of failure will ensue. Different stakeholders will hold different expectations. They will look to the organisation to fulfil different types of goals. The investor may be interested only in the venture’s offering financial returns whereas the customers and suppliers will want financial rewards, but they

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Figure 9.2 The dynamics of entrepreneurial success

may also hope to build rewarding social relationships with people in the organisation. Employees will expect a salary but this will only be their minimum expectation. They will also expect the venture to provide a route for self-development. The venture will be central to the personal development of the entrepreneur. Success, then, is not a simple thing. The organisation’s financial and strategic performance is only part of the picture. Success is achieved if the organisation uses its performance to meet, or better to exceed, the financial, social and personal growth expectations of the people who have an interest in it. The success of a venture depends on how its performance helps stakeholders to achieve their individual goals, and the way that different people judge the success of the venture will depend on how well these expectations are met (Figure 9.2). What are the chances that a business will be successful? Nucci (1999) found that for US small businesses, some 20 per cent are terminated by the end of the first year, with 60 per cent gone by the end of the fifth. These do not all represent financial failure. Those actually filing for bancruptcy are quite low. Dennis and Fernald (2001) examine the probability of a new venture’s success based on US business statistics. They find that the probability of a venture’s success is quite high, but that the probability of a venture’s providing an entrepreneur with a substantially increased income over conventional alternatives is quite low.

9.2 Success factors for the new venture A venture is successful if it meets the aspirations of its stakeholders. In order to do this it must survive and prosper in the marketplace. It must attract resources, reward its stakeholders for

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An appreciation of some of the main factors involved in the success of a new venture.

their contributions and be financially secure. Every venture is different, but a common set of factors lies behind every successful business.

The venture exploits a significant opportunity

The opportunity spotted by the entrepreneur is real and significant. The venture is faced with the possibility of delivering sufficient value to a large enough number of customers to make the business viable in terms of income and profits.

The opportunity the venture aims to exploit is well defined The venture must be clear as to why it exists. It must understand the nature of the opportunity it aims to exploit. This may be codified in the form of a mission statement (discussed further in Chapter 17). The danger is not just that the business may fail to find a sufficiently large opportunity for its innovation but also that in pursuing too many opportunities, and opportunities that are not right for the business, the venture will dilute its resources across too many fronts and fail to focus its efforts on creating a sustainable competitive advantage in the areas where it has real potential to be competitive.

Chapter 9 Success, stakeholders and social responsibility

Key learning outcome

The innovation on which the venture is based is valuable The innovation behind the venture, that is, its new way of doing things, must be effective and different from the way existing businesses operate. It must be appropriate to exploit the opportunity identified. Recognising an opportunity, and innovating to exploit it, can only occur if the entrepreneur thoroughly understands the market and the customers who make it up. All new ideas, no matter how good, must be scrutinised in the light of what the market really wants.

The entrepreneur brings the right skills to the venture The entrepreneur possesses the right knowledge and skills to build the venture to exploit the opportunity. These include knowledge of the industry sector they are working in, familiarity with its products and markets, general management skills, and people skills such as communication and leadership. The entrepreneur must not only have these skills but also be active in refining and developing them. The effective entrepreneur learns how to learn.

The business has the right people Entrepreneurs rarely work alone. They draw other people into their ventures to work with them. The business as a whole must have the right people working for it. Entrepreneurs do not need to employ copies of themselves; rather, they need people with skills and knowledge to complement their own. The business will need specialists and technical experts as well as people to actually make the product or deliver the service the business offers. It will need general managers and people able to build relationships outside the firm. The people who make

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up the organisation will be linked in a suitable framework of communication links and responsibilities, both formal and informal. As the business grows, identifying and recruiting the right people to support its growth is a task of primary importance for the entrepreneur.

The organisation has a learning culture and its people a positive attitude The new venture is in a weak position compared with established players in the marketplace. It is young and relatively inexperienced. It has not had a chance to build up the expertise or relationships that its established counterparts have. It will not have access to their resource levels. The entrepreneurial organisation must turn this on its head and make the disadvantage an advantage. The entrepreneurial venture must use the fact that it is new to do things in a fresh and innovative way. It must recognise its inexperience as an opportunity to learn a better way of doing things. This can only be achieved if the organisation has a positive culture which seeks ways of developing and which regards change as an opportunity. Adversity must be met as a learning experience. Culture comes down to the attitudes of the people who make up the organisation. They must be motivated to perform on behalf of the venture. The entrepreneur is responsible for establishing a culture in the organisation through leadership and example.

Effective use of the network Successful entrepreneurs, and the people who work with them, use the network in which the organisation finds itself to good effect. They look upon suppliers and customers not as competitors for resources but as partners. They recognise that entrepreneurship is not a zero-sum game. If all parties in the network recognise that they can benefit from the success of the venture – and it is down to the entrepreneur to convince them that they can – then the network will make resources and information available to the venture and will be prepared to share some of its risks.

Financial resources are available The venture can pursue its opportunity only if it has access to the right resources. Financial resources are critical because the business must make essential investments in productive assets, pay its staff and reimburse suppliers. In the early stages, expenditure will be higher than income. The business is very likely to have a negative cash flow. The business must have the resources at hand to cover expenditure in this period. Once the business starts to grow, it will need to attract new resources to support that growth. Again, cash flow may be negative while this is occurring. The entrepreneur must be an effective resource manager. They must attract financial resources from investors and then make them work as hard as possible to progress the venture.

The venture has clear goals and its expectations are understood A venture can be successful only if it is seen to be successful. This means that it must set clear and unambiguous objectives to provide a benchmark against which performance can be

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9.3 Measuring success and setting objectives

Key learning outcome An understanding of the criteria used to set objectives for the entrepreneurial venture and to monitor its performance.

• • • • • • •

Ultimately, success is personal. The entrepreneurial venture is a vehicle for individual success as much as for organisational success. If it is to be an effective vehicle, the venture must be successful as a business. The performance of the venture is subject to a variety of measures including:

Chapter 9 Success, stakeholders and social responsibility

measured. Success can only be understood in relation to the expectations that stakeholders have for the venture. These expectations must be explicit. This will be critical in the case of investors, who will be very definite about the return they expect. The business must be sure of what its customers want if it expects them to buy its offerings. Understanding expectations is also important in dealing with employees since it is the starting point for motivating them. The entrepreneur must learn to recognise and manage the expectations of all the venture’s stakeholders.

• absolute financial performance – e.g. sales, profits; • financial performance ratios – e.g. profit margin, return on capital employed; financial liquidity ratios – e.g. debt cover, interest cover; absolute stock market performance – e.g. share price, market capitalisation; stock market ratios – e.g. earnings per share, dividend yield; market presence – e.g. market share, market position; growth – e.g. increase in sales, increase in profits; innovation – e.g. rate of new product introduction; customer assessment – e.g. customer service level, customer rating.

These performance indicators are quantitative and are fairly easy to measure. They provide definite goals for the venture to attain. They are strategic goals in that they relate to the business as a whole and refer to the position it develops in its external market as well as to purely internal criteria. An entrepreneurial venture is distinguished from a small business by the ambition of its strategic goals. The specifics of the objectives set for the venture will depend on the type of business it is, the market in which it is operating and the stage of its development. They will be used by management to define objectives, evaluate strategic options and benchmark performance. Different businesses will set objectives in different ways: they will vary in specificity; they may be for the organisation as a whole or they may define the responsibilities of particular individuals; they may be based on agreement and consensus or they may be ‘imposed’ on the organisation by the entrepreneur. The way the entrepreneur defines and sets goals, and uses them to motivate and monitor performance, is an important aspect of leadership strategy. The objectives of the firm may not be an entirely internal concern. Financial and market performance measures may form part of the agreement made with investors. They provide manageable and explicit proxies for the success of the business and indicate the returns it can hope to generate. They provide a sound and unambiguous basis for monitoring its development. They may also be used in communication with suppliers and customers to indicate the potential of the business and to elicit their support.

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9.4 Success and social responsibility

Key learning outcome An entrepreneurial venture touches the lives of many people. All its stakeholders have an interest in its success since this success provides the means by which they can fulfil their personal goals. People have expectations about what an entrepreneurial business can achieve and how it should undertake its business. Some of these expectations are formal, others are informal. Some are explicit, others implicit. Some result from binding contracts, others from trust that has been accumulated. Entrepreneurs perform on a social stage and in creating an entire new world they must take responsibility for its ethical content as well as for its new value (this develops a theme established in section 6.2). The moral dimension of their activity cannot be ignored. The idea of corporate social responsibility is one that has come to the fore of business thinking in recent years. The reasons for this interest are many, but the following factors are important. The first is a move from the ‘patrician’ management of the 1950s and 1960s where managers were relatively free to spend profits as they wished (and often did so to the advantage of non-investor stakeholders) to the more investor-driven management of the 1980s and 1990s, where managers are expected to concentrate on maximising investor returns. Second, concerns with environmental and development issues are growing, with the rise of nongovernmental organisations (NGOs) to lobby for them, particularly with government legislators. Third, there is a belief that ‘globalisation’ is taking power from governments and passing it to (particularly multinational) business. The idea of corporate social responsibility goes beyond simply defining the responsibility of the entrepreneur in terms of stakeholder expectations. After all, a profit-maximising firm may still develop rewarding relationships with stakeholders simply as a means to that profit maximisation, in which case (non-investor) stakeholder rewards are an implicit, means-to-an-end aspect of strategic objective setting. Advocates of social corporate responsibility generally demand that social and environmental concerns should be an explicit, endin-themselves aspect of strategic objective setting along with an interest in profit creation. This issue is highly controversial. There are, broadly, four positions. At one end, there are those who reject the idea of corporate social responsibility entirely (for example, Friedman, 1962; Henderson, 2001). Rejectors argue that maximising investor return is the only real responsibility that businesses have. This position is often caricatured as a mixture of greed and complacency about world issues. This is unfair. What rejectors are claiming is that profit maximisation is the best way to ensure that resources are used in the best possible way, given individuals’ freedom to choose what they want. At the other end of the spectrum are those who believe that corporate social responsibility (imposed by government if necessary) is a way to limit the power of, and even punish, business (again, especially the large multinational). This belief centres on the idea that ‘business has been given too free a rein for too long; it is time it paid back’. The middle ground is occupied by those who do not particularly want to see business punished but believe that corporate social responsibility improves collective social welfare, even if it does impose some costs on business (Hutton et al., 1997; De George, 1999). Finally, there are those who argue that it is actually good for businesses to adopt corporate social responsibility and that it can improve profitability (a win–win scenario) (Nash, 1995). This latter view has come to dominate among many business academics.

An appreciation of how entrepreneurial success impacts on social responsibility.

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Figure 9.3 Levels of entrepreneurial responsibility

A central theme running through these four positions is the relationship between adopting standards of corporate social responsibility and resulting performance. This is an issue that can, in principle, be evaluated empirically, and is explored in the next section. It should not be forgotten that there is no real agreement between different advocates as to what, exactly, corporate social responsibility is. Avishai (1994) develops a historical account of the development of the concept. Joyner et al. (2002) summarises definitions of related concepts as follows: • Values are the core set of beliefs and principles deemed to be desirable by a particular group. • Ethics are the conception of which actions are right or wrong, what individuals should seek to do or avoid, with business ethics as a specific set of such views relating to business practice. • Corporate social responsibility is the categories of economic, legal, ethical and discretionary activities of a business entity adapted to the values and expectations of wider society. This section concludes with an overview of models of corporate social responsibility in strategic objective setting. An early model was developed by Carroll (1979). He suggests a four-dimensional approach to understanding corporate social responsibility, as shown in Figure 9.3.

The first dimension: the people to whom the venture has a social responsibility Potentially, the entrepreneurial venture has a social responsibility towards all those who are affected by its activities, that is, its stakeholder groups. Stakeholders may be members of distinct groups but they are also individuals. The venture has responsibilities towards both individuals and organisations or groups.

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Following on from the themes developed in Chapter 8, one of the distinctions between social and conventional entrepreneurship might be to consider the emphasis that different domains of entrepreneurship place on different stakeholders. As has been made clear, all forms of entrepreneurship, if they are to be successful, must consider the interests of all stakeholders, but this does not mean there is no latitude for the entrepreneur to prioritise particular stakeholder groups in terms of strategy development, communication, reward ranking and cultural development. For example, the classical principal–agent model of entrepreneurship places the investor as the sole stakeholder of interest, and the managerowner model allows the entrepreneur to place him or herself (and dependants) at the head of the queue. The now received wisdom of the customer-first ‘marketing’ model is that the customer’s interests come first (although cynics may suggest this is for instrumental – it works as a way of doing business – rather than moral reasons). The ‘Fairtrade’ model suggests that its raison d’être is the interest of the supplier (especially weaker, poorer suppliers, perhaps in the developing world). The ‘cooperative’ model (a dying organisational form, although some forms of franchise have taken on many of its characteristics) places emphasis on joint and equitable ownership by employees. Charities target specific groups within the community (these groups may include animals, the environment and social goods) as their critical responsibility. In the public sector, local government intrapreneurship sees the local community as its customer. At an intra- and international level, non-governmental organisational entre/intrapreneurship emphasises the interests of local groups around the world. The various foci for the different forms of entrepreneurship are summarised in Figure 9.4.

Figure 9.4 Stakeholder focus for different forms of social and commercial entrepreneurship

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The business may accept various types of social responsibility. These may be described as economic, legal, moral and discretionary.

Economic responsibility Economic responsibility refers to the basic function of the firm and demands that it produce goods or services and sell them at a profit. This is a minimum level of responsibility. The firm must do this merely to survive within its market. Beyond this basic responsibility, however, the business will recognise a number of other responsibilities.

Legal responsibility The firm’s legal responsibility constrains it to operate within the law. The law under which a business operates is defined by the state. Different laws will dictate the way the business operates financially and the way it sets up contracts with other organisations and with individuals. Important examples of laws affecting business are tax and accounting laws and employment laws. A business will be subject to both criminal and civil law. If the criminal law is broken, the state will act as prosecutor. If a civil law is breached, then it is up to the injured party to bring an action.

Chapter 9 Success, stakeholders and social responsibility

The second dimension: the levels of social responsibility accepted

Moral responsibilities A business is a social organisation which operates within a framework of cultural norms. The society within which it exists has ethical standards which it believes must be upheld. These provide rules and norms which create constraints for behaviour. These constitute the firm’s moral responsibilities and they are difficult to define. They are the unwritten rules about what should be done and what should not be done, and they may not be noticed at all until an individual or organisation breaks them. Although a society will not necessarily articulate its ethics and moral standards, those standards still form an important part of people’s expectations, and those affected will react strongly if they are not adhered to.

Discretionary responsibilities Economic, legal and moral responsibilities comprise the standard constraints operating on the actions of the business. In addition, the entrepreneur may decide to accept discretionary responsibilities. Discretionary responsibilities are ones the entrepreneur accepts for their venture even though it is not generally expected that businesses will accept them. They are responsibilities that go above and beyond the norm. Discretionary responsibilities may relate to the way the business treats its employees, the standards it sets for its products or the way it manages the impact of its activities on the environment. They may reflect beliefs and standards which are held dear by the entrepreneur. They may be used to distinguish the business from competitors.

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The third dimension: the issues that form part of the venture’s social responsibility There are a variety of issues that the entrepreneur can accept as part of the venture’s social responsibility. Minimum standards in the treatment of employees, occupational health and safety, and product liability will usually be the subject of legal regulation. Entrepreneurs frequently take a positive attitude towards wider social issues such as the treatment of the environment, relationships with developing nations, and ethnic and sexual discrimination. Occasionally, they may also take a stand on much broader issues relating to social trends such as the growth in ‘consumerism’.

The fourth dimension: the venture’s approach to its social responsibility The business faces a choice in the way in which it approaches its social responsibilities. It may be defensive. This means that the business decides that its social responsibilities are a liability and that they hinder its performance. It may then try to avoid them and to minimise their impact. This may boost short-term profits but it can easily lead to a reaction by stakeholders, especially, but not exclusively, its employees and customers. The business must then put its efforts into defending its actions which can lead to a vicious, and expensive, circle. The more the firm seeks to avoid its responsibilities the stronger can be the reaction by stakeholders, so more effort must be put into the defence. This can easily result in a debilitating ‘bunker’ mentality within the business whereby it feels that its stakeholders are an enemy, rather than partners. Alternatively, the business may decide not to go looking for social responsibilities but will accept them when confronted by them. In this it is reactive. The business does not see social responsibilities either as a source of advantage or as a problem, they are just something else that has to be managed. Accepting social responsibility is probably less expensive than defending against it in the long run, but in being reactive the business is allowing itself to be confronted by uncertainties that it would otherwise be able to control. A third option is for the business to be positive towards its social responsibilities. It can choose to regard them not as liabilities but as opportunities and use them as a source of competitive advantage. Adopting a positive attitude towards social responsibilities brings them under control. They can be made part of the venture’s strategy. They can be used to motivate employees and to build a strong relationship with customers and suppliers, or they can be used to address the wider concerns of investors and so gain their support. A positive approach to its social responsibilities can be made into a success factor for the entrepreneurial business. Social responsibilities constrain the actions of a business. They often define what it cannot do rather than what it can. This does not mean that social responsibilities are bad for business. They provide a sound, and shared, set of rules within which the business community can operate. They ensure that the benefits of business activity are distributed in a way which is seen to be fair and equitable. This sustains the motivation of all stakeholders in the venture. Businesses are rarely penalised for meeting their social responsibilities positively. On the other hand, they will be punished if they are seen to evade their responsibilities. This

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ensures that ventures which set high standards are not penalised by being undercut by those that have lower standards. Taking on discretionary responsibilities and being proactive with them may be a strategic move. If this meets with the approval of customers and other stakeholders, it can provide a means by which the business can make itself different from competitors and gain an advantage in the marketplace. In recognition of this fact, the entrepreneur may specify the business’s social responsibilities in its mission statement. Using discretionary responsibilities to give the business an edge need not conflict with the personal values of the entrepreneur. The entrepreneur can improve the world with those values only if the business is successful. The social responsibilities the venture accepts, and how it defines them, are not merely ‘add-ons’ to the entrepreneur’s vision, they lie at its core. They are the character of the new world that the entrepreneur seeks to build. Paine (1994) suggests two basic approaches to social responsibility: first, a legal compliance strategy in which the firm adheres to the strict letter of the law, thus avoiding costly legal penalties; and, second, an integrity strategy, in which the firm aspires to meet the spirit of the law, fulfilling what it sees as the intention of legislators. This framework is applied to a study of ten US ventures by Joyner et al. (2002). The study found that entrepreneurs were often willing to go beyond mere legal compliance. A matrix model of corporate social responsibility was developed by Martin (2002). The vertical axis of the 2 × 2 matrix is split between ‘civil foundation’ on the bottom and ‘frontier’ on the top. The civil foundation is instrumental in that it provides a basal level of social responsibility that all firms are expected to abide by. Adherence may be by choice guided by social and cultural norms or due to legal imposition. The frontier represents behaviour that is intrinsic, in that managers act on their own initiative to adopt particular social responsibility standards above and beyond those expected of the sector as a whole. The horizontal axis is split between ‘strategic adherence’, in which adopting these higher standards actually increases returns to shareholders (and so is intrinsically motivated) and ‘structural adherence’, in which case shareholder value is reduced but society as a whole (arguably) benefits. This last category represents a barrier to social responsibility, as adherence may lead to punishment (selling of stock) by shareholders, threatening managers’ rewards and, potentially, the independence of the business. A decision tree model for choices about social responsibility was suggested by Bagley (2003). The first node asks if the action is legal. If it is not, it should not be undertaken. If it is, then the next node asks if the action is in line with maximising shareholder value. If it is, then the next node asks if the action is ethical (do other stakeholders benefit?). If so, it should be undertaken. If not, then it should not. If the action does not maximise shareholder value, then the next node asks if it would be ethical not to undertake the action (is the imputed cost to stakeholders acceptable given the increased return to investors?). If the answer is yes, then the action should not be undertaken. If the answer is no, then the action should be considered, but investors must be informed of its consequences. A study by Bucar and Hisrich (2001) explores whether entrepreneurs or (nonentrepreneur) business managers in Britain hold (or aspire to) higher ethical standards. He finds no significant difference between the two groups. The contributions to Ben-Ner and Putterman (1998) are recommended for those interested in the debate about how economic priorities establish social norms, and how social norms influence economic behaviour.

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9.5 Social responsibility and business performance Does the adoption of discretionary levels of corporate social responsibility result in an improvement or a reduction in total shareholder (investor) value? Arguments may be offered for both An appreciation of the positions. On the one hand, a firm adopting higher levels of corissue of, and the difficulty in porate social responsibility may develop an enhanced reputation, determining if, the adoption attracting new customers for whom such values are important. of levels of social responsibility Increased sales lead to increased performance. On the other hand, above those required of the introducing social and environmental objectives into the business sector as a whole leads to will, at the very least, complicate managers’ tasks and increase the an improvement in, or has need for co-ordination, thus raising costs. At worst, it might limit a detrimental effect on, the most efficient use of resources and force the business to ignore shareholder value. certain new opportunities. Both of these will reduce shareholder value. The total change in shareholder value will reflect the balance of these positive and negative forces. The resulting balance is, in principle, observable. It simply requires that the correlation between adoption of social responsibility and performance be measured. However, there are several reasons why this is not as straightforward as it seems. First of all, there needs to be an accepted definition of what corporate social responsibility is. As noted above, there is not. Different commentators prioritise different issues. Second, what do we mean when we say that a firm is adopting a particular social responsibility? The bottom line must be how much of its resources are being dedicated to delivering on this responsibility. Conventional accounting does not report on such things, not least because they are difficult to audit. Third, there is the issue of which actions are judged to be socially responsible. Do we regard them as such because they have the right motives, or because they are moral in themselves, or because they have beneficial outcomes? This is an issue explored in section 6.2, where motivist, deontological and consequentialist approaches to judging moralty were discussed. Different perspectives will change the judgement of the ethical quality of a particular action. Is a firm really being ethical if it adopts corporate social responsibility because it will actually increase its profits? Is protecting the environment, for example, moral in itself, no matter what other costs it incurs? Is a firm that employs low-cost labour in the developing world right to argue that it is in fact acting with social responsibility because it is providing jobs that otherwise would not be there? Finally we have the issue of what constitutes performance. If this is limited to financial performance (and measuring even this is not unproblematical), then it might be argued that other benefits (and costs) are being ignored. If social and environmental factors are accounted for, how are these to be measured in financial terms when there are not fully formed markets to price them. One group’s (personal) estimation of the value created will differ from another’s whose (again personal) values and valuations are different. If a ‘balanced scorecard’ approach is taken, then ipso facto, firms adopting social responsibility will perform better. A number of studies have attempted to address and circumvent these issues, and research in this area is growing rapidly. A review by McWilliams and Siegel (2000) suggests that there are two sorts of study. The first looks at short-run profits after adoption of social responsibility standards, assessing, for example, the effect on share price of announcements of new standards or of failures (an example being the study by Clinebell and Clinebell, 1994). The second looks at long-run profitability by taking a cross-sectional

Key learning outcome

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analysis of company accounts and comparing social responsibility adoption with profits over a relatively long period (an example being the study by Waddock and Graves, 1997). The findings have been mixed. For example, Aupperle et al. (1985) found no relationship between social responsibility and performance. Waddock and Graves (1997) found that profitability correlated positively with financial performance a year later. McGuire et al. (1988) found that performance prior to the adoption of social responsibility was important (suggesting that more successful firms were willing to adopt it), but that subsequent performance was not improved. McWilliams and Siegel themselves suggest that earlier studies are at fault because they do not take into account the effect of investment in research and development on corporate performance. Once this is taken into account, they suggest, social responsibility is largely neutral in terms of performance. Of course, a mixed picture might be expected. The demand for a general rule: ‘Does undertaking socially responsible action X lead to an improved (or reduced) performance?’ is probably a demand too much. Contingent factors such as the business sector, the expectations of customers, the actions of competitors and the prominence of particular social issues at the time are likely to have a significant impact and be highly variable. How does this add up as far as the entrepreneur is concerned? Should they seek to aspire to a higher level of social responsibility? There is no clear answer. Taking on discretionary responsibilities and being proactive with them may be a strategic move. If this meets with the approval of customers and other stakeholders, it can provide a means by which the business can make itself different from competitors and gain an advantage in the marketplace (though, for some, this may negate the ethical character of the move). In recognition of this fact, the entrepreneur may specify the business’s social responsibilities in its mission statement. Using discretionary responsibilities to give the business an edge need not conflict with the personal values of the entrepreneur. The entrepreneur can improve the world with those values only if the business is successful. The social responsibilities the venture accepts, and how it defines them, are not merely ‘add-ons’ to the entrepreneur’s vision, they lie at its core. They are the character of the new world the entrepreneur seeks to build.

9.6 Understanding failure Entrepreneurs are always faced with the possibility of failure. No matter how much they believe that their innovation offers new value to customers and regardless of how confident they are that An understanding of what they can build a business to deliver it, they will ultimately be tested business failure actually means. by the market. However many success factors they think are present, they may be found wanting in some respects. Uncertainty and risk are always present. Statistics of business failure are widely reported and they are usually quite frightening. Yet ‘failure’ is not a simple notion. It implies the absence of success and, like success, it can only be understood in relation to people’s goals and expectations. Failure happens when expectations are not met. It is a question of degree and means different things to different stakeholders. From the perspective of the entrepreneur, at least eight degrees of ‘failure’ can be identified based on the performance of the business and the way the entrepreneur retains control of it. These are listed in order of increasing severity below.

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1 The business continues to exist as a legal entity under the control of the entrepreneur (a) The business performs well financially but does not meet the social and self-development needs of the entrepreneur To most outsiders the business may appear to be a success. It may be performing well financially and making an impact on its market. It may be providing for the economic needs of the entrepreneur and their dependants but this does not necessarily mean it is meeting higher needs. The work necessary to keep the business running may be disrupting the entrepreneur’s social life. The entrepreneur may have had unrealistic expectations about how the venture would satisfy their self-development needs. If the entrepreneur feels that they have failed in this respect, they will be demotivated, and this can have an impact on their personal performance.

(b) The business fails to achieve set strategic objectives The business may meet the financial targets that have been set for it by the entrepreneur and its investors but even so may fail to meet the strategic targets, such as market share, growth and innovation rate set for it. This may not be of immediate concern if profits are being generated. However, it may warn of challenges ahead and potential problems with the longterm performance of the business. Much will depend on how sensitive business performance is to the strategy adopted and how flexible that strategy is.

(c) The business fails to perform as well as was planned but is financially secure The venture may not meet the financial objectives set for it by the entrepreneur and investors but still remain financially secure. The objectives may have been quite ambitious, setting income targets which were very comfortable in relation to necessary expenditure. Although the business may not be in immediate danger, investors may feel disappointed in the returns they will receive. Planned investments may have to be forgone. The entrepreneur may be called upon to address the business’s strategy and revise its plans to improve performance in the future.

(d) The business fails to perform as well as was planned and needs additional financial support The financial performance of the business may be so weak that income cannot cover necessary expenditure. Cash flow problems will be encountered and it is likely that the business will not survive without a further injection of cash. This is likely to come from investors, but additional support may also be gleaned by agreeing special terms with customers and suppliers. In this instance the entrepreneur is likely to be called upon to address the direction of the business and the way it is being run. If financial performance falls below a certain level, and the commitments of the business exceed its ability to meet them, then investors and creditors may lose confidence altogether. A change in management may be called for. A number of scenarios are possible.

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(a) The business is taken over as a going concern by new management The business that an entrepreneur creates is separate to them in that it has its own legal and organisational identity. It is possible that the business can continue and prosper even if the entrepreneur is no longer involved in its running. The entrepreneur may leave the business for a variety of reasons. Though successful, the entrepreneur may feel that the business does not offer them sufficient challenges or they may feel that managing it does not fulfil them (as in 1(a) above). They may sell their interest to a new manager or management team and move on to do something else. If this is what the entrepreneur wants to do then it must be counted as a success. The entrepreneur may, however, be called upon to leave the business against their wishes. If the business is not performing, its backers may decide that their interests are best served by bringing in new management with different ideas and different ways of doing things. The ability of the investors to oust the resident entrepreneur will depend on how much of the business they own, their ability to liquidate their investment and the contracts they have with the entrepreneur.

Chapter 9 Success, stakeholders and social responsibility

2 The business continues to exist as an independent entity but the entrepreneur loses control

(b) The business is taken over with restructuring As in scenario 2(a), the entrepreneur is called upon to leave. However, rather than run the business much as it was, the new management team may feel that performance can only be improved if the business undergoes a fundamental restructuring. This can involve changing its employees and making major acquisitions and divestments of assets.

3 The business does not continue to exist as an independent entity (a) The business is taken over as a going concern and absorbed into another company One business may be acquired by another through a takeover. It may retain some of its original character, and a modified legal status, by becoming a subsidiary of the parent. It loses its separate identity and all legal character if it is merged with the parent. In this case its employees move to work for the parent and its assets are combined with the parent’s assets. A takeover, or merger, may take place at the behest of the entrepreneur who wishes to sell their interest and move on to something else. It may also be instigated by investors who have lost confidence in the entrepreneur and the venture and wish to cut their losses by liquidating their investment. The entrepreneur may, or may not, retain an involvement by becoming a manager for the new parent.

(b) The business is broken up and its assets disposed of Takeover and mergers take place if there is a belief that the venture has some potential, even if a completely new management approach is called for. If there is no confidence even in this,

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Figure 9.5 Levels of entrepreneurial failure

then the business may be broken up and its assets sold off. The proceeds are used to reimburse stakeholders. Creditors and outstanding loans take priority. The investors, i.e. the owners of the venture, are only entitled to anything left after all creditors have been paid (Figure 9.5).

Managing failure Failure is a fact of business life. It is the possibility of failing that makes success meaningful. Failure is not always a disaster and it does not inevitably mean the end of the venture. Failure is part of the learning process. Minor failures can be positive indicators of how things might be done better. Such failures should not be ignored. They must be addressed before they become the seeds of larger failures. Success and failure exist relative to expectations. Failure occurs when expectations are not met. Managing success, and managing failure, has a lot to do with managing people’s expectations for the venture: keeping those expectations positive, but at the same time keeping them realistic.

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• The success of the entrepreneurial venture must be understood through three dimensions: the stakeholders who have an interest in the venture; their expectations of the venture; and actual outcomes relative to those expectations.

• The most effective entrepreneurs define objectives for success in relation to all the venture’s stakeholders (not just its investors) and operate with a keen sense of social responsibility.

• Many successful entrepreneurs have demanded that their businesses operate with a higher level of social responsibility than other businesses operating in their sectors.

• The issue of corporate social responsibility is complex and of growing interest. There is no clear picture as to whether, in general, accepting higher levels of responsibility increases or decreases shareholder value.

Chapter 9 Success, stakeholders and social responsibility

Summary of key ideas

• In many ways, different types of entrepreneurship (social versus conventional) might be seen as different prioritisations of stakeholders within a general entrepreneurship framework.

• Failure has many degrees and is an integral part of venturing. Good entrepreneurs learn from failure.

Research theme Entrepreneurs’ perceptions of success Section 9.1 developed a model of entrepreneurial success based on the venture’s ability to satisfy economic, social and developmental needs, the stakeholders involved in the venture and their expectations relative to outcomes. This framework provides a basis for exploring entrepreneurs’ belief in and attitudes towards success. Select a poll of entrepreneurs. These may be nascent, novice, singular or portfolio. It would be interesting to correlate beliefs across these different types of entrepreneur. Conduct a survey with the sample group, ascertaining: • their general thoughts about success; • whom they feel has a role in success, and who has a priority for rewards from the venture’s success; • what needs success aims to satisfy (have the entrepreneur prioritise economic, social and developmental needs); • how the entrepreneur sees the role of expectations and how they should be managed (e.g. should the entrepreneur over-promise at the start to get stakeholders on board, or under-promise so that stakeholders will be satisfied with actual outcomes?).

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For the analysis, categorise the entrepreneurs in terms of their priorities with regard to the needs that their ventures must satisfy (e.g. economic over social and developmental) and their priorities with stakeholders (e.g. investors over employees). Do entrepreneurs fall into neat ‘rationalist’ (self-priority – economic needs) and ‘humanist’ (other stakeholder – broader needs) categories, or are they more dispersed? How do the categories identified match with the entrepreneurs’ development stage? How do the categories match with the entrepreneurs’ management of expectations?

Key readings The classic paper that considers different levels of organisational responsibility (and used as the basis for the discussion here) is: Carroll, A.B. (1979) ‘A three-dimensional model of corporate performance’, Academy of Management Review, Vol. 4, No. 4, pp. 497–505. The original is still worth reading for its clarity and expansion on ideas. A more recent review that considers current thinking on issues relating to small business and entrepreneurial performance (not just what we measure, but how) is: Garengo, P., Biazzo, S. and Bititchi, U.S. (2005) ‘Performance measurement systems in SMEs: a review for a research agenda’, International Journal of Management Reviews, Vol. 7, No. 1, pp. 25–47.

Suggestions for further reading Atkinson, A.A., Waterhouse, J.H. and Wells, R.B. (1997) ‘A stakeholder approach to strategic performance measurement’, Sloan Management Review, Spring, pp. 25–37. Aupperle, K., Carroll, A. and Hatfield, J. (1985) ‘An empirical examination of the relationship between corporate social responsibility and profitability’, Academy of Management Journal, Vol. 28, No. 2, pp. 446–63. Avishai, B. (1994) ‘What is business’s social compact’, Harvard Business Review, Vol. 72, No. 1, pp. 38–48. Bagley, C.E. (2003) ‘The ethical leader’s decision tree’, Harvard Business Review, Feb., pp. 18–19. Ben-Ner, A. and Putterman, L. (eds) (1998) Economics, Values, and Organization, Cambridge: Cambridge University Press. Bucar, B. and Hisrich, R.D. (2001) ‘Ethics of business managers vs entrepreneurs’, Journal of Developmental Entrepreneurship, Vol. 6, No. 1, pp. 59–72. Buchholz, R.A. and Rosenthal, S.B. (2005) ‘The spirit of entrepreneurship and the qualities of moral decision making: towards a unifying framework’, Journal of Business Ethics, Vol. 60, No. 3, pp. 307–15.

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Carroll, A.B. (1979) ‘A three-dimensional model of corporate performance’, Academy of Management Review, Vol. 4, No. 4, pp. 497–505. Clinebell, S.K. and Clinebell, J.M. (1994) ‘The effects of advance notice of plant closures on firm value’, Journal of Management, Vol. 20, pp. 553–64. Dawson, S., Breen, J. and Satyen, L. (2002) ‘The ethical outlook of micro-business operators’, Journal of Small Business Management, Vol. 40, No. 4, pp. 302–13. De George, R. (1999) Business Ethics. Upper Saddle River, NJ: Prentice Hall. Dennis, W.J. and Fernald, L.W. (2001) ‘The chances of financial success (and loss) from small business ownership’, Entrepreneurship Theory and Practice, Fall, pp. 75–83. Dollinger, M.J. (1984) ‘Measuring effectiveness in entrepreneurial organisations’, International Small Business Journal, Vol. 3, No. 1, pp. 10–20. Douma, S. (1991) ‘Success and failure in new ventures’, Long Range Planning, Vol. 24, No. 2, pp. 54–60.

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Brown, D.M. and Laverick, S. (1994) ‘Measuring corporate performance’, Long Range Planning, Vol. 27, No. 4, pp. 89–98.

Fisscher, O., Frenkel, D. Lurie, Y and Nijhof, A. (2005) ‘Stretching the frontiers: exploring the relationship between entrepreneurship and ethics’, Journal of Business Ethics, Vol. 60, No. 3, pp. 207–9. Friedman, M. (1962) Capitalism and Freedom. Chicago: University of Chicago Press. Griffiths, B., Sirco, R.A., Barry, N. and Field, F. (2001) Capitalism, Morality and Markets, London: Institute of Economic Affairs. Harrison, E.F. and Pelletier, M.A. (1995) ‘A paradigm for strategic decision success’, Management Decision, Vol. 33, No. 7, pp. 53–9. Harrison, E.F. and Pelletier, M.A. (2000) ‘Levels of strategic decision success’, Management Decision, Vol. 38, No. 2, pp. 107–17. Henderson, D. (2001) Misguided Virtue: False Notions of Corporate Social Responsibility. London: Institute of Economic Affairs. Hutton, W. (ed.) (1997) Stakeholding and its Critics, Choice in Welfare No. 36. London: Institute of Economic Affairs. Joyner, B.E., Payne, D. and Raiborn, C.A. (2002) ‘Building values, business ethics and corporate social responsibility into the developing organisation’, Journal of Developmental Entrepreneurship, Vol. 7, No. 1, pp. 113–31. Kaplan, R.S. and Norton, D.P. (1996) ‘Linking the balanced scorecard to strategy’, California Management Review, Vol. 39, No. 1, pp. 53–79. Longenecker, C.O., Simonetti, J.L. and Sharkey, T.W. (1999) ‘Why organizations fail: the view from the front line’, Management Decision, Vol. 37, No. 6, pp. 503–13. Martin, R.L. (2002) ‘The virtue matrix: calculating the return on corporate social responsibility’, Harvard Business Review, Mar., pp. 68–75. McGuire, J., Sundgren, A. and Schneeweis, T. (1988) ‘Corporate social responsibility and firm financial performance’, Academy of Management Journal, Vol. 31, No. 4, pp. 854 – 72.

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McWilliams, A. and Siegel, D. (2000) ‘Corporate social responsibility and financial performance: correlation or misspecification?’, Strategic Management Journal, Vol. 21, pp. 603–9. Mole, K. (2000) ‘Business advisers impact on SMEs’, Middlesex University Discussion Paper Series: Business and Management. Available at: http://mubs.mdx.ac.uk/research/ Discussion_Papers/Business_and_Management/dpapmsno_4.pdf. Nash, L. (1995) ‘The real truth about corporate values’, Public Relations Strategist, Summer. Nucci, A. (1999) ‘The demography of business closings’, Small Business Economics, Vol. 12, No. 1, pp. 25–9. Osborne, R.L. (1993) ‘Why entrepreneurs fail: how to avoid the traps’, Management Decision, Vol. 31, No. 1, pp. 18–21. Osborne, R.L. (1995) ‘The essence of entrepreneurial success’, Management Decision, Vol. 33, No. 7, pp. 4–9. Paine, L.S. (1994) ‘Managing for organisational integrity’, Harvard Business Review, Mar./Apr., pp. 106–17. Porter, M. and Kramer, M.R. (2002) ‘The competitive advantage of corporate philanthropy’, Harvard Business Review, Dec., pp. 56–69. Routamaa, V. and Vesalainen, J. (1987) ‘Types of entrepreneur and strategic level goal setting’, International Small Business Journal, Vol. 5, No. 3, pp. 19–29. Sacks, J. (ed.) (1998) Morals and Markets, Institute of Economic Affairs Occasional Paper No. 108. London: Institute of Economic Affairs. Seglod, E. (1995) ‘New ventures: the Swedish experience’, Long Range Planning, Vol. 28, No. 4, pp. 45–53. Smallbone, D. (1990) ‘Success and failure in new business start-ups’, International Small Business Journal, Vol. 8, No. 2, pp. 34–47. Throsby, C.D. (2001) Economics and Culture. Cambridge: Cambridge University Press. Waddock, S. and Graves, S. (1997) ‘The corporate social performance–financial performance link’, Strategic Management Journal, Vol. 18, No. 4, pp. 303–19. Watson, J. and Everett, J. (1993) ‘Defining small business failure’, International Small Business Journal, Vol. 11, No. 3, pp. 35–48. Watson, K., Hogarth-Scott, S. and Wilson, N. (1998) ‘Small business start-ups: success factors and support implications’, International Journal of Entrepreneurial Behaviour and Research, Vol. 4, No. 3, pp. 217–38.

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CASE 9.1

27 January 2006

FT

The polluter pays: how environmental disaster is straining China’s social fabric FIONA HARVEY AND RICHARD MCGREGOR A week after scrambling to handle a discharge of tonnes of poisonous metals into a local river on which millions rely for drinking water, Jiang Yimin, the chief of the environment protection bureau in Hunan, south-central China, was adamant. Further spillages would be prevented, he vowed to visitors. In Mr Jiang’s sights were 50 to 60 small factories producing indium, a metallic element used in the manufacture of semi-conductors and liquid-crystal display screens, near the Xiang River, about an hour by road from the provincial capital, Changsha. ‘I am signing the order to close them today!’ he declared. Moments later, however, Mr Jiang’s assistant phoned the local environmental officials to request they show visitors the bureau’s work in the area, only to be rebuffed. Permission would have to come from the county government first. It was a telling reminder that the authority of even senior officials such as Mr Jiang means little on the ground. Once upon a time China’s environmental problems would scarcely have mattered beyond its borders. But the country’s highspeed growth and energy-intensive development model, combined with ineffective local enforcement of anti-pollution rules, has transformed its national shortcomings into a global problem. For Beijing, meanwhile, facing increasingly well-organised and often violent protests by villagers whose land has been ruined by pollution from factories built with local government support, the environment is the cause of

an ever more pressing challenge to the nation’s social cohesion and industrial dynamism. Joshua Muldavin, a professor of human geography at Sarah Lawrence College in the US who has spent 20 years in rural China, mostly working on environmental issues, believes the government may already have paid an irrevocable price. ‘China’s fabulous growth since the 1980s was achieved through environmental destruction and social and economic polarisation which now threaten its continuation,’ he says. ‘There is an emerging pattern of rural unrest that challenges the very legitimacy of the Chinese state and the development path on which it has embarked.’ Figures released by the Chinese government’s official Xinhua news agency at the end of December found that the drinking water of 300m people, nearly one-quarter of the population, was contaminated, often by harmful chemicals. About 90 per cent of China’s cities also suffer from polluted water and more than 100 cities suffered serious water shortages last year. In the last 15 years, China has hurried to establish an extensive system of environmental laws and regulations, many of them modelled on those of the west. Unlike the US, the only country that produces more greenhouse gases than China, Beijing’s leaders have put the environment at the heart of their rhetoric about economic development. China’s latest five-year economic blueprint lays out an ambitious plan to improve energy efficiency and enshrines in policy-making the

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CASE 9.1 CONT. concept of ‘green GDP’ (gross domestic product) – adjusting growth figures to take account of the impact of economic activity on the environment. In theory, the work of all government officials will be judged against those yardsticks. China also has precise targets to more than double the use of natural gas, renewables and nuclear power in its primary energy mix, in an effort to wean itself off over-reliance on coal. Such pronouncements win praise from foreign energy experts but, as Mr Jiang in Hunan could testify, the situation on the ground is very different. The area around the Xiang River bears the ravages not just of recent spillages of toxic metals but of three to four decades of pollution from a zinc smelter, the largest in China, and assorted related factories. The landscape is littered with scores of large and small factories – the oldest built in the fifties, the newest last month – separated by rancid pools of water and small vegetable patches. The villagers say they try to sell the produce because they dare not eat it themselves. Huddled around a mudbrick home behind a levee bank, villagers laugh sardonically when told that the environment bureau in Changsha is about to crack down on the indium plants. They are cynical about the media, too: they have conducted many interviews for local television stations but have yet to see one aired. ‘We can’t drink water from the river; we can’t drink it from the pools on the ground, and not even from underground,’ says Ma Shaomin. He hospitably rustles up some tea but then adds: ‘We always offer tea, but no visitors will drink it when they come here.’ The 50 or 60 indium factories under scrutiny from Mr Jiang are mostly new, built in 2003 amid a frenzy of ramshackle construction

by entrepreneurs untrammelled by official oversight at a time when the price of the metal began soaring on world markets. The price of indium has risen about eightfold from just above $100/kg in 2003 to nearly $900 earlier this year. Some of the latest rises are due to the closure of indium manufacturers in southern China last December after another toxic spill. Mr Jiang admits that many county officials have shares in the factories and their huge profits, which makes his job of closing them down even harder. ‘They are playing guerrilla games with us,’ adds his assistant, saying the plants will close briefly, before reopening nearby, often in the shells of old abandoned factories. Elizabeth Economy of the Council on Foreign Relations, who is the author of The River Runs Black, a book on China’s environment, says the weakest link in anti-pollution policy is poor local enforcement but that the problem goes deeper. ‘The root cause of China’s environmental problem is a fundamental unwillingness on the part of both Beijing and local governments to reform the political and economic system in a way that would make doing the right thing environmentally an attractive proposition,’ she says. Energy and water are cheap, so factories simply pay low pollution fines or use the cheapest waste water treatment technologies. Corruption is endemic, she says. Zhang Jianyu, of the Beijing office of Environmental Defence, a consultancy, agrees the issue is more complex than the conventional analysis, which blames the problem on the gap between the central government’s state-of-the-art laws and poor local enforcement. Whenever he sees a new law, he says: ‘I go straight to the penalties section to see whether they are severe enough.’ Mostly, they are not, with penalties for even the worst breaches of anti-pollution rules rarely costing companies more than Rmb200,000 ($25,000).

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used there, it could prompt a massive take-up of renewable energy. The Chinese government is also collaborating with the European Union to build coalfired power stations that will pioneer a drastic reduction in carbon dioxide emissions. The emissions will then be buried, ensuring that they do not contribute to climate change. This is a vital issue. China has abundant coal and it is the country’s default source of energy. Even by 2020, with a huge take-up in renewables, natural gas and nuclear energy, coal is expected to provide about 60 to 70 per cent of China’s electricity needs. John Ashton is the chief executive of Third Generation Environmentalism, a consultancy, and a former British diplomat who served as political adviser to Chris Patten, then Hong Kong governor, during the territory’s handover. He says the EU-backed power station will have a huge impact. ‘Coal is an extremely important fuel for China, and for other countries like India, as it is much cheaper than oil and often more readily available.’ Funding for environmental projects in China is becoming more readily available from sources such as the World Bank, which last month signed some of the biggest deals yet struck under a mechanism of the Kyoto protocol that funds greenhouse gas emissions reductions in developing nations. Two Chinese chemical companies will receive nearly $1bn in return for reducing emissions by 19m tonnes a year. For the residents living around the polluted Xiang River in Hunan, change cannot come fast enough. They point up the hill to a collection of small houses, which they call ‘widow’s village’ because most of the men have died of cancer-related diseases. Even small improvements can win praise in such a degraded environment. Yao Yunxian, dean of the department of environmental supervision at Changsha Institute of Environmental

Chapter 9 Success, stakeholders and social responsibility

China’s Clean Air Act, for example, devolves responsibility for issuing permits to factories to local officials, who for the most part have an interest in keeping factories open, as they are benchmarked according to economic growth in the area. The State Environmental Protection Administration, central government’s highest antipollution body, by contrast, remains a weak and understaffed actor in the Beijing bureaucracy, with just 250 staff and a budget of Rmb300m. Its US equivalent has 18,000 staff and $6bn, according to Mr Zhang. Nevertheless, it was Sepa that was held responsible after the most recent environmental crisis, the spill of toxic benzene from a petrochemical plant into the Songhua River late last year, which forced local authorities to cut off water to millions of residents in Harbin, north-east China. The Sepa minister was sacked for his handling of the issue, something that Mr Zhang compared to ‘imprisoning the policeman because he could not catch the thief’. Even the attempt to introduce ‘green GDP’, much admired overseas, looks less heroic when seen through the prism of Chinese domestic politics. The idea is now being piloted in 10 provinces but already the National Bureau of Statistics has said that it has not been able to find a formula for it. That isolates Sepa as it attempts to push the scheme through. However, China’s ability to solve its environmental problems, while also influencing policies in the rest of the world, should not be underestimated, according to Peter Sharratt of WSP Environmental, a consultancy. Mr Sharratt cites the current worldwide shortage of wind turbines, which has driven up prices and constrained the growth of renewable energy in many countries. If the manufacturing of some of these products, and other technologies such as solar panels, were to be undertaken in China at low cost and also

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CASE 9.1 CONT. Technology, has his own benchmark for measuring advances in the quality of the water in the Xiang. In some parts of the river, he says, the water used to turn many different colours from all the different kinds of pollution. With large numbers of factories shut down by the

CASE 9.2

authorities and a reduction in discharges, ‘the water colour has started to turn black recently’. That, he reckons, is progress. Source: Fiona Harvey and Richard McGregor, ‘The polluter pays: how environmental disaster is straining China’s social fabric’, Financial Times, 27 January 2006, p. 17. Copyright © 2006 The Financial Times Limited.

31 January 2006

FT

New Bosnia chief makes boosting economy priority STEFAN WAGSTYL The international community’s new high representative in Bosnia, who starts work tomorrow, plans to make boosting the economy a priority. Christian Schwarz-Schilling, a veteran German politician and businessman with long experience of the Balkans, intends to start his stint in Sarajevo with a visit next month to Germany’s Cebit technology fair at the head of a group of Bosnian entrepreneurs. ‘We have to create conditions for normal business to grow in Bosnia,’ he said. Mr Schwarz-Schilling, who takes over from Britain’s Lord Ashdown, said his aim was to promote reforms that would create normal political and economic conditions in Bosnia. ‘[I want to continue reforms] to bring the population to the point of taking real ownership of their institutions and not relying on the high representative as a governor to do this job.’ The US, the European Union, Russia and other countries and agencies, which have supervised Bosnia’s progress since the end of

its civil war in 1995, are now pushing for a change of status in Sarajevo with plans to end the high representative’s role and transfer power to local politicians. Under this plan, the EU’s special representative would become the senior international figure in Sarajevo and act like a powerful ambassador, having influence but no executive powers. Mr Schwarz-Schilling said this change could take place ‘at least three months’ after the October general election. But that would not end Mr Schwarz-Schilling’s personal role, as he is also the EU envoy, and would remain in Sarajevo in that role. Mr Schwarz-Schilling, 75, served for 10 years in Chancellor Helmut Kohl’s government. Afterwards, he worked in Bosnia in the 1990s as a mediator between the hostile Bosnian Serb, Muslim and Croat communities. Lord Ashdown has been an assertive figure in Bosnia, forcing local politicians to accept his will in the drive to create Bosnian state institutions above the institutions of the two

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done ten years of bottom-up work as a mediator.’ Mr Schwarz-Schilling dismissed suggestions his age might undermine his effectiveness. The new high representative’s other responsibilities include assisting in the hunt for fugitive alleged war criminals headed by Radovan Karadzic, the former Bosnian Serb leader, and Ratko Mladic, his army chief. ‘This is tremendously important. You can’t really create confidence in the justice system unless you can solve this problem,’ said Mr Schwarz-Schilling. Source: Stefan Wagstyl, ‘New Bosnia chief makes boosting economy priority’, Financial Times, 31 January 2006, p. 9. Copyright © 2006 The Financial Times Limited.

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entities into which Bosnia is divided – the Bosnian Serb Republic and the Muslim/ Croat Federation. Lord Ashdown also pushed Bosnian leaders to accept reforms needed for talks with the EU on a stabilisation and association agreement, the entry level of co-operation that could one day lead to EU membership. Mr Schwarz-Schilling is expected to be a more conciliatory high representative, who will try to cajole Bosnians into making the emerging institutions work. He declined to comment on Lord Ashdown’s approach directly but he pointed to his own record as a mediator and said: ‘The diplomacy [that has determined the shape of Bosnia since the 1995 Dayton peace agreement] has been a top-down approach. It is important that I have

Discussion points 1. Analyse Case 9.1 using the models of business responsibility developed in the chapter. 2. What are the responsibilities of entrepreneurs in building a nation or region after a major conflict?

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CHAPTER 10

The entrepreneurial process Chapter overview This chapter is concerned with developing a model of the process by which entrepreneurs create new wealth. It suggests that entrepreneurship, in the first instance, is driven by a desire for creating change on the part of the entrepreneur. This desire for change leads the entrepreneur to bring together three contingencies – opportunity, resources and organisation – in an innovative and dynamic way. The chapter also considers the limits of entrepreneurship and whether it extends beyond the profit-making domain to the management of artistic, social and cultural endeavours.

10.1 Making a difference: entrepreneurship and the drive for change Entrepreneurship is about bringing about change and making a difference. The world is not the same after the entrepreneur has finished with it. In a narrower sense, entrepreneurship is about An understanding of the exploiting innovation in order to create value, which cannot always changes that entrepreneurship be measured in purely financial terms. Innovation in this sense goes drives and the differences beyond just invention. It means doing something in a way that is entrepreneurs make. new, different and better. The entrepreneur is concerned with identifying the potential for change for the better. He or she exists in a state of tension between the actual and the possible, that is, between what is and what might be (see Figure 10.1). This tension is manifest in three dimensions: the financial, the personal and the social.

Key learning outcome

The financial dimension: the potential to create new value Entrepreneurship is an economic activity. It is concerned, first and foremost, with building stable, profitable businesses which must survive in a competitive environment. If they are to

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Figure 10.1 Tension in the entrepreneurial process

thrive and prosper they must add more value and deliver that value to buyers more effectively than their competitors. The new world created by the entrepreneur must be a more valuable one than that which existed previously. The opportunity exploited and the innovation present must create additional value if the venture is to be successful in the long term since it is this additional value that entrepreneurs use to attract and reward the venture’s key stakeholders. A point worth noting here is that in creating new value, entrepreneurship is not a ‘zerosum game’. Even though business is competitive, it is not inevitable that if an entrepreneur wins then someone else must lose. Entrepreneurship often presents win–win scenarios. As discussed in section 6.2, entrepreneurial activity increases the overall value of economies. Entrepreneurs do more than just shift existing wealth around. The new value that the entrepreneur creates can be shared in a variety of ways.

The personal dimension: the potential to achieve personal goals Entrepreneurs are motivated by a number of factors, and although making money may motivate some, it is not the only factor, nor necessarily the most important. A sense of achievement, of having created something, or of ‘making an entire new world’ is often a much more significant driving factor. The entrepreneurial venture can be an entrepreneur’s way of leaving their mark on the world. Entrepreneurs may also be motivated by the challenge that the competitive environment presents, namely a chance for them to pit their wits against the wider world. Driving their own ventures also gives entrepreneurs a chance to design their own working environment and instils a sense of control. In order to understand entrepreneurial motivation it is essential to recognise that, for many entrepreneurs, what matters is not the final destination of the business they build up, but the journey – the process of creating the business.

The social dimension: the potential for structural change Entrepreneurs operate within a wider society. In making an ‘entire new world’ they must, of course, have an impact on that society. They provide the society with new products and access to new services. They provide fellow citizens with jobs. They help make the economic system competitive. This may be good for the economic system as a whole, but not for the less dynamic, less efficient competitors they will drive to the wall. All of this gives the entrepreneur power to drive changes in the structure of a society. The kind of world that an entrepreneur envisages, perhaps the possibility of a better world, can

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10.2 The entrepreneurial process: opportunity, organisation and resources Every entrepreneurial venture is different, with its own history. Its successes are the result of it having faced and addressed specific Key learning outcome issues in its own way. Nonetheless, it is useful to consider the An understanding of the process of entrepreneurship in a generalised way since this gives factors in the process of us a framework for understanding how entrepreneurship creates entrepreneurial value creation. new wealth in several terms and for making sense of the detail in particular ventures. It also provides us with a guide for decision making when planning new ventures. The approach to the entrepreneurial process that will be described here is based on four interacting contingencies. The entrepreneur is responsible for bringing these together to create new value. A contingency is simply something which must be present in the process but can make an appearance in an endless variety of ways. The four contingencies in the entrepreneurial process are the entrepreneur, a market opportunity, a business organisation and resources to be invested (Figure 10.2).

Chapter 10 The entrepreneurial process

be an important factor in motivating the entrepreneur. It also means that the entrepreneur must (and often eagerly decides to) operate with some degree of social responsibility, sometimes in excess of that shown by their incumbent competitors. The kind of world that the entrepreneur would like to see is often a part of their vision for their firm and for the future. This vision may be enshrined in the mission that the organisation sets itself.

The entrepreneur The entrepreneur is the individual who lies at the heart of the entrepreneurial process, that is, the manager who drives the whole process forward. Entrepreneurs often act singly but in many instances entrepreneurial teams are important. Different members of the team may take on different roles and share responsibilities. They may be from the same family, for example the Benetton siblings from northern Italy who revolutionised the manufacture of textiles, or alternatively, they may be from an existing management team who have joined together to initiate their own venture, perhaps through a management buyout.

Opportunity An opportunity is the gap left in a market by those who currently serve it. It represents the potential to serve customers better than they are being served at present. The entrepreneur is responsible for scanning the business landscape for unexploited opportunities or possibilities that something important might be done both differently from the way it is done at the moment and, critically, better than it is done at the moment. The improved way of doing it is the innovation that the entrepreneur presents to the market. If customers agree with the entrepreneur that it is an improvement on what exists already and if the entrepreneur can supply the innovation effectively and profitably then new value can be created.

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Figure 10.2 The entrepreneurial process: opportunity, resources and organisation

Organisation In order to supply the innovation to the market, the activities of a number of different people must be co-ordinated. This is the function of the organisation that the entrepreneur creates. Organisations can take on a variety of forms depending on a number of factors, such as their size, their rate of growth, the industry they operate in, the types of product or service they deliver, the age of the organisation and the culture that it adopts. Entrepreneurial organisations are characterised by strong, often charismatic, leadership from the entrepreneur. They may have less formal structures and systems than their more bureaucratic, established counterparts. In many respects the entrepreneurial organisation is still learning, but rather than judge this to be a handicap the business turns it into a strength by being receptive to new ideas and responsive to the need for change. Current thinking on entrepreneurial organisations tends not to draw a hard and fast distinction between those inside the organisation and those who are on the outside. It has been found more productive to think in terms of the organisation in a wider sense as being a network of relationships between individuals, with the entrepreneur sitting at the centre. This network stretches beyond just the individuals who make up the formal company, to include people and organisations outside the venture such as customers, suppliers and investors. The relationships that make up the network are very diverse. Some are defined by

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Resources The final contingency in the entrepreneurial process is resources. This includes the money that is invested in the venture, the people who contribute their efforts, knowledge and skills to it, and physical assets such as productive equipment and machinery, buildings and vehicles. Resources also include intangible assets such as brand names, company reputation and customer goodwill. All these features can be subject to investment. One of the key functions of the entrepreneur is to attract investment to the venture and to use it to build up a set of assets which allow the venture to supply its innovation competitively and profitably. The entrepreneur plays a critical role in identifying opportunity, building and leading the organisation, and attracting and managing resources. The three external contingencies quickly develop a momentum of their own and become independent of the entrepreneur at the centre. As the organisation grows, it develops processes and systems, and the people within it adopt distinct roles. The entrepreneur must delegate responsibility within the organisation and specialist functions may take over some aspects of the entrepreneur’s role. For example, the marketing department may identify opportunities and innovate the firm’s offerings to take advantage of them; the finance department may assume responsibility for attracting investment. In this way, entrepreneurial ventures quickly take on a life of their own. They become quite distinct from the entrepreneur who established them. Consequently, the entrepreneur must constantly address the question of their own role within the organisation.

Chapter 10 The entrepreneurial process

contracts, whereas others are defined by open markets; some are formal and some informal; some are based on self-interest, whereas others are maintained by altruism; some are driven by short-term considerations, and others by long-term interests. In the network view, then, the organisation is a fluid, defined by a nexus of relationships. Its boundaries are permeable. The idea of a network provides a powerful insight into how entrepreneurial ventures establish themselves, how they locate themselves competitively, and how they sustain their position in their market by adding value to people’s lives.

10.3 The entrepreneurial process: action and the dynamics of success The entrepreneurial process results from the actions of the entrepreneur. It can only occur if the entrepreneur acts to develop Key learning outcome an innovation and promote it to customers. The entrepreneurial A recognition that process is dynamic. Success comes from the contingencies of the entrepreneurship is a entrepreneur, the opportunity, the organisation and resources dynamic process in which coming together and supporting each other over time. The entresuccess fuels success. preneur must constantly focus the organisation on to the opportunity that has been identified. They must mould the resources to hand to give the organisation its shape and to ensure that those resources are appropriate for pursuing the particular opportunity. These interactions are the fundamental elements of the entrepreneurial process and together they constitute the foundations of the strategy adopted by the venture.

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Table 10.1 An outline of organisational assets, structure, process and culture for three global entrepreneurial businesses Organisation McDonald’s

The Body Shop

Microsoft

Opportunity pursued

Desire for fast, convenient, consistent meals

Desire for toiletries in convenient packaging; a concern for the environment

Desire to process information

Assets

Brand name, outlets, locations, people

Brand name, outlets, locations, people

People, knowledge, patents, brand name

Structure

Series of production/ retail outlets

Series of retail outlets

Project teams based at one location

Process

Production and distribution standardised at outlets. Central financing and marketing

Production centralised. Distribution through outlets. Promotion largely by store presence

Product development, production, distribution and marketing centralised

Culture

Positive attitude, concern for quality, customer focus

Attitude of concern. Emphasis on wider social responsibility for organisation

Innovative and creative ‘technophilia’. Emphasis on managerial informality

Opportunity–organisation fit The nature of the opportunity that is being pursued defines the shape that the organisation must adopt. Every organisation built by an entrepreneur is different. Organisations are complex affairs and there are a variety of ways in which they might be described and understood. The essential features are the assets of the organisation, that is, the things which it possesses; its structure, namely how it arranges communication links (both formal and informal) within itself; its processes: how it adds value to its inputs to create its outputs; and its culture, that is, the attitudes, beliefs and outlooks that influence the way people behave within the organisation (see Table 10.1). Assets, structure, process and culture are not separate parts of an organisation. They are merely different perspectives we may adopt in describing it. These four perspectives on the organisation form a unified whole which must be appropriate for the opportunity that the organisation is pursuing. The organisation must be shaped to fit the market gap that defines the opportunity.

Resource–organisation configuration Resources are the things that are used to pursue opportunity. They include people, money and productive assets. In a sense, an organisation is ‘just’ a collection of resources, although

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Resource–opportunity focus The entrepreneur must decide what resources will make up the organisation; for example, its mix of capital, how this will be converted into productive assets, and the nature and skills of the people who will make it up are all matters to be decided by the entrepreneur in the first instance. If the organisation is to develop the assets, structure, process and culture that will enable it to fit with its opportunity then the resource mix must be correctly balanced. Entrepreneurs must be active in attracting resources such as suitably qualified employees, financial backing in the form of investors’ money, and the support of customers and suppliers. Even so, they usually find that they do not have access to the same level of resources as established players in a market and, because their risks may be higher, they will find the resources to be more expensive. If they are to compete successfully then entrepreneurs must make the resources they can get hold of work much harder than perhaps many established players do. The entrepreneur must be single-minded and focus those resources definitely and unambiguously on to the opportunity that has been identified since the performance of the entrepreneurial organisation depends on how well the contingencies of opportunity, organisation and resources are linked together (Figure 10.3).

Chapter 10 The entrepreneurial process

this does not exhaust possibilities for its description. The configuration of the resources is the way in which a particular mix of resources is brought together and blended to form the organisation’s assets, structure, process and (through the attitude of the people who make it up) its culture.

Learning organisations These three aspects of the entrepreneurial process – making the organisation fit the opportunity it aims to exploit, configuring the resources to shape the organisation and focusing the

Figure 10.3 The entrepreneurial process: focus, fit and configuration

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Figure 10.4 The entrepreneurial organisation constantly learns from its successes and failures

resources in pursuit of the opportunity – are not reflected in separate spheres of activity. They merely provide different perspectives on the same underlying management process. However, they do illuminate the essence of the entrepreneur’s task and the direction their leadership must take. That leadership must be applied constantly since organisations are fluid things and, left to themselves, they can lose their shape and sense of direction. Furthermore, the entrepreneurial organisation must be a learning organisation. That is, it must not only respond to opportunities and challenges but also reflect on the outcomes that result from that response and modify future responses in the light of experience. The venture cannot afford to acquire assets and set up structures and systems which are incapable of evolving as the organisation develops. Assets and structures must be modified as the organisation grows and changes and, critically, learns from its successes and failures. The entrepreneur must take responsibility for stimulating the firm to change in the light of experience. This learning process is shown in Figure 10.4.

Summary of key ideas • The entrepreneurial process is the creation of new value through the entrepreneur identifying new opportunities, attracting the resources needed to pursue those opportunities and building an organisation to manage those resources.

• The process is dynamic with the entrepreneur and the entrepreneurial organisation learning through success and failure.

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Theorising about processes The entrepreneurial process is one of the core aspects of entrepreneurial research. Consider the model of the entrepreneurial process developed in this chapter, in terms of its theoretical and methodological foundations. What paradigm does it represent? What methodologies would be appropriate for validating and developing the model? Could the model be integrated into other paradigmatic approaches? In particular, ask whether it might be used as an interpretive framework for non-positivistic approaches. Could it be used to make sense of cognitive maps of entrepreneurs’ perceptions of the issues they face in developing their ventures such as opportunity identification, resource acquisition, organisation creation and competition? Primary information may be gained from interviews with practising entrepreneurs.

Chapter 10 The entrepreneurial process

Research themes

Types of entrepreneur and the entrepreneurial process Chapter 2 discussed various types of entrepreneur. A distinction was made between singular, sequential and portfolio entrepreneurs. Use the contingency model developed in this chapter to propose generic issues in the development of singular, sequential and portfolio ventures, emphasising the contingencies of the entrepreneur, opportunity, resources, organisation, fit, focus and configuration as a guide. Use case studies of each type of venture as a source of information to develop real examples of the issues identified. How do they differ for each type of venture? What are the implications for each type of venture? Are the issues generic across each type of venture? How might these affect the need for external support for different types of venture?

Key readings Two highly influential studies that helped to establish the notion of an ‘entrepreneurial process’ that make good preparatory reading are: Bhave, M.P. (1994) ‘A process model of entrepreneurial venture creation’, Journal of Business Venturing, Vol. 9, No. 3, pp. 223–42. Gartner, W.B. (1985) ‘A conceptual framework for describing the phenomenon of new venture creation’, Academy of Management Review, Vol. 10, No. 4, pp. 696–706.

Suggestions for further reading Batstone, S. and Pheby, J. (1996) ‘Entrepreneurship and decision-making: the contribution of G.L.S. Shackle’, International Journal of Entrepreneurial Behaviour and Research, Vol. 2, No. 2, pp. 34–51.

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Bouchiki, H. (1993) ‘A constructivist framework for understanding entrepreneurial performance’, Organisation Studies, Vol. 14, No. 4, pp. 549–70. Brockner, J., Higgins, E.A. and Low, M.B. (2004) ‘Regulatory focus theory and the entrepreneurial process’, Journal of Business Venturing, Vol. 19, No. 2, pp. 203–20. Fayolle, A. (2002) ‘Insights to research on the entrepreneurial process from a study on perceptions of entrepreneurship and entrepreneurs’, Journal of Enterprising Culture, Vol. 10, No. 4, pp. 257–75. Hill, R. (1982) ‘The entrepreneur: an artist masquerading as a businessman?’, International Management, Vol. 37, No. 2, pp. 21–6. Jones, M.V. and Coviello, N.E. (2005) ‘Internationalisation: conceptualising an entrepreneurial process of behavior in time’, Journal of International Business Studies, Vol. 36, No. 3, pp. 284–303. Kodithuwakku, S.S. and Rosa, P. (2002) ‘The entrepreneurial process and economic success in a constrained environment’, Journal of Business Venturing, Vol. 17, No. 5, pp. 431–65. Lessem, R. (1978) ‘Towards the interstices of management: developing the social entrepreneur’, Management Education and Development, Vol. 9, pp. 178–88.

Selected case material CASE 10.1

25 January 2006

FT

A shot of rum turns crisis into opportunity ANDY WEBB-VIDAL When Alberto Vollmer appeared with Hugo Chávez earlier this month on the Venezuelan president’s Sunday television show, viewers could have been forgiven for thinking someone had handed out the wrong script. At first glance, the president’s supporters might have considered the tall and fair-haired Mr Vollmer as just the sort of ‘rancid oligarch’ that the rumbustious Mr Chávez regularly insists is plotting the overthrow of his leftist ‘revolution’ for the poor. But, instead of grilling a hapless victim, Mr Chávez heaped praise on Mr Vollmer as a model entrepreneur. It would seem that Mr Chávez shares common ground with the high priests of Harvard Business School.

And for good reason: Mr Vollmer’s management of Ron Santa Teresa, a rum company, is exemplary, both in turning round a nearbankrupt enterprise and in piloting it through a sea of social and political obstacles that would have left many businesses adrift. Today, Venezuela’s Santa Teresa produces one of the world’s finest premium rums, unique in its distilling method, regularly winning medals for flavour. Mr Vollmer, 37, has strong feelings about the social role of an entrepreneur. ‘It is the responsibility of those with most talent, wealth and vision to safeguard society’s health.’ He warns: ‘To not pay attention to this reality can lead to enormous costs in the long term.’

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In 1999 the board granted Mr Vollmer full decision-making powers, and he began a painful restructuring. ‘It was a critical moment. We had lost two-thirds of our capital and we had $25m in overdue debts,’ he says. ‘The company didn’t know if it was a producer or an importer.’ Mr Vollmer fended off threats to call in the receivers and restructured outstanding loans. Crucially, he also refocused the mission of the company. ‘The aim was to refocus on our core product – rum – and dignify the brand,’ he adds. Most of the company’s 260 products were eliminated, leaving only 17. Mr Vollmer says: ‘We focused on them and grew by 25 per cent in three months.’ While Santa Teresa’s sales since 1998 have steadily risen, to a projected $39m this year, its margins have been transformed. After several years in the red, the company recorded a profit of just over $1m in 2001. This year Mr Vollmer forecasts it will reach almost $5m. The world rum market accounts for about 60m cases per year, but Santa Teresa’s strategy is to aim for the top quartile of the market, specifically drinkers who favour premium rums. Rum used to be seen as a commodity favoured by sailors, and in Venezuela the drink of prestige is still whisky. But trends are changing. Exports are expanding. From only 2 per cent of total sales five years ago, export revenue is forecast to reach 15 per cent this year. Turning around Santa Teresa’s finances, however, has been only half the challenge. Venezuela under Mr Chávez, in power for the past seven years, has been gripped by political turmoil, presenting perhaps the toughest business environment in the Americas bar Cuba. ‘We survived the restructuring. But immediately a new front opened up: the social one,’ says Mr Vollmer. ‘In February 2000, only 15 days after completing the debt restructuring with the banks, we were invaded.’

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The road to success for Mr Vollmer has been an unusual one. After college in France and training as a civil engineer he worked for four years in a Caracas barrio, or slum, helping the poor to build homes. He eschewed the rum business that had been passed down through four generations to his father. The Santa Teresa hacienda, or estate, located in a lush valley 60 km west of the capital, was founded in 1796. It was acquired by Mr Vollmer’s great-great grandfather, a German adventurer. Santa Teresa began to produce rum in 1896, and modernised its distillery through the 20th century. In the 1970s it expanded its portfolio of rums and forged an alliance with a local whisky distributor. But the company suffered in Venezuela’s volatile economy. Currency fluctuations led to financial problems, whisky imports crimped the rum market and Santa Teresa faced tougher competition. Ron Cacique and Pampero, the two main competitors, were taken over by Seagram and United Distillers, respectively. (Diageo later took over United Distillers.) In an attempt to hold its position, Santa Teresa sold 20 per cent of its shares to Allied Domecq. But after a clash of management styles and a succession of chief executive officers, Santa Teresa had lost its sense of direction. It was not until he entered the Santa Teresa distillery in 1996 as a bottling supervisor that Mr Vollmer realised the source of the family’s wealth was on the rocks. The banks were calling in overdue loans, and some board members were plotting. ‘It was in bad shape,’ recalls Mr Vollmer. Mr Vollmer and his brother, Henrique, decided to propose a management takeover plan to their father, who was then Venezuela’s ambassador to the Vatican. ‘We got on the first plane to Rome and we said to him: “If the company is to be saved we need a major restructuring, and soon”,’ recalls Mr Vollmer. ‘He agreed.’

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CASE 10.1 CONT. About 250 local families took over 30 hectares of the 3,000 ha estate, demanding housing. The land invasion was organised by a former soldier and comrade-in-arms from Mr Chávez’s military days. Encouraged by the government, there has been a surge in land invasions in recent years. Enter Mr Vollmer’s experience in the Caracas slum. ‘We had to rethink our ideas. I had learnt a lot about the problems in the barrios. It was clear: if we didn’t invest heavily in the social area, we were not going to survive.’ Mr Vollmer and his closest managers offered to donate the land, on the condition that the company design a housing project. Today, the area has about 100 plots with family homes. Mr Vollmer, however, argued that what was needed was not philanthropy, but sustainable development. ‘We completed the housing project but realised that we had to invest in the community to avoid this happening again.’ Santa Teresa has experimented with local tourism to develop the adjacent town, blighted by unemployment, and sponsored sport and medical facilities. Perhaps the biggest test came in 2003, when members of a local gang attacked one of Santa Teresa’s security guards. Mr Vollmer’s response was again enlightened: he proposed to two of the youngsters that either they work for three months without pay or they would be handed over to the police. The whole 20-strong gang turned up to work. The idea was christened Project Alcatraz, and adjusted to allow the youths to work in the morning and attend social values classes in the afternoon. Since Alcatraz’s inception, four gangs have passed through – and the local incidence of crime has fallen by 35 per cent.

Pedro Gallardo, 32, who spent 18 months in Project Alcatraz, says: ‘Alcatraz has been fantastic. Your wallet wouldn’t be safe in your pocket when I was around. I have learnt to be less of a rebel.’ Alcatraz has now been expanded to include a housing construction workshop. ‘It is an issue of turning a crisis into an opportunity,’ says Mr Vollmer, who adds that while Santa Teresa invests about 2 per cent of its profits in the social projects, it has attracted about three times that amount from other sources. The Andean Development Corporation, or CAF, was the first institution to back Project Alcatraz. Ana Botero, CAF’s director for cultural and community development, says it is a model that should be replicated elsewhere. Mr Vollmer has already been invited by Colombia to advise on its programme to return guerrilla fighters to civilian life. Experts are also convinced that the model adopted by Santa Teresa is not just prudent politics, but also the most appropriate blueprint for business success in places with multiple problems such as Venezuela. ‘The management of Santa Teresa has wisely recognised that its viability and profitability are dependent not only on its ability to produce a superior product, but also to generate social value for its surrounding community,’ says Professor James Austin of Harvard Business School’s Social Enterprise Initiative. ‘Generating business and social value synergistically is the new paradigm for success throughout Latin America.’ Mr Vollmer is certain Mr Chávez would agree. Source: Andy Webb-Vidal, ‘A shot of rum turns crisis into opportunity’, Financial Times, 25 January 2006, p. 11. Copyright © 2006 The Financial Times Limited.

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The driving force behind a successful food distribution group JONATHAN MOULES When Mustafa Kiamil has a problem, he does something about it. In 1989, Jenny’s Burgers, his family’s fast food restaurant chain, had trouble getting regular supplies of tinned and fresh produce, so he set up his own catering delivery business. Sixteen years later, JJ Fast Food Distribution is operating from a six acre purpose-built site in an Enfield industrial park, delivering tinned and frozen food across a 100 mile radius. Among its claims to fame, JJ is the largest distributor of chips in London. The business model has some similarities to that of the Ryanair, the budget airline. JJ’s fleet of 200 delivery lorries consist of just two brands, making maintenance simple. The lorries are serviced and refuelled on site, minimising the time they spend off the road. JJ’s on-site 68,000 litre fuel store also means the company is less exposed to the fluctuations in petrol prices. Efficiencies in vehicle operations alone adds another 6 per cent to the bottom line, according to Mr Kiamil, who was named this year’s Credit Suisse Entrepreneur of the Year. ‘We have just taken a very old industry and done it differently.’ Recently his problem became finding truck drivers. Changes in the rules for heavy goods vehicle (HGV) licences limited the number of hours drivers were allowed to be on the road. The subsequent reduction in earning capacity has dissuaded many British workers from becoming truck drivers, encouraged existing drivers to change careers and made competition between companies that need drivers more intense, according to Mr Kiamil.

‘It became unfashionable to be a driver. Those that would work were spoilt for choice, wanted double the money and would change companies at the drop of a hat.’ As a result, Mr Kiamil started looking outside the UK for staff. The expansion of the European Union last May opened up the opportunity of employing Polish workers, many of whom had an equivalent of an HGV licence, earned during national service in the army. His Polish workers had an excellent work ethic. Some even worked for him while building their own businesses. But there were problems with JJ bringing people over. Firstly, there was the language barrier. A key way that JJ tries to differentiate from its competition is through politeness with customers and friendly service, so the Polish drivers needed good conversational English as well as being able to communicate with the operational team back at headquarters. Secondly, Mr Kiamil was concerned about experience on the road. ‘We knew that their driving licences were correct but they often get them purely by joining the army and it didn’t mean that they had driven a truck. ‘A lot of our competitors saw they had their driving licences and just put them in a truck. As far as we were concerned, if they had driven before it was on the other side of the road and they might have just been behind a wheel of a tractor. ‘We said if we are going to do this, let’s do it properly.’ As a result, Mr Kiamil ensured that every Polish driver received a half-day’s

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CASE 10.2

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CASE 10.2 CONT. English teaching every Saturday and four weeks of lorry driving training. Divisions between British and Polish drivers was also a concern, so the most experienced of JJ’s existing hauliers were assigned an eastern European recruit to ride in their cab until they knew the ropes. He also insisted that the Polish drivers earned the same wage as the rest of the staff. ‘We didn’t want to make them feel exploited. They earned the same as other drivers throughout the training. But it was made clear that, if they didn’t make the grade, then we would put them on as a driver’s mate permanently and they would earn an appropriate salary. ‘As time went on, they found out that other companies didn’t do that and so that earned us a lot of loyalty from our drivers.’ JJ started with a handful of Polish drivers and is now up to 70, more than a third of the team. The intensive language courses have now stopped. ‘We found that we can be a little more selective about who we employ, so we

now only take Polish workers who already speak English.’ Staff retention has been an issue. About a third of the Polish drivers go back after a year of working for JJ to the family they have left behind, often having earned enough money to build a better home back in Poland. This is not necessarily a problem, Mr Kiamil says, since often those that leave will send a brother or a cousin to replace them. This is encouraged by Mr Kiamil. ‘I know it sounds old-fashioned but work is about people dealing with people,’ he says. ‘If somebody brings in a member of their family with a recommendation, they tend to make good employees who stay with the company.’ Not all JJ’s Polish staff return home. The company has had its first marriage between a Polish driver and one of the British staff. As Mr Kiamil notes: ‘This is a family business.’ Source: Jonathan Moules, ‘The driving force behind a successful food distribution group’, Financial Times, 21 January 2006, p. 20. Copyright © 2006 The Financial Times Limited.

Discussion point 1. Apply the model of the entrepreneurial process to (a) the turnaround of a Venezuelan drinks company and (b) a food distribution group.

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CHAPTER 11

The nature of business opportunity Chapter overview This chapter presents an examination of the starting point for the entrepreneurial process, that is, the business opportunity. Entrepreneurs are motivated by the pursuit of opportunity. An analogy is developed through which a business opportunity can be pictured as a gap in the landscape created by existing business activities. The different types of innovation that can fill that gap, and so offer a means of exploiting opportunity, are considered. It is recognised that exploiting opportunities creates new wealth which can be distributed to the venture’s stakeholders.

11.1 The landscape of business opportunity All living systems have needs. At a minimum, animals need food and oxygen, plants need sunlight and water. Human beings are Key learning outcome different from many living organisms in that we are not content An understanding of simply to survive using the things nature places to hand. We build what comprises a business highly structured societies and within these societies we join opportunity. together to create organisations. Human organisations take on a variety of forms. However, they all exist to co-ordinate tasks. This co-ordination allows people to specialise their activities and to collaborate in the production of a wide variety of goods (a word taken to mean both physical products and services). Goods have utility because they can satisfy human needs. The products produced in the modern world can be used to satisfy a much more sophisticated range of human wants and needs, and to satisfy them more proficiently, than can the raw materials to be found in nature. An organisation is an arrangement of relationships in that it exists in the spaces between people. Organisations exist to address human needs. Their effectiveness in doing this is a function of the form adopted by the organisation and the way it works. As the number of people involved increases, so too do the ways of organising them. In fact, the possibilities quickly become astronomical. This leads to a simple conclusion: whatever the organisational arrangement is at the moment, there is probably a better way of doing things. Even if, by

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chance, we did find the optimum arrangement, it would not stay so for long. The world is not static. Technological progress would quickly change the rules. Ideas from classical economics suggest that the optimal (that is, the most productive) organisation is one in which individuals work to maximise their own satisfaction from the goods available and freely exchange those goods between themselves. Such behaviour is said to be economically rational. While this provides a powerful framework for thinking about economic relationships, it is clearly only an approximation. People gain satisfaction from a variety of things, not all are exchanged through markets (how much does a beautiful sunset, or a personal sense of achievement cost?). Nor is it obviously the case that individuals will maximise their own utility without any consideration towards their fellows. We can, and often do, act from altruistic motives. Even if we wanted to act rationally, we probably could not. We simply do not have access to the information we would need to make decisions on purely rational lines. If all the information were available, individuals would still be limited in their ability to process and analyse it. In response to this, some economists talk of satisficing behaviour. That is, individuals aim to make the best decision available given a desire to address a wider sphere of concerns than purely economic self-satisfaction and taking into account limitations in knowledge. An opportunity, then, is the possibility to do things both differently from and better than how they are being done at the moment. In economic terms, differently means an innovation has been made. This might take the form of offering a new product or of organising the company in a different way. Better means the product offers a utility, in terms of an ability to satisfy human needs, that existing products do not. The new organisational form must be more productive, i.e. more efficient at using resources than existing organisational forms. Yet the decisions as to what is different and whether it is better are not made by economic robots. Both entrepreneurs and the consumers who buy what they offer are social beings who engage in satisficing behaviour. They must also base their decisions on the knowledge they have to hand, and their ability to use it. Furthermore, they make their decisions while following the rules they have laid down for themselves and the rules of the culture that shapes their lives. We may think of business opportunity as being rather like a landscape representing the possibilities open to us. As we look across the landscape we will see open ground, untouched and full of new potential. We may see areas which are built up, leaving few new opportunities to be exploited. We will see other areas which are built up but where the buildings are old and decrepit, waiting to be pulled down and for something new built in their places. Effective entrepreneurs know the landscape in which they are operating. They know where the spaces are and how they fit between the built-up areas. They know which buildings can be pulled down and which are best left standing. Critically, they know where to move in and start building.

11.2 Innovation and the exploitation of opportunity A business opportunity is the chance to do something differently and better. An innovation is a way of doing something differently and better. Thus an innovation is a means of exploiting a business opportunity. Innovation has a definite meaning in economics. All goods

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New products

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(whether physical products or services) are regarded as being made up of three factors: natural raw materials, physical and mental labour, and capital (money). An innovation is a new combination An appreciation that of these three things. Entrepreneurs, as innovators, are people who innovation is the key to create new combinations of these factors and then present them exploiting opportunity. to the market for assessment by consumers. This is a technical conceptualisation of what innovation is about. It does not give the practising entrepreneur much of a guide to what innovation to make, or how to make it, but it should warn that innovation is a much broader concept than just inventing new products. It also involves bringing them to market. Some important areas in which valuable innovations might be made are discussed below.

Key learning outcome

One of the most common forms of innovation is the creation of a new product. This may exploit an established technology or it may be the outcome of a whole new technology. The new product may offer a radically new way of doing something or it may simply be an improvement on an existing theme. David Packard built a scientific instrumentation and information processing business empire, Hewlett-Packard, based on advanced scientific developments. Frank Purdue (founder of the major US food business Purdue Chickens), on the other hand, built his business by innovating in an industry whose basic product was centuries, if not millennia, old: the farmed chicken. Whatever the basis of innovation, the new product must offer the customer an advantage if it is to be successful: a better way of performing a task, or of solving a problem, or a better quality product. Products are not simply a physical tool for achieving particular ends. They can also have a role to play in satisfying emotional needs. Branding is an important aspect of this. A brand name reassures the consumer, draws ready-made associations for them and provides a means of making a personal statement. The possibility of innovations being made through branding should not be overlooked. The British entrepreneur Richard Branson, for example, has been active in using the Virgin brand name on a wide variety of product areas following its initial success in the music industry. To date, it has been used to create a point of difference on, among other things, record labels, soft drinks and personal finance products.

New services A service is an act which is offered to undertake a particular task or solve a particular problem. Services are open to the possibility of new ideas and innovation just as much as physical products. For example, the American entrepreneur Frederick Smith created the multi-million dollar international business Federal Express by realising a better way of moving parcels between people. Like physical products, services can be supported by the effective use of branding. In fact, it is beneficial to stop thinking about ‘products’ and ‘services’ as distinct types of business and to recognise that all offerings have product and service aspects. This is important because it is possible to innovate by adding a ‘customer service’ component to a physical product to make it more attractive to the user. Similarly, developments in product technology allow new service concepts to be innovated.

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New production techniques Innovation can be made in the way in which a product is manufactured. Again, this might be by developing an existing technology or by adopting a new technological approach. A new production technique provides a sound basis for success if it can be made to offer the end user new benefits. It must either allow them to obtain the product at lower cost, or to be offered a product of higher or more consistent quality, or to be given a better service in the supply of the product. An important example here is Rupert Murdoch’s drive for change in the way newspapers were produced in the 1980s. Production is not just about technology. Increasingly, new production ‘philosophies’ such as just-in-time (JIT) supply and total quality management (TQM) are providing platforms for profitable innovation.

New operating practices Services are delivered by operating practices which are, to some extent, routinised. These routines provide a great deal of potential for entrepreneurial innovation. Ray Kroc, the founder of McDonald’s, for example, noted the advantages to be gained in standardising fast-food preparation. As with innovations in the production of physical products, innovation in service delivery must address customer needs and offer them improved benefits, for example easier access to the service, a higher quality service, a more consistent service, a faster service, a less disruptive service.

New ways of delivering the product or service to the customer Customers can only use products and services they can access. Consequently, getting distribution right is an essential element in business success. It is also something which offers a great deal of potential for innovation. This may involve the route taken (the path the product takes from the producer to the user), or the means of managing its journey. A common innovation is to take a more direct route by cutting out distributors or intermediaries. A number of successful entrepreneurial ventures have been established on the basis of getting goods directly to the customer. This may be an indirect way into high street retailing, for example Richard Thalheimer in the USA with the Sharper Image catalogue or the Littlewoods chain in the UK (however, the closure of Littlewood’s Index stores in 2005 is a good example of Shumpetarian ‘creative destruction’ in action). Another approach is to focus on the distribution chain and specialise in a particular range of goods. This type of ‘category busting’ focus has allowed Charles Lazarus to build the toy retail outlet Toys ‘R’ Us into a worldwide concern.

New means of informing the customer about the product People will only use a product or service if they know about it. Demand will not exist if the offering is not properly promoted to them. Promotion consists of two parts: a message, what is said, and a means, the route by which that message is delivered. Both the message and the means present latitude for inventiveness in the way they are approached. Communicating with customers can be expensive, and entrepreneurs, especially when their ventures are in an early stage, rarely have the resources to invest in high-profile advertising and public

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New ways of managing relationships within the organisation Any organisation has a wide variety of communication channels running through it. The performance of the organisation will depend to a great extent on the effectiveness of its internal communication channels. These communication channels are guided (formally at least) by the organisation’s structure. The structure of the organisation offers considerable scope for value-creating innovations. Of particular note here is the development of the franchise as an organisational form. This structure, which combines the advantages of small business ownership with the power of integrated global organisation, has been a major factor in the growth of many entrepreneurial ventures, including The Body Shop retail chain, the Holiday Inn hotel group and the McDonald’s fast-food chain.

Chapter 11 The nature of business opportunity

relations campaigns. They are therefore encouraged to develop new means of promoting their products. Many entrepreneurs have proved to be particularly skilful at getting ‘free’ publicity. Anita and Gordon Roddick, for example, have used very little formal advertising for their toiletries retailer The Body Shop. However, the approach adopted by the organisation, and its stated corporate values, have made sure that The Body Shop has featured prominently in the widespread commentary on corporate responsibility that has regularly appeared in the media. As a result, awareness of their organisation is high and consumer attitudes towards it are positive.

New ways of managing relationships between organisations Organisations sit in a complex web of relationships. The way in which organisations communicate and relate to each other is very important. Many entrepreneurial organisations have made innovation in the way in which they work with other organisations (particularly customers) into a key part of their strategy. The business services sector has been particularly active in this respect. The advertising agency Saatchi and Saatchi, founded by the brothers Charles and Maurice Saatchi in 1970, did not build its success solely on the back of making good advertisem*nts. The brothers also realised that managing the relationship with the client was important. An advertising agency is, in a sense, a supplier of a service like any other, but its ‘product’ is highly complex and expensive, and its potential to generate business for the client is unpredictable. Thus advertising is a high-risk activity. The brothers realised that if advertising were to be managed properly, the agency had to become an integral part of the management team within the client organisation. It had not just to create advertisem*nts but also to work with the management team at resolving the issues generated by advertising, as well as help the team to exploit the potential of its advertising. In effect, the brothers broke down the barrier between their organisation and their customers.

Multiple innovation An entrepreneurial venture does not have to restrict itself to just one innovation or even one type of innovation. Success can be built on a combination of innovations: for example, a new product delivered in a new way with a new message.

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11.3 High- and low-innovation entrepreneurship Even though innovation has been defined as a key characteristic of entrepreneurship and has been used as one of the factors that disKey learning outcome tinguishes the entrepreneurial venture from the small business, An understanding of the particular entrepreneurial ventures differ in terms of the degree distinction between high- and of innovation they adopt. Manimala (1999), in a major study of low-innovation approaches entrepreneurship in India, has drawn a distinction between what to exploiting business he refers to as high and low pioneering-innovativeness (PI) entreopportunities. preneurship. These two types can be distinguished on the basis of a variety of strategic characteristics, the selection of which reflects the innovation discovered, the business opportunity and resources available and the personal preferences of the entrepreneur. These characteristics are summarised (with modification) in Table 11.1.

11.4 Opportunity and entrepreneurial motivation An opportunity, then, is a gap in a market or the possibility of doing something both differently and better; and an innovation Key learning outcome presents a means of filling that market gap, that is, a way of purAn understanding of how suing the opportunity. Such definitions, while they capture the the effective entrepreneur nature of opportunity and innovation from both an economic is motivated by business and a managerial perspective, do little to relate the way in which opportunity. opportunity figures in the working life of the entrepreneur. Opportunity motivates entrepreneurs. Therefore, it is the thing that attracts their attention and draws their actions. But good entrepreneurs are not blindly subject to opportunities; they take control of them. It is important to understand how entrepreneurs should relate to business opportunities and allow themselves to be motivated by them.

Entrepreneurs are attuned to opportunity Entrepreneurs are always on the lookout for opportunities. They scan the business landscape looking for new ways of creating value. As we have seen, this value can take the form of new wealth, a chance to pursue an agenda of personal development or to create social change. Opportunities are the ‘raw material’ out of which the entrepreneur creates an ‘entire new world’. To be motivated by opportunity entails the recognition that the current situation does not represent the best way of doing things; that the status quo does not exhaust possibilities. While this may be a spur to move forward, it could also create motivational problems. If we are too conscious of what might be, do we not become disillusioned with what is? Can the entrepreneur ever get to where they are going? There is no simple answer to this question. There are certainly some entrepreneurs who are driven forward because they are not satisfied with the present. However, many, while not losing their motivation for what might be, are still able to enjoy what is. Some gain satisfaction, not from reaching the end-points of their activity, but in the journey itself. Others make

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Strategic characteristics

Low PI entrepreneurship

High PI entrepreneurship

Idea management

Tend to rely on local contacts and ideas from existing products

Tend to be more inventive and obtain ideas from a wider source, perhaps internationally

Strategic vision starts limited but may evolve over time

Strategic vision ambitious from the start

Stick to and repeat earlier successes

Eager for new ideas

Prefer to manage autonomy by working with close-knit team

Will appoint individuals with relevant expertise even if personal knowledge of them is limited

Develop own expertise through experience

Will develop expertise through employment opportunities and formal training

Tend to stick to what is tried and trusted. Avoid competing when experience is limited

Will undertake, new, higher-risk competitive moves

Tend to build good working relationship with limited number of key customers (say, as subcontractor)

Greater drive to bring new customers on board. Emphasis on product, quality and service

Desire for growth but rely on clear and unhindered market opportunity to achieve growth

Desire for growth but more willing to actively compete for market space

Unlikely to make risky diversification moves

More likely to make risky diversification moves

Tend to rely on known, experienced workers

Experts brought on board as and when needed

More likely to rely on directions and routines as a means of control

More likely to rely on strategy, culture to exert control

Limit risk taking. Tried and trusted route

More likely to manage risk through information, e.g. market researching

Seeking of institutional and governmental support for expansion moves

Also keen for institutional and governmental support, but more willing to make unsupported risky moves

Mainly local. Keen to use informal as much as formal networks

Broader base and range of networking. Use local base for further expansion. Also use informal networks, but more adept at managing formal networks

Management of autonomy

Management of competition

Growth strategy

Human resource management

Risk management

Network development

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Table 11.1 High and low pioneering-innovativeness (PI) entrepreneurial strategies

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sure they create space for themselves to take pride in what they have achieved, as well as looking forward to what they might achieve. Entrepreneurs must be aware of their motivation. As well as knowing what they want to achieve they must be aware of why they want to achieve it and why they will enjoy the process of achieving it.

Opportunity must take priority over innovation It is easy to get excited about a new idea. However, an innovation, no matter how good it is, should be secondary to the market opportunity that it aims to exploit. The best ideas are those which are inspired by a clear need in the marketplace rather than those that result from uninformed invention. Many innovations which have been ‘pushed’ by new product or service possibilities rather than ‘pulled’ by unsatisfied customer needs have gone on to be successful. However, without a clear understanding of why customers buy and what they are looking for, this can be a very hit-or-miss process. Mistakes are punished quickly and they can be expensive. Failure is certainly demotivating, but this is not to suggest that new product ideas should necessarily be rejected. It does mean that they provide the inspiration to assess their market potential, not to rush the idea straight into the market.

Identifying real opportunities demands knowledge One of the misconceptions that many people entertain about entrepreneurs is that they are the ‘wanderers’ of the business world. The notion that they drift between industries, opportunistically picking off the best ideas missed by less astute and responsive ‘residents’, is widely held. This idea can be traced to the view that the entrepreneur is a ‘special’ type of person. If they are entrepreneurial by character, then they will be entrepreneurs wherever they find themselves. So they can move at will between different areas of business taking their ability with them. Such an idea is not only wrong, it is also dangerous because it fails to recognise the knowledge and experience that entrepreneurs must have if they are to be successful in the industries within which they operate. Some important elements of this knowledge include knowledge of: • • • • • • •

the technology behind the product or service supplied; how the product or service is produced; customers’ needs and the buying behaviour they adopt; distributors and distribution channels; the human skills utilised within the industry; how the product or service might be promoted to the customer; competitors: who they are, the way they act and react.

This knowledge is necessary if good business opportunities are to be identified and properly assessed. Acquisition of this knowledge requires exposure to the relevant industry, an active learning attitude and time. Most entrepreneurs are actually experienced in a particular industry sector and confine their activities to that sector. Many have acquired this experience by working as a manager in an existing organisation. This ‘incubation’ period can be important to the development of entrepreneurial talent. However, industry-specific knowledge does not produce entrepreneurs on its own. It must be supplemented with general business skills and people skills. If an entrepreneur with these

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11.5 The opportunity to create wealth Entrepreneurs can often become well-known public figures. They are of public interest because they have been successful, and this Key learning outcome success has often made them wealthy. Their success is of interest An appreciation of the role in its own right, but their wealth may give them a good deal of of wealth creation in the social (and perhaps political) power. So while entrepreneurship, entrepreneurial process. and the desire to be an entrepreneur, cannot usually be reduced to a simple desire to make money, it must not be forgotten that making money is an important element in the entrepreneurial process. Business success, and the accumulation of wealth this brings, creates a number of possibilities for the entrepreneur and their ventures to dispose of that wealth.

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skills were to be transplanted between industries, these skills would still be valuable but they would be unlikely to come into their own until the entrepreneur had learnt enough about the new business area to be confident in making good decisions. It is interesting to note that entrepreneurs who do move between industries demonstrate a skill in drawing out and using the expertise that exists within those different industries. Richard Branson, for example, is renowned for his ability to work effectively with industry specialists.

Reinvestment If the entrepreneur wishes to grow their business then that growth will demand continued investment. Some of this may be provided by external investors but it will also be expected, and may well be financially advantageous, that the business reinvest some of the profits it has generated.

Rewarding stakeholders The entrepreneurial venture is made up of more than just the entrepreneur. Entrepreneurs exist in a tight network of relationships with a number of other internal and external stakeholders who are asked to give their support to the venture. They may be asked to take risks on its behalf. In return, they will expect to be properly rewarded. Financial success offers the potential for the entrepreneur to reward them, not just financially but in other ways as well.

Investment in other ventures If reinvestment within the venture has taken place, and the stakeholders have been rewarded for their contributions, and there are still funds left over, then alternative investments might be considered. The entrepreneur may start an entirely new venture (an option which can be particularly tempting to serial entrepreneurs when their business has matured and they feel that its initial excitement has gone). Another option is that of providing investment support to another entrepreneur. Successful, established entrepreneurs will often act as ‘business angels’ and offer their knowledge and experience, as well as spare capital, to young ventures.

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Personal reward Some of the value created by the entrepreneur and their venture (though by no means all of it) can be taken and used for personal consumption. Funding a comfortable lifestyle is part of this. It may be regarded by the entrepreneur as a just reward for taking risks and putting in the effort that the success has demanded. Some entrepreneurs may also be quite keen to put their money into altruistic projects: for example, they may sponsor the arts or support social programmes. This may reflect their desire to make a mark on the world outside the business sphere, which is part of their desire to leave the world different from the way in which they found it.

Keeping the score For many entrepreneurs, money is not important in itself. It is just a way of quantifying what they have achieved; a way of keeping the score on their performance, as it were. The money value of their venture is a measure of how good their insight was, how effective their decision making was, and how well they put their ideas into practice. As far as the entrepreneur is concerned, money is more usually a means rather than an end in itself. That we notice the entrepreneurs who are highly rewarded for their efforts should not blind us to the fact that this reward is more often than not the result of a great deal of hard work and it is a reward that is far from inevitable.

11.6 The opportunity to distribute wealth

Key learning outcome A recognition of who expects to be rewarded from the entrepreneurial venture.

No entrepreneur works in a vacuum. The venture they create touches the lives of many people. To drive their venture forward, the entrepreneur calls upon the support of a number of different groups. In return for their support, these groups expect to be rewarded from the success of the venture. People who have a part to play in the entrepreneurial venture generally are called stakeholders. The key stakeholder groups are employees, investors, suppliers, customers, the local community and government.

Employees Employees are the individuals who contribute physical and mental labour to the business. The business’s success depends on their efforts on its behalf and therefore upon their motivation. Employees usually have some kind of formal contract and are rewarded by being paid a salary. This is usually agreed in advance and is independent of the performance of the venture, although an element may be performance related. Employees may also be offered the possibility of owning a part of the firm through share schemes. People do not work just for money. The firm they work for provides them with a stage on which to develop social relationships. It also offers them the possibility of personal development. When someone joins an organisation they are making a personal investment in its future and the organisation is investing in their future. Changing jobs is time consuming and

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Investors Investors are the people who provide the entrepreneur with the necessary money to start the venture and keep it running. There are two main sorts of investor. Stockholders are people who buy a part of the firm, its stock, and so are entitled to a share of any profits it makes. Stockholders are the true owners of the firm. The entrepreneur managing the venture may, or may not, be a major shareholder in it. Lenders are people who offer money to the venture on the basis of its being a loan. They do not actually own a part of the firm. All investors expect a return from their investment. The actual amount of expected return will depend on the risk the venture is facing and the other investments that are available at the time. The return the stockholder receives will vary depending on how the business performs. Lenders, on the other hand, expect a rate of return which is agreed independently of how the business performs before the investment is made. Lenders usually take priority for payment over stockholders, whose returns are paid only once the business has met its other financial commitments. Lenders consequently face a lower level of risk. However, there is still the possibility that the venture might become insolvent and not be able to pay back its loans.

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can be expensive. Those who decide to work for an entrepreneurial venture are exposing themselves to the risk of that venture, even if they are being paid a fixed salary.

Suppliers Suppliers are the individuals and organisations who provide the business with the materials, productive assets and information it needs to produce its outputs. Suppliers are paid for providing these inputs. The business may only make contact with a supplier through spot purchases made in an open market, or contact may be more direct and defined by a formal contract, perhaps a long-term supply contract. Suppliers are in business to sell what they produce and so they have an interest in the performance of their customers. Supplying them may involve an investment in developing a new product or providing back-up support. A new venture may call upon the support of its suppliers, perhaps by asking for special payment terms to ease its cash flow in the early days. Information and advice about end-user markets may be provided. The chance to build a partnership with suppliers should never be overlooked.

Customers As with suppliers, customers may need to make an investment in using a particular supplier. Changing suppliers may involve switching costs. These include the cost of finding a new supplier, taking a risk with goods of unknown quality, and the expenses incurred in changing over to new inputs. When customers decide to use the products offered by a new venture rather than one with an established track record, they may be exposing themselves to some risk. (This is something the entrepreneur needs to take into account when devising a selling strategy.) The entrepreneur’s business may sell to its customers on an open market but, as with suppliers, the possibility of building a longer-term partnership should always be considered.

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The local community Businesses have physical locations. The way that they operate may affect the people who live and other businesses which operate nearby. A business has a number of responsibilities to this local community, for example in not polluting their shared environment. Some of these responsibilities are defined in national or local laws, others are not defined in a legal or formal sense but are expected on the basis that the firm will act in an ethical way. Corporate responsibility is a political and cultural as well as an economic issue. If the firm is international and operates across borders then the way it behaves in one region may influence the way it is perceived in another. For example, a number of well-known sports shoes manufacturers were criticised recently for paying Indian workers less than $0.5 for manufacturing shoes that retailed for over $200 in the USA. Whatever the fair ‘market’ price of labour in India, the firm’s managers had to react to the damage this criticism did to the brand names they were trying to market in the West.

Government A major part of a government’s responsibility is to ensure that businesses can operate in an environment which has political and economic stability, and in which the rule of law operates so contracts can be both made and enforced. The government may also provide central services such as education and health care which the workforce draws upon. These services cost money to provide and so the government taxes individuals and businesses. In general, governments aim to support entrepreneurial businesses because they have an interest in their success. Entrepreneurs bring economic prosperity, provide social stability and generate tax revenue.

Distribution of rewards All the stakeholders shown in Figure 11.1 expect some reward from the entrepreneurial venture. By working together they can maximise its success. Even so, the new wealth created by the entrepreneur is finite. It can only be shared so far. The entrepreneur must decide how to distribute the wealth among the various stakeholders. To some extent the entrepreneur’s

Figure 11.1 Stakeholders in the entrepreneurial venture

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11.7 Entrepreneurship: risk, ambiguity and uncertainty

Key learning outcome An understanding of the role that knowledge of business opportunities plays in defining the types of decision an entrepreneur must make.

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hands are tied since the sharing of the profits is, in part, determined by external markets. Legal requirements and binding contracts also play a part in deciding what goes where. However, the entrepreneur has some freedom to decide who gets what. Customers can be rewarded for their loyalty. Higher payments may be used to motivate employees. Profits can be used to support projects in the local community. Distributing the rewards created by the venture is a great responsibility. Using this latitude for rewarding stakeholders creatively is important to the future success of the venture. If rewards are distributed in a way which is seen as fair and proper then they can motivate all involved in the venture. However, a distribution which is seen as illegitimate is a sure way to cause ill feeling.

Entrepreneurs are often characterised as risk takers. Although, as argued in Chapter 1, it is properly investors, not entrepreneurs, who take risks, it is certaintly true that entrepreneurs manage risk and make decisions in relation to it. Strictly speaking, though, decisions made in the face of risk constitute only one type of decision that an entrepreneur makes. Modern decision theory clearly distinguishes among decisions made under conditions of risk, of uncertainty and of ambiguity. All these decision types are based on knowledge of three information sets:

• The set of states of the world. These are the eventualities that the world may throw up in the future. They are outside the active control of an entrepreneur. An entrepreneur cannot control (or can influence in only a very limited way) factors such as overall demand for a new product, the actions of competitors, government interventions or broader world events. Such states of the world are regarded as discrete: we can distinguish one situation from another. Generally speaking, this is theoretically sound, but in practice it may be difficult to distinguish closely related or fine-grained states such as a competitor launching one product or launching a closely related one. • The set of acts. These are the choices that the entrepreneur can make and has control over. For example, an entrepreneur may decide to launch one product or another, or invest in production machinery rather than advertising and so on. Acts are made in anticipation of the state of the world that will obtain. An act results from a particular decision. As with states of the world, acts are regarded as discrete and distinguishable, at least in principle. • The set of outcomes. Outcomes result from the intersection of an act with a state of the world. They are the payoff expected to happen if the entrepreneur does ‘this’ and ‘that’ occurs. So the entrepreneur may invest in developing an export market in the expectation that demand in that market will grow. If it does so, then extra revenue will result. If it does not do so, however, then a lower return will be obtained. The entrepreneur may have invested in developing a new product for the domestic market, but decided not to do so because a launch by a competitor was expected, a launch that would have reduced demand for the new offering. It may turn out that the competitor does not go through with the expected launch, and so the investment in the domestic market would have given a better return than the export drive.

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Decisions, then, are made on the basis of knowledge about states, acts and outcomes. Different levels of knowledge about each of these lead to different types of decision: • Decisions under certainty. A decision under certainty is one where the actual state of the world that will occur is known definitely – for example, placing a bet on the sun rising tomorrow. In this case, the decision maker simply selects the act that gives the highest returns. These returns will definitely be obtained. As might be imagined, such decisions under certainty occur very rarely in business life. • Decisions under risk. A decision under risk is one where the states that might occur are known, but it is not known for definite which one will occur. What is known is the probability with which each state might occur. Decisions of this type occur in gambling – for example, betting that a tossed coin will come up heads or that a thrown die will land with six uppermost. The probability of a head is 1 in 2, that of throwing a six, 1 in 6. A rational decision maker will adjust the bet so that their expected payoff is maximised. The probabilities involved in such gambling games is known because the frequency with which the events will occur is known. There may be situations where frequencies are not known but where expert judgement can ascribe a probability – for example, a weather forecaster suggesting that the chance of rain tomorrow is 20 per cent, or a doctor suggesting that a particular treatment has a 90 per cent chance of being successful. Strictly speaking, risk is present only if such probabilities are known. • Decisions under uncertainty. In fact, despite the widespread use of the word ‘risk’ in business, decisions under risk are quite rare in business life (they may occur with stock market investments, for example). They are rare because, while a manager may have a good knowledge of what might happen, he or she does not usually have detailed knowledge of the actual probabilities of what will happen. For example, a competitor may or may not launch a new product (states of the world); but what is the probability of this? If this is not known at all, the decision is said to be one under uncertainty. Under conditions of uncertainty, decision makers may adopt a number of guiding rules depending on whether they wish to maximise their minimum return, or minimise the maximum loss they might make. • Decisions under ambiguity. Of course, an experienced manager might suggest that they have a ‘feel’ for whether or not the competitor will launch. This judgement will be based on knowledge of the market and of the way the competitor has acted in the past. The manager may resist putting a definite figure on the probability of the launch, but will be prepared to make a decision based on their intuition that the launch is very likely, moderately likely or unlikely. Decisions under ambiguity lie between those under uncertainty and risk. There is no definite probability for the things that might happen (risk), but the situation is not one of complete uncertainty either. Normative rules for decision making under ambiguity are far from clear and are the subject of research in field of the decision theory. • Decisions under ignorance. Ignorance represents the opposite end of the spectrum to certainty. In this situation, not only are probabilities not known, but even what might happen is not known. Without even this foresight, it is difficult to make any decision at all. Most managerial, and entrepreneurial, decisions are decisions under ambiguity rather than under risk. With this distinction in mind, it can be argued that what entrepreneurs actually do is not take on risk but act to convert uncertainty (and ignorance) into risk (via ambiguity) by using their judgement to analyse and clarify the eventualities (states) that might occur,

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Summary of key ideas • A business opportunity is a gap in the market which presents the possibility of new value being created.

• Opportunities are pursued with innovations – a better way of doing something for a customer.

• Entrepreneurs are attuned to new opportunities and are motivated to pursue them.

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estimate their probabilities and then identify the acts that will maximise payoffs given these eventualities. This is a service that entrepreneurs offer to investors. Investors will take on risk, but they will not take on uncertainty.

• Entrepreneurs decide not only how to create new wealth but also how to distribute it to the venture’s stakeholders.

• Decisions may be defined in terms of the knowledge available before they are made. • Entrepreneurs turn uncertainty into risk on behalf of investors, rather than take on risk themselves.

Research themes High- and low pioneering-innovativeness (PI) entrepreneurial strategies Manimala’s scheme for distinguishing between high- and low-innovativeness entrepreneurship is described in section 11.3. This distinguishes between the two types on a categorical and heuristic basis (see also section 18.6). Using either case study descriptions of a series of entrepreneurial ventures or information obtained from primary surveys (at least 20 ventures in either case), evaluate them in terms of the criteria described. On the basis of these criteria, does Manimala’s scheme clearly divide the ventures into high- and low-PI categories? Are there any other factors that discriminate between them? Might more categories or intermediate categories be needed?

Key readings An interesting study that draws out the different ways in which entrepreneurs and ‘administrators’ identify and respond to opportunities is: Cave, F. and Minty, A. (2004) ‘How do entrepreneurs view opportunities: rose tinted spectacles or the real option lens?’ Journal of Private Equity, Vol. 7, No. 3, pp. 60–7.

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A formal framework for guiding and supporting entrepreneurial creativity is described in: Dutta, D.K. and Crossan, M.M. (2005) ‘The nature of entrepreneurial opportunities: understanding the 4L organizational learning framework’, Entrepreneurship: Theory and Practice, Vol. 29, No. 4, pp. 425–49.

Suggestions for further reading Choi, Y.R. and Shepherd, D.A. (2004) ‘Entrepreneurs’ decisions to exploit opportunities’, Journal of Management, Vol. 30, No. 3, pp. 377–95. Donaldson, T. and Preston, L.E. (1995) ‘The stakeholder theory of the corporation: concepts, evidence and implications’, Academy of Management Review, Vol. 20, No. 1, pp. 65–91. Drucker, P.F. (1985) ‘The discipline of innovation’, Harvard Business Review, May/June, pp. 67–72. Gray, H.L. (1978) ‘The entrepreneurial innovator’, Management Education and Development, Vol. 9, pp. 85–92. Katz, J. (1990) ‘The creative touch’, Nation’s Business, March, p. 43. Keh, H.T., Foo, M.D. and Lim, B.C. (2002) ‘Opportunity evaluation under risk conditions: the cognitive processes of entrepreneurs’, Entrepreneurship: Theory and Practice, Vol. 27, No. 2, pp. 125–48. Manimala, M.J. (1999) Entrepreneurial Policies and Strategies. New Delhi: Sage. Vandekerckhove, W. and Dentchev, N. (2005) ‘A network perspective on stakeholder management: facilitating entrepreneurs in the discovery of opportunities’, Journal of Business Ethics, Vol. 60, No. 3, pp. 221–32.

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CASE 11.1

7 February 2006

FT

How and why giveaways are changing the rules of business MICHAEL SCHRAGE A simple lyric explains the dynamic driving so much innovation in today’s post-industrial marketplace: ‘The best things in life are free.’ Never in history has so much innovation been offered to so many for so little. The world’s most exciting businesses – technology, transport, media, medicine and finance – are increasingly defined by the word ‘free’. Whereas Wal-Mart, the world’s largest retailer, promises ‘everyday low prices’, entrepreneurs and ultra-competitive incumbents develop business models predicated on providing more for free. It is a difficult proposition to beat. Google charges users nothing to search the internet; neither does Yahoo! nor Microsoft MSN. E-mail? Instant messaging? Blogging? Free. Skype, the Luxembourg-based company that is now a multibillion-dollar division of eBay, offers free VOIP – Voice Over Internet Protocols – telephone calls worldwide. San Francisco-based Craigslist provides free online classified advertising around the world. In America, the Progressive insurance group gives comparison-minded shoppers free vehicle insurance quotes from its competitors. Innumerable financial service companies offer clients free tax advice, online bill payments and investment research. Michael O’Leary, Ryanair’s colourful founder, predicts his discount carrier may soon offer free tickets to his cost-conscious euro-flyers. Of course, Milton Friedman, the Nobel economist, is right: just as ‘there’s no such thing as a free lunch’, there is also no such thing as a ‘free innovation’. These ‘free’ offerings are all creatures of creative subsidy. Free

search engines have keyword-driven advertisers. Financial companies use cash flow from profitable core businesses to cost-effectively support alluringly ‘free’ money management services. Ryanair counts on the lucrative introduction of in-flight gambling to make its ‘free tickets’ scenario a commercial reality. Innovative companies increasingly recognise that innovative subsidy transforms the pace at which markets embrace innovation. ‘Free’ inherently reduces customer risk in exploring the new or improved – and bestows competitive advantage. To the extent that business models can be defined as the artful mix of ‘what companies profitably charge for’ versus ‘what they give away free’, successful innovators are branding and bundling ever-cleverer subsidies into their market offerings. The right ‘free’ fuels growth and profit. Technology has successfully upgraded King Gillette’s classic ‘razor and blades’ business model. All this freedom poses provocative challenges for global regulators and economic development champions. One company’s clever cross-subsidy is another’s anti-competitive predatory pricing. Ingenious subsidies inevitably invite invasive scrutiny. Look at Airbus and Boeing. American and European trustbusters certainly frowned on Microsoft’s successful bid to bundle ‘free’ internet browsers into its dominant Windows operating system. Yet bundling ‘free’ e-mail and other ‘free’ online services into Yahoo! and Google search engines was deemed legitimate. In trade competition, not all ‘frees’ are created equal. Europe’s proposed ‘Google-killer’, the Quaero search engine initiative, for example, is itself

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CASE 11.1 CONT. a créature de subvention. ‘Free’ competition with Google, Microsoft and Yahoo could prove expensive. However, regulators might argue that the ever-growing suites of crosssubsidised ‘free’ digital innovations proffered by these companies unfairly compete. That is, these search engineers could take cash from their most profitable keyword advertising and use it to offer ‘free’ Quaero-like multimedia searches. Good for cost-conscious searchers, yes; not so great for state-supported competitors. The simple reality is that technology will continue eroding entry barriers to provocative cross-subsidy. The more digital or virtual a process, product or service, the faster and easier crafting clever subsidies become. Scale matters, too. Global scale facilitates global subsidies. Just as advertisers subsidise free Google searches, marketers can easily download advertising-supported ‘free’ songs, videos and games into iPods, Sony PSPs and Nokia phones. Internet-based telephone calls similarly lend themselves to sponsorship: ‘This free call from your brother in New York is brought to you by Tesco . . . please press #1 to accept . . .’ While that prospect will not thrill traditional telecommunications companies, consumers might appreciate the ‘free’ choice. Opportunities to add ‘free’ value that matters in a networked world are expanding exponentially. Why wouldn’t Ikea, the Swedish furniture giant with a reputation for horrible DIY documentation, want to post free instructional videos on its websites to make it less risky to buy its unassembled wares? By definition, successful companies are better positioned to subsidise such ‘free’ innovation to deter potential rivals. Competing against ‘free’ is hard. Consequently, complaints of unfair competition will multiply as innovative subsidy facilitates technical innovation.

The emerging ‘economics of free’ thus creates policy quandaries for emerging economies. Do developing countries want to enjoy and exploit the economic benefits of ‘free’ telecommunications and information for their citizenry and workforce? Or are ‘free’ search and e-mail services merely postindustrial counterparts to the agricultural subsidies undermining a nation’s ability to grow its own digital entrepreneurs? Might China or a South American coalition complain to the World Trade Organisation that a Yahoo! and Google were effectively dumping their services in ways that unfairly hurt indigenous industrial development? Certainly, the ‘free’ market paradigm is finding its way into the business plans of local Asian and Indian innovators in telecommunications, microfinance and other sectors. The work of C.K. Prahalad, the US-based management expert, on profitably bringing innovation to the bottom of the pyramid has inspired even established incumbents such as Unilever and Procter & Gamble to redefine ‘free’ promotion in emerging markets. The rise and intricate complexity of government subsidies in public life is increasingly provoking political controversy. Similarly, the private sector’s growing dependence on crosssubsidy as an innovation edge seems guaranteed to provoke a regulatory and litigatory backlash. Ironically, free markets create markets for ‘free’ that conjure the spectre of unfair and anti-competitive subsidy. That conflict is inherently unavoidable. But while ‘free’ has its costs, this century’s economic reality is that the surest sign of dynamic innovation is a sector where everyone – producer and consumer alike – eagerly awaits what is offered for ‘free’. Source: Michael Schrage, ‘How and why giveaways are changing the rules of business’, Financial Times, 7 February 2006, p. 19. Copyright © 2006 Michael Schrage.

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25 January 2006

FT

The geeks have inherited the earth – and it is hell for efficiency JONATHAN GUTHRIE I have new e-mail. I also have a headache. There are 2,965 unread e-mails in my inbox. I face a career choice. I can become a fulltime e-mail administrator. Or I can carry on working as a business journalist, blithely letting unread correspondence mount up in ever-deeper digital drifts. Moore’s Law states that the power of semiconductors increases by roughly 50 per cent every year. But this gives rise to another tenet, which I call the ‘For God’s Sake No More Law’. This states that the efficiency of human communication declines in inverse proportion to growth in the number of messages and channels for their transmission. Eli Noam of Columbia University wrote perceptively in the Financial Times last week about the brake that slow regulation applies to the speeding vehicle of technology. But I believe much of the efficiency gains that IT claims to offer are illusory in the first place because of an inherent friction. This is the input of time and money needed simply to keep up with the demands of new technology. E-mail is a good example. If I conscientiously nurse-maided the attention-seeking brat that is my inbox, I would do no work. The FT’s filter already routes such spam as penis enlargement promotions and solicitations from West African fraudsters to a quarantine centre I never visit. Most items in my inbox relate at least peripherally to my job. I receive 70–80 e-mails daily, reading maybe six or seven that look like individual correspondence. Even so, I regularly fail to spot personal emails whose contents I should read. Many of these disappear when I speed-delete the bulk of my unread messages once a fortnight.

I assume many other busy people adopt a similarly slipshod approach. Anyone who conscientiously dealt with every e-mail they received would cost their employer thousands of pounds a year in lost productivity. Rare messages with a legitimate purpose are swept away in the tide of e-mail generated by the lazy and insecure. To the solipsist, e-mailing the entire staff of a multinational law firm to ask whether anyone knows a plumber in Hemel Hempstead does not seem like an imposition. For someone who is underemployed, or fears social contact, spending 40 minutes setting out an idea in an e-mail is preferable to explaining it in a five-minute conversation. E-mail has meanwhile given skivers a perfect means of gossiping with friends while apparently remaining hard at work. John Caudwell, the mobile phones magnate, banned staff from e-mailing each other last year. But even this most exacting of bosses found it impossible to enforce the prohibition. E-mail is just one of several exciting new means of failing to communicate that the technology revolution has given us. There are also the voicemail oubliettes belonging to anyone with the typical endowment of two landlines and a mobile. Usually the recorded message will inform callers their contact will be back after the Christmas break, even if it is already Easter. Then there are text messages. To my incredulous fury, someone from public relations recently sent me one of these. Who did he think I was? Vicky Pollard? I would have texted a withering response had I known how to do so. I work remotely for the FT and I reckon I spend more than 5 per cent of my time fixing

Chapter 11 The nature of business opportunity

CASE 11.2

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CASE 11.2 CONT. computer faults or learning to use new systems. A help desk in London provides me with advice and equipment. None of this costs me anything because I am an employee. But I dread to think what burden IT imposes on the small ventures around me in the serviced office block we share. Keeping abreast of technology helps IT entrepreneurs spot new opportunities. But for most new businesses, it feels like time wasted. Yet if they fall behind, they risk appearing as old-fashioned as if they illustrated sales presentations with magic lantern slides. Enough. I propose a buyers’ strike of at least a year. Technology companies would have to postpone the launch of new computers, software or communications devices. IT geeks could realise long-cherished ambitions to backpack around the world or perform in Grateful Dead tribute bands. IT users could get to grips with systems that were temporarily free from the threat of obsolescence, maybe even using them to generate extra business. Since my chances of arresting technological advances driven by remorseless global competition are pretty low, I have a more modest plan B. It is to launch a Slow Business movement. The Slow Food movement aims to

replace burgers and fries with traditional fare cooked and eaten at a leisurely rate. Slow Business would swap frenetic, energy-sapping activity for the unhurried realisation of strategy. Slow businesses would delight customers sufficiently to make their waits worthwhile. Slow Business, you might think, would be commercial suicide. Think again. Companies with some of its key characteristics are already among us. Banks that take three days to clear a cheque are some of the UK’s most successful organisations. A motorist can drive a cheap Ford Fiesta away from a dealer as soon as he has paid for it, but Ford’s upmarket Aston Martin subsidiary makes him wait up to 18 months for a Vantage V8. Generic cookers are installed the day after purchase, but Aga does nicely from ranges it delivers in six weeks. An important trait of disciples of Slow Business would be answering ‘urgent’ e-mails with handwritten notes dispatched after a few weeks of reflection. This would generally conclude the correspondence, because the problem bugging the e-mailer would meanwhile have resolved itself. Please e-mail me if you want to discuss this further. I promise to reply. Eventually. Source: Jonathan Guthrie, ‘The geeks have inherited the earth – and it is hell for efficiency’, Financial Times, 25 January 2006, p. 16. Copyright © 2006 The Financial Times Limited.

Discussion point 1. What are the similarities and differences between the business opportunity presented by (a) a ‘giveaway’ business model and (b) changing technology?

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CHAPTER 12

Resources in the entrepreneurial venture Chapter overview People, money and operational assets are the essential ingredients of the entrepreneurial venture. This chapter explores each of these resource types and the management issues they raise for the entrepreneur. Why investment in such resources leads to risk for the backers of the venture is considered. The concept of resource stretch and leverage is applied to develop an understanding of how entrepreneurs can work their resources harder than established competitors.

12.1 Resources available to the entrepreneur

Key learning outcome An understanding of the nature and type of resources that the entrepreneur uses to build the venture.

Resources are the things that a business uses to pursue its ends. They are the inputs that the business converts to create the outputs it delivers to its customers. They are the substance out of which the business is made. In broad terms, there are three sorts of resource that entrepreneurs can call upon to build their ventures. These are:

• financial resources – resources which take the form of, or can be readily converted to, cash; • human resources – people and the efforts, knowledge, skill and insights they contribute to the success of the venture; • operating resources – the facilities which allow people to do their jobs: such as buildings, vehicles, office equipment, machinery and raw materials, etc. The entrepreneurial venture is built from an innovative combination of financial, operating and human resources (Figure 12.1). Thus when Frederick Smith founded the US parcel air carrier Federal Express he needed to bring together people – a board of directors, pilots, operational staff, etc. – along with a fully operational airline which was able to give national coverage. This demanded an investment of the order of $100 million. Regardless of the form they take, all resources have a number of characteristics in common. Resources are consumed; they are converted to the products which customers buy, and there is competition to get hold of resources. A number of businesses, entrepreneurial and

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Figure 12.1 Entrepreneurship and the combination of resources

otherwise, will be trying to acquire a particular resource; consequently, managers are willing to pay for resources. Third, resources have a cost. The cost of a resource is an indication of how it might be used by a business to create new value. Resources are bought and sold by businesses and their cost is determined by the market created for that resource. Resources with the potential to create a lot of new value will be expensive. This cost is not the same as the value of the resource to a particular business since the value of a resource lies in the way a business will use it, how innovative it will be with the resource and how hard it will make the resource work. One type of resource can be converted into another. This process normally involves selling a resource, thereby converting it into cash, and then using this cash to buy something new. However, in some cases, resources may be exchanged directly through ‘asset swaps’. In places where financial markets are not well developed, such as in parts of the developing world and the former communist bloc, ‘bartering’ may be important. Not all markets for resources are equally accessible. Some markets are more developed than others. The ease with which a particular resource can be converted back into ready cash is called its liquidity: liquid resources are easily converted back, illiquid resources are converted back only with difficulty. Entrepreneurs must be active in acquiring resources for their ventures. The paths through which resources are obtained and exchanged make up the network in which the business is located. In the long run, the entrepreneur only has access to the same resources as any other business. Competitiveness in the marketplace cannot normally be sustained on the basis of having access to unique resource inputs. If an input is valuable, other businesses will eventually find a way to get hold of it or of something like it. What entrepreneurs must do to be competitive is combine the resources they have access to in a unique and valuable way – that is, innovate with them and then make those resources work harder than their competitors do. It is this which ultimately enables the entrepreneur to deliver new value to the customer.

12.2 Financial resources Financial resources are those which take a monetary form. Cash is the most liquid form of resource because it can be used readily to buy other resources. The following are all financial resources which have a role to play in the entrepreneurial venture:

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• Cash in hand. This is money to which the business has immediate access. It may be spent at very short notice. Cash in hand may be held either as money, i.e. petty cash, or it may be stored An appreciation of the financial in a bank’s current account or other direct access account. resources available for use by • Overdraft facilities. Such facilities represent an agreement with the entrepreneur. a bank to withdraw more than is actually held in the venture’s current account. An overdraft is a short-term loan which the business can call upon, although it is normally quite expensive to service and so tends to be saved for emergencies. • Loans. Loans represent money provided by backers, either institutional or private, which the business arranges to pay back in an agreed way over a fixed period of time at an agreed rate of interest. The payback expected is usually independent of the performance of the business. Loans may be secured against physical assets of the business which can be sold off to secure repayment. This reduces the risk of the loan to the backer. • Outstanding debtors. This represents cash owed to the business by individuals and firms which have received goods and services from it. Many debtors will expect a period of grace before paying and it may not be easy to call in outstanding debt quickly. Outstanding debtors are one of the main reasons that cash flow may be negative in the early stages of the venture’s life. • Investment capital. This is money provided to the business by investors in return for a part-ownership or share in it. Investors are the true owners of the business. They are rewarded from the profits the business generates. The return they receive will be dependent on the performance of the business. • Investment in other businesses. Many businesses hold investments in other businesses. These investments may be in unrelated businesses but they are more often in suppliers or customers. If more than half of a firm is owned, then it becomes a subsidiary of the holding firm. Investments can be made through personal or institutional agreements, or via publicly traded shares. A firm does not normally exist solely to make investments in other firms. Individual and institutional investors are quite capable of doing this for themselves. However, strategic investments in customers and suppliers may be an important part of the dynamics of the network in which the business is located. For this reason, such investments tend to represent long-term commitments, and although they can be sold to generate cash, doing so is not routine.

Key learning outcome

All financial resources have a cost. This cost takes one of two forms. The cost of capital is the cost encountered when obtaining the money: it is the direct charge faced for having an overdraft; the interest on loans; the return expected by investors, and so forth. In addition to this direct cost, there is an opportunity cost. Opportunity cost is the potential return that is lost by not putting the money to some alternative use. For example, cash in hand and outstanding debts lose the interest that might be gained by putting the money into an interest-yielding account. Financial resources are the most liquid, and thus the most flexible, resources to which the venture has access. However, they are also the least productive. Cash, of itself, does not create new value. Money is valuable only if it is put to work. This means that it must be converted to other, less liquid, resources. The entrepreneur must strike a balance. A decision must be made between how liquid the business is to be, how much flexibility it must have to

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meet short-term and unexpected financial commitments, and the extent to which the firm’s financial resources are to be tied up in productive assets. Such decisions are critical to the success of the venture. If insufficient investment is made then the business will not be in a position to achieve its full potential. If it becomes too illiquid, it may be knocked off course by short-term financial problems which, in the long run, the business would be more than able to solve. Managing the cash flow of the business is central to maintaining this liquidity balance. The financial resources to which an entrepreneur can gain access will depend on how well developed the economy they are working in is and the type of capital markets available. In the mature economies of western Europe and the USA, capital is usually provided by explicit and open institutional systems such as banks, venture capital businesses and stock markets. In other parts of the world, provision of financial resources may be through less formal networks. Displaced communities often create financial support networks around the extended family. One of the main challenges to developing entrepreneurism in the former communist bloc is the setting up of supportive and trusted financial institutions.

12.3 Operating resources

Key learning outcome An appreciation of the operational resources available for use by the entrepreneur.

• • • •

Operating resources are those which are actually used by the business to deliver its outputs to the marketplace. Key categories of operating resources include:

• premises – the buildings in which the business operates. This includes offices, production facilities and the outlets through which services are provided; • motor vehicles – any vehicles which are used by the organisation to undertake its business such as cars for sales representatives and vans and lorries used to transport goods, make deliveries and provide services; production machinery – machinery which is used to manufacture the products which the business sells; raw materials – the inputs that are converted into the products that the business sells; storage facilities – premises and equipment used to store finished goods until they are sold; office equipment – items used in the administration of the business such as office furniture, word processors, information processing and communication equipment.

Operating resources represent the capacity of the business to offer its innovation to the marketplace. They may be owned by the business, or they may be rented as they are needed. Either way, they represent a commitment. Liquid financial resources are readily converted into operating resources, but operating resources are not easily converted back into money. The markets for second-hand business assets are not always well developed. Even if they are, operating resources depreciate quickly and a loss may be made on selling. In order to use operating resources effectively it is important that entrepreneurs make themselves fully conversant with any technical aspects relating to the resources; legal issues and implications relating to their use (including health and safety regulations); suppliers and the supply situation; and the applicable costs (both for outright purchase and for leasing). It

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is in this area that partnerships with suppliers can be rewarding, especially if the operating resources are technical or require ongoing support in their use. The commitment to investment in operating resource capacity must be made in the light of expected demand for the business’s offerings. If capacity is insufficient, then business that might otherwise have been obtained will be lost. If it is in excess of demand, then unnecessary, and unprofitable, expenditure will be undertaken. It is often difficult to alter operating capacity in the light of short-term fluctuations in demand. This results in fixed costs, that is, costs which are independent of the amount of outputs the firm offers. Critically, fixed costs must be faced whatever the business’s sales. Fixed costs can have a debilitating effect on cash flow. The entrepreneur must make the decision about commitment to operating capacity in the light of an assessment of the sales and operating profits that will be generated by the business’s offering, that is, on the basis of an accurate forecast of demand. Even good demand forecasting cannot remove all uncertainty and therefore the entrepreneur must be active in offsetting as much fixed cost as possible, especially in the early stages of the venture. This may mean renting rather than buying operating resources. It can also mean that some work is delegated to other established firms. In the early stages of the venture, managing cash flow and controlling fixed costs may be more important than short-term profitability. It may be better to subcontract work to other firms rather than to make an irreversible commitment to extra capacity, even if this means short-term profits are lost.

12.4 Human resources

Key learning outcome An appreciation of the human resources available for use by the entrepreneur.

• •

People are the critical element in the success of a new venture. Financial and operating resources are not unique and they cannot, in themselves, confer an advantage to the business. To do so they must be used in a unique and innovative way by the people who make up the venture. The people who take part in the venture offer their labour towards it. This can take a variety of forms:

• productive labour – a direct contribution towards generating the outputs of the business, its physical products or the service it offers; technical expertise – a contribution of knowledge specific to the product or service offered by the business. This may be in support of existing products, or associated with the development of new ones; provision of business services – a contribution of expertise in general business services, for example in legal affairs or accounting; functional organisational skills – the provision of decision-making insights and organising skills in functional areas such as production, operations planning, marketing research and sales management; communication skills – offering skills in communicating with, and gaining the commitment of, external organisations and individuals. This includes marketing and sales directed towards customers, and financial management directed towards investors; strategic and leadership skills – the contribution of insight and direction for the business as a whole. This involves generating a vision for the business, converting this into an effective strategy and plan for action, communicating this to the organisation and then leading the business in pursuit of the vision.

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The entrepreneur represents the starting point of the entrepreneurial venture. He or she is the business’s first, and most valuable, human resource. Entrepreneurs, if they are to be successful, must learn to use themselves as a resource, and use themselves effectively. This means analysing what they are good at, and what they are not so good at, and identifying skill gaps. The extent to which the entrepreneur can afford to specialise their contribution to their venture will depend on the size of the venture and the number of people who are working for it. If it is moderately large and has a specialist workforce then the entrepreneur will be able to concentrate on developing vision and a strategy for the venture and providing leadership to it. If it is quite small then the entrepreneur will have to take on functional and administrative tasks as well. Even so, the entrepreneur must be conscious of how the human resource requirements of the business will develop in the future by deciding what skill profile is right for their business and what type of people will be needed to contribute those skills. But employing people with the right skills is not enough; those people must be directed to use their skills. They must also be motivated if they are to make a dedicated and effective contribution to the business. This calls for vision and leadership on the part of the entrepreneur. Human resources represent a source of fixed costs for the business. The possibility of taking on, and letting go of, people in response to short-term demand fluctuations is limited by contractual obligations, social responsibility and the need to invest in training. Further, motivation can only be built on the back of some sense of security. Hence, making a commitment to human resources involves the same type of decisions as making a commitment to operating resources, namely: what will be needed, to what capacity, over what period, must the resource be in-house or can it be hired when needed? However, people are still people even if they are also resources, and such decisions must be made with sensitivity.

12.5 Organisational process and learning as resources The idea that resources are key to the success of a venture was introduced in section 6.1 with a discussion of the resource- and Key learning outcome competence-based views of business performance. It was noted Recognition of organisational there that what constitutes a resource in these perspectives is quite learning and process as broad. This section develops a framework for understanding resources critical to the resources in their wider context and examines further the ideas venture’s success. Appreciation of resource imitability and tradability as the basis for gaining a of the importance of sustainable competitive advantage. uniqueness, inimitability and The broad definition of resources is at once both an opp*rnon-tradability as characteristics tunity and a challenge. The opportunity lies in the flexibility of of resources that confer the resource-based perspective to account for a wide spectrum of competitive advantage. resource–performance links. The challenge lies in maintaining the theoretical and methodological soundness of the approach given that it can easily become tautological (a circular argument of the form: performance is the result of unique resources, so a high-performing business is such because of its unique resources; and these are freely defined), and the causal link between resources and performance is, in any case, ambiguous. To be rigorous, the approach must be strict in its definition of what constitutes a resource, develop a hypothesis linking that resource causally to performance and then test that hypothesis empirically.

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An immediate move is to distinguish different types of resource. Clearly, the notion of a resource must be broader than simply physical assets. The resource-based view makes it evident that it is not assets per se that are important, but what the entrepreneur does with them. So resources must include the organisational processes that manipulate and utilise assets. However, these processes are not static. They must adapt and develop as the venture gets bigger, and its competitive position and situation change. At this level, organisational learning must be counted as a resource. This is depicted in Figure 12.2. The hypothesis is that organisational learning develops organisational processes that then control the use of assets. Assets and processes are (in principle at least) directly observable. Organisational learning is not usually directly observable, but its effect can be gauged by observing changes in the organisational processes. Assets may be divided into three categories. Tangible assets have physical form. Intangible assets do not have physical form, but are nonetheless valuable to the business. Examples here would be patents and brand names. This distinction is made in accounting practice as tangible assets are recorded on the balance sheet but intangible assets are not usually recorded (though some moves have been made in accounting to value such assets). Intellectual assets refer to specific knowledge of technology or products held within the business that directly informs its activities. What connects the idea of a resource to that of competitive advantage? In short, a resource confers a competitive advantage if it fulfils three criteria:

Chapter 12 Resources in the entrepreneurial venture

Figure 12.2 Three levels of organisational resource

• That resource can be used in some way to deliver value to buyers. • That resource is unique to the venture. • Competitors find it hard to imitate or acquire that resource. The issue of resource access is linked to the idea that some resources may be traded with or can be imitated by competitors. Four types of resource can be distinguished on the basis that they can be copied (imitated) or bought and sold (are tradable) within a market. Tradable resources are those that can be ‘packaged up’ and sold within a market whereas non-tradable resources cannot be detached from the firm using them and so cannot be traded within a market. Imitable resources are those that can easily be copied by competitors. Inimitable resources are not easy to copy because they have legal protection or they take time to build up or they have causal ambiguity and their link to performance is not clear. Commodity resources are those that are both tradable and can easily be copied. General factory equipment and offices are an example. Exchangeable resources are those that cannot

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be traded but can easily be copied. An example here might be a unique organisational structure or staff skills and training. Tradable resources are those that are not easy to copy but that can be traded freely – patents, copyrights and brand names, for example. Finally, competitive resources are those that can be neither traded nor copied. Examples here might include the entrepreneur’s visionary leadership, a culture that encourages and rewards the discovery and exploitation of new opportunities, or an effective approach to integrating new organisational learning. The most secure competitive advantage is that built on competitive resources. Tradable resources might also be a platform for a time, but being tradable, other entrepreneurs might well set up to establish ventures trading in them, limiting their long-term appeal. Many universities have set up science parks with the explicit intention of trading in scientific and technological ideas and the patents protecting them. A brand is valuable only if competitors (often larger and better resourced) do not compete with their own brands more strongly.

12.6 Resources, investment and risk In one sense, a business is ‘just’ the financial, operating and human resources that comprise it. Only when these things are combined Key learning outcome can the business generate new value and deliver it to customers. An understanding of how and Resources have a value and there is competition to get hold of why investing in resources them. A business is not being competitive when it converts input creates risk for the resources into outputs of higher value. It is being competitive entrepreneurial venture. only if it is creating more value than its competitors can do. Thus resources are used to pursue opportunities and exploiting those opportunities creates new value. The profit created by an entrepreneurial venture is the difference between the cost of the resources that make it up and the value it creates. This is the return obtained from investing the resources. Although profits are important for survival and growth, the performance of an entrepreneurial venture cannot be reduced to a simple consideration of the profits it generates. Profits must be considered in relation to two other factors: opportunity cost and risk. Resources are bought and sold in markets and so they have a price. This price is not the same as the cost of using a resource. The true cost incurred when a resource is used is the value of the opportunity missed because the resource is consumed and so cannot be used in an alternative way. This is the opportunity cost. If the entrepreneur uses the business’s resources in the most productive way possible then the value created will be higher than that which might have been generated by an alternative investment and so the opportunity cost will be less than the value created. If, on the other hand, the resources are not used in the most productive way possible, then some alternative investment could potentially give a better return. The opportunity cost will be greater than the value created. Opportunity cost is a fundamental factor in measuring performance. This is because investors are not concerned in the first instance with the profit made by a venture but with the return they might get if they put their money to an alternative use. The second factor in considering how well an entrepreneur is using resources is risk. We cannot predict the future with absolute accuracy so there is always a degree of uncertainty about what will happen. This uncertainty creates risk. No matter what return is anticipated,

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Figure 12.3 The risk–return relationship for investment in an entrepreneurial venture

there is always the possibility that some unforeseen event will lead to that return being lower. Customers may not find the offering as attractive as was expected. Marketing and distribution may prove to be more expensive than was budgeted for. Competitors may be more responsive than was assumed to be the case. Investors make an assessment of the risk that a venture will face. If the risk is high then they will expect to be compensated by a higher rate of return. If they perceive that it is low then they will be happy with a lower return. Consequently there is a payoff between risk and return. The exact way in which expected return is related to risk is quite complex and is a function of the dynamics of the market for capital. The risk–return relationship for investment in an entrepreneurial venture is shown in Figure 12.3. In practice, institutional investors will aim to hold a portfolio, that is, a collection of investments with different levels of risk and return. The objective here is to reduce the overall level of risk for the portfolio. Risk occurs because resources must be committed to a venture. Once money is converted into operating and human resources it is either too difficult or too expensive, or both, to convert it back. Therefore, once resources have been brought together and shaped to pursue a particular opportunity, there is no going back if a better opportunity demanding a different shaping of the resources is identified later. In this way, entrepreneurial innovation demands an irreversible commitment of resources (Figure 12.4). The opportunity cost must be faced and it is the investor in the venture who must absorb this cost, not the entrepreneur (although the entrepreneur may be an investor as well). In summary, if an entrepreneur identifies an opportunity that might be exploited through an innovative way of using resources and then asks investors to back a venture pursuing that opportunity, two fundamental questions will come to the investor’s mind: how do the returns anticipated compare with the alternative investments available, and what will be the risks? The decision to support the venture or not will depend on the answers to these questions. It should not be forgotten that although investors are people who put financial

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Figure 12.4 Resource commitment in the entrepreneurial venture

resources into a venture, individuals who work for a business are also making a personal investment in it. They expect to be rewarded for their efforts and to be given an opportunity to develop. They also face opportunity costs in not being able to offer their efforts elsewhere, and face the risk of the venture not being successful. Similarly, non-financial commitments may also be made by customers and suppliers who build a relationship with the venture. In this way, risk is spread out through the network in which the venture is located.

12.7 Stretch and leverage of entrepreneurial resources As has been noted earlier, entrepreneurs and their success do appear to be paradoxical. After all, they do not have the same level of resources as established competitors, they lack the internal sucAn understanding of the way cess factors incumbents have access to (such as costs, established in which entrepreneurs often customer relationships) and they do have to pay more for the compete – and win – against resources they obtain (paying for the risk premium they present). better resourced incumbent See Mosakowski (2002) for a recent discussion. The answer to this competitors through superior paradox seems to be that entrepreneurs work their resources exploitation – ‘stretch and harder than do established businesses. The question is, in what leverage’ – of critical resources. way does this working take place? In an influential paper, Hamel and Prahalad (1993) suggested that ten processes could describe the way that resources were worked. They suggest that ‘competitiveness is born in the gap between a company’s resources and its managers’ goals’. Their concern in the article cited was with business in general, not just entrepreneurship, but it seems

Key learning outcome

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• Convergence. This refers to the creation of a gap between resources and the aspirations of the venture that will act as a driver of competitive advantage. It reflects ‘loyalty’ to the entrepreneur’s vision. • Focus. Here, focus refers specifically to a dedication to create and maintain a competitive advantage, and once established, to move on to enhance it and create the next competitive advantage. The entrepreneur must never become complacent about competitive advantage. • Extraction. New information is coming into the business all the time. Extraction is the process whereby that information is used as the basis of learning about the opportunities available to the venture and how the venture might enhance its competitive position. That learning must be open and honest, even if it conflicts with long-held and established ideas. • Borrowing. This refers to gaining information from all available sources, both inside and outside the business. Effective entrepreneurs use meetings with customers as an opportunity to gain new insights as well as an opportunity to sell. • Blending. As the venture grows, the people who make it up will tend to specialise in specific areas. This provides the opportunity to improve efficiency. However, individuals can still learn from each other and learn to blend their skills in new and valuable combinations. This is especially important for the entrepreneur, whose role can become detached from the cutting edge of the business as it grows. • Balancing. This implies that excellence in one area is not undermined by mediocrity in another. Excellence must be balanced across all areas of the business. The entrepreneur must ensure that examples of excellence in one area provide lessons for, and are shared with, other areas of the business. • Recycling. Competitive advantage should be regarded as a resource for the whole organisation, not just some part of it. It should be recycled around the whole venture. This can be particularly important for serial entrepreneurs who wish to transfer competitive advantage in one business to another independent start-up or acquisition. • Co-option. This refers to the effectiveness with which the entrepreneur draws other organisations into the venture’s network to provide money, skills and information to the venture. It demands an understanding of the structure of the network, what different parties are gaining from the network and the role they play in sustaining the venture. • Shielding. Competitive advantage is comparative: it is an advantage over competitors. The effective entrepreneur is aware of competitors’ (relative) weaknesses, how to use their own venture’s strengths to attack those weaknesses and how to do so in a way that limits (resource-richer) competitors’ abilities to counterattack. • Recovery. This relates to the venture’s overall agility and its ability to turn information on market opportunities into profitable offerings faster than competitors do. It impacts on every stage in the venture’s operations: its ability to obtain information, product development, production, and delivery and distribution.

Chapter 12 Resources in the entrepreneurial venture

that entrepreneurs are ‘stretchers and leveragers’ of resources par excellence. The ten processes Hamel and Prahalad discuss are as follows:

Necessarily, these ten processes are interlinked. One cannot be managed in the absence of, or without reference to, the others. The entrepreneur will not necessarily see them in these distinct terms, but will take them on board in a holistic manner and regard them simply as an integrated aspect of their management practice. However, there is value in considering

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them separately as a basis for creating strategy out of vision. The stretch and leverage model provides a managerial perspective on a game-theoretical economic model developed by Hirshleifer (2001), who suggests that, under certain conditions, the resource-weaker competitor may win against the resource richer because it can use its resources to tax the stronger more than the stronger can tax it. This is discussed in more detail in section 21.1.

Summary of key ideas • Entrepreneurs must attract resources to their ventures in order to pursue business opportunities.

• Resources occur at three levels: assets, organisational processes and organisational learning.

• Resources are distinguished by the degree to which they can be traded and the ease with which they might be imitated.

• Competitive advantage is most securely based on competitve assets that are difficult to trade and cannot be imitated easily.

• Assets are valuable and are traded in markets. • The entrepreneur must compete with other businesses to get hold of resources by offering a good return from using them.

• Dedicating resources to a particular venture exposes investors to risk, namely the possibility that the return gained will be less than expected.

• Entrepreneurs stretch and leverage their resources to make them work harder in the face of resource-richer competitors.

Research themes Do entrepreneurs stretch and leverage resources? This study adopts a case-study methodology. Obtain descriptions of a series of entrepreneurial ventures (case studies are a good source). Ideally they should compare the entrepreneurial firm with a conventional incumbent in the same sector. Otherwise you may find information from a primary research survey. Can you find evidence of the stretch and leverage processes described by Hamel and Prahalad in entrepreneurial businesses? If so, do entrepreneurs recognise these processes in their own management? One way to do this would be to use a survey instrument to outline each process in terms of a short (up to 50 word) scenario and ask entrepreneurs to describe how they would respond to each of these challenges (don’t just use the Hamel and Prahalad terms; they will probably not mean much to practising entrepreneurs). For example, a test for co-option might be:

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or for balancing: A manager in your business proves to be very effective in dealing with customers. Is your first priority to: (a) (b) (c)

keep him/her in the front line with customers promote him/her to lead others working with customers give him/her a wider leadership role and be a champion for the customer within the business

and so on in this style. Code the responses and look for evidence of the Hamel and Prahalad stretch and leverage processes.

Chapter 12 Resources in the entrepreneurial venture

When you (or one of your people) make a sales call, is your primary objective to: (a) gain a sale (b) obtain information on new opportunities and competitors’ activities (c) both of the above

Resources and industry structure The resource-based perspective can be made to make predictions about the performance of individual firms and the structures of the industries in which they are located. Obtain some good descriptions of businesses in a variety of sectors. This may be obtained directly from a survey instrument or published information. Characterise the sectors in terms of the resources they use as discussed in section 12.2. Attempt to identify sectors that are largely based on commodity resources and those for which competitive resources are more prevalent (other resource types may be included if the sample is large enough). Be prepared to set up strict criteria for judging the inclusion of resources under each type. Categorise them in terms of assets, organisational process and organisational learning. Check if they are tradable and if they are imitable. The best practice is to have someone independently check the categorisation. It can be hypothesised that sectors based on competitive resources will have: • higher overall profitability; • a greater range of profitabilities (as competitive resources sort the winners from losers); and • higher growth performance for winners when compared to sectors based on commodity resources. Test these predictions using financial data for the sectors. To be statistically robust, at least 25 firms of each resource type should be included.

Key readings Two papers that are not specifically about entrepreneurship, but their insights have had an enormous impact on thinking about entrepreneurship and the ways in which entrepreneurs manage resources:

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Hamel, G. and Prahalad, C.K. (1993) ‘Strategy as stretch and leverage’, Harvard Business Review, Mar./Apr. pp. 75–84. Wernerfelt, B. (1984) ‘A resource based view of the firm’, Strategic Management Journal, Vol. 5, pp. 171–80.

Suggestions for further reading Alvarez, S.A. and Barney, J.B. (2002) ‘Resource-based theory and the entrepreneurial firm’, in Hitt, M.A., Ireland, R.D., Camp, S.M. and Sexton, D.L. (eds) Strategic Entrepreneurship: Creating a New Mindset. Oxford: Blackwell. Alvarez, S.A. and Busenitz, L.W. (2001) ‘The entrepreneurship of resource-based theory’, Journal of Management, Vol. 27, pp. 755–75. Amit, R. and Schoemaker, P.J.H. (1993) ‘Strategic assets and organisational rent’, Strategic Management Journal, Vol. 14, pp. 33–46. Bergmann-Lichenstein, B.M. and Brush, C.G. (2001) ‘How do “resource bundles” develop and change in new ventures? A dynamic model and longitudinal exploration’, Entrepreneurship Theory and Practice, Spring, pp. 37–58. Collis, D.J. (1994) ‘How valuable are organisational capabilities?’, Strategic Management Journal, Vol. 15, pp. 143–52. Foss, N.J. (ed.) (1997) Resources, Firms and Strategies: A Reader in the Resource-based Perspective. Oxford: Oxford University Press. Hall, R. (1992) ‘The strategic analysis of intangible resources’, Strategic Management Journal, Vol. 13, pp. 135–44. Hamel, G. and Prahalad, C.K. (1993) ‘Strategy as stretch and leverage’, Harvard Business Review, Mar./Apr. pp. 75–84. Hirshleifer, J. (2001) ‘The paradox of power’, in The Dark Side of the Force: Economic Foundations of Conflict Theory. Cambridge: Cambridge University Press. Makadok, R. (2001) ‘Towards a synthesis of the resource-based and dynamic capability views of rent creation’, Strategic Management Journal, Vol. 22, pp. 387–401. Mosakowski, E. (2002) ‘Overcoming resource disadvantages in entrepreneurial firms: when less is more’, in Hitt, M.A., Ireland, R.D., Camp, S.M. and Sexton, D.L. (eds) Strategic Entrepreneurship: Creating a New Mindset. Oxford: Blackwell. Peteraf, M.A. (1993) ‘The cornerstones of competitive advantage: a resource based view’, Strategic Management Journal, Vol. 14, pp. 179–91. Wernerfelt, B. (1984) ‘A resource based view of the firm’, Strategic Management Journal, Vol. 5, pp. 171–80. Wernerfelt, B. (1995) ‘The resource based view of the firm: ten years after’, Strategic Management Journal, Vol. 16, pp. 171–4. Wilcox-King, A. and Zeithaml, C.P. (2001) ‘Competencies and firm performance: examining the causal ambiguity paradox’, Strategic Management Journal, Vol. 22, pp. 75–99. Yu, A.F. (2001) ‘Towards a capabilities perspective of the small firm’, International Journal of Management Reviews, Vol. 3, No. 3, pp. 185–97.

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CASE 12.1

26 January 2006

FT

When language gives and industry the edge ANDREW JACK technical skills. Cipla, based in Mumbai, one of the country’s largest producers by sales, has made a name for itself not only domestically, but as a leading supplier of affordable antiretroviral drugs for HIV sufferers across the developing world. It has helped reduce the prices of the large companies that first patented Aids medicines. ‘Take a look around you at our products,’ says Yusuf Hamied, the chairman, gesturing towards glass cabinets stretched around a large meeting room in the corporate headquarters lined with its own-brand versions of well-known medicines. But a short drive away into Mumbai’s suburbs, in its smart new office block, Nicholas Piramal is taking a radically different strategic approach. The company’s core pharmaceuticals business is contract manufacturing for western drugs companies but, increasingly, it is undertaking original research too. It argues that Indian companies cannot only mimic but develop their own innovative drugs at a fraction of western prices, by exploiting the country’s genetic diversity and lower costs for research, development and manufacturing alike. It has several in the pipeline, and in a sign of new-found confidence, recently acquired a UK business. Ranbaxy may be suing GlaxoSmithKline (GSK) over patents in the west, but it has also signed a contract with the same multinational to carry out research and development at home. The Indian company is also working with the Medicines for Malaria Venture to produce a new synthetic drug.

The hours are long and the time difference tough but, shuttling between their offices in Cambridge and Ahmedabad, Sunil and Prashant Shah co-ordinate a fledgling company that is riding India’s fast-growing pharmaceuticals wave. Since April 2005, cheap travel, telephony and cameras in their laboratories have allowed the two entrepreneurs to build Oxygen Healthcare into a business marketed from the UK to European and North American biotech clients, with their contract chemistry conducted in Gujarat. But if they claim that the enthusiasm and flexibility of their Indian workforce helps them turn around projects quickly and effectively, they have already had to modify an initial business plan which was based on the expectations of low wages for top quality employees. ‘It’s really difficult to get experienced people to move,’ says Prashant Shah. ‘You have to give them a 30 to 40 per cent pay rise. That’s an indication that a lot of companies are investing and increasing their capacity.’ For many years, India was best known in the medical world for its thriving generic industry, and the manufacture of the active pharmaceutical ingredients from which drugs are formulated. One company, Hetero, last month signed a sub-licensing agreement with Roche of Switzerland to produce Tamiflu, the antiviral drug experiencing soaring demand on the back of fears of a flu pandemic. The contract implicitly endorsed the Indian company’s

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Selected case material

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CASE 12.1 CONT. ‘More and more companies are trying to put their footprint in India,’ says Simon Friend, head of the pharmaceuticals group at PwC. ‘Compared with China, India has the edge by four to five years because of the language and the infrastructure.’ One of the big triggers for change has been intellectual property. In the early 1970s, many multinational drugs companies left India when it introduced new patent laws that only granted protection for processes, not for the original products or compounds on which drugs were based. That created a vast copycat industry. As a condition of joining the World Trade Organisation, however, India agreed to introduce legislation in 2005 that provides tougher patent protection on products too, and which could threaten the generic producers. Separately, regulatory changes have helped break down other protectionist barriers, making it easier to conduct clinical trials in the country – albeit accompanied by ethical guidelines being introduced to limit past abuses. GSK has been among the first to exploit the shifting trends. Itself the largest single pharmaceutical company in India, which it sees as a market with considerable growth, it has outsourced back office functions to India and begun collaborative research with Ranbaxy. It is also looking more and more to conduct clinical trials in India. The company insists that this has nothing to do with simple cost cutting, arguing that the facilities are excellent and that many doctors are British trained. ‘India has 8,000 to 10,000 manufacturers, 18,000 distributors and 250,000 pharmacies,’ says Shailesh Gadre, head of the Indian office of IMS, the market research company. ‘It is a

very complex system. A company that gets in early will have a very good advantage.’ He says that with sales – partly because of the absence of higher margin branded drugs – at $5bn last year, India still represents only a little more than 1 per cent of global pharmaceutical sales. These figures represent the retail market, which makes up the vast bulk of sales. But revenue grew by 8 per cent in 2005, and Mr Gadre predicts it will increase by about 10 per cent a year for the coming five years. He points out that, by 2010, 450m Indians will have western middle-class incomes. Demand for western-style chronic treatments – for the cardiovascular and central nervous systems, for instance – are already on the rise. However, he cautions that India remains a country of vast contrasts, with widespread poverty, a very modest state-supported health care system, and private insurance which remains its infancy. That creates considerable tensions and uncertainties. Others warn that it will be some time yet before western companies are confident about intellectual protection. Nearly 9,000 patents filed between 1995 and 2005 remain in the ‘mailbox’ awaiting consideration, with none yet granted, and there are reports of inconsistent work by India’s different regional patent offices. Mr Shah is confident but realistic about India’s pharmaceutical future. He admits that significant problems of corruption, basic infrastructure and work culture remain. ‘We’re at least five years away from a blockbuster drug coming from grass roots companies,’ he says. Source: Andrew Jack, ‘When language gives and industry the edge’, Financial Times, 26 January 2006, p. 5. Copyright © 2006 The Financial Times Limited.

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17 January 2006

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Entrepreneur fires broad attack on manufacturers PETER MARSH British manufacturers have failed to invest enough in marketing and given too much management control to accountants, according to Edward Atkin, one of the country’s most successful engineering entrepreneurs of the past decade. In a speech tonight in London, Mr Atkin, who created a personal fortune of about £225m when he sold his babies’ bottles company last year, will also criticise the government for lack of foresight over manufacturing generally and in particular for neglecting the country’s transport infrastructure, as a result providing huge handicaps for industrial companies. ‘Government now, far from being supportive, each year piles more and more cost, complication and restriction on industry. We are probably the first generation since the invention of the wheel which, in spite of great technical advances, cannot look forward to ever greater ease of access to all parts of our country,’ Mr Atkin will say. Until recently Mr Atkin was the managing director and majority owner of Avent, one of the world’s biggest makers of babies’ bottles and which bases all its manufacturing in a high-tech plant in Suffolk. He sold Avent to a venture capital company for £300m, of which £225m (minus advisers’ fees) came to Mr Atkin and his family. The entrepreneur is now weighing up several ideas about ways in which to invest some of the cash in innovative businesses. Avent has sales from babies’ bottles and other infant feeding products such as breast pumps of just over £80m a year. It is thought

to account for about a sixth of global revenues from such items and has 80 per cent of its sales coming from outside the UK. In a speech to the Institution of Electrical Engineers Mr Atkin will say that most successful manufacturers require a stable investment climate and an interest in making worldbeating products. These factors are more likely to be in place if the businesses are owned privately, and also have people with an interest in engineering at the helm, rather than accountants. ‘As soon as financial criteria become the main method used for evaluating investment opportunities, the company is almost certainly doomed,’ Mr Atkin will say. He will say that companies subject to the control of investors through a stock market flotation are more likely than private entrepreneurs to be swayed by short-term financial considerations, which are likely to deflect them from decisions linked to building up a global brand on the back of innovative and competitive products. ‘It is impossible to forecast variables like volumes, competitive pricing, raw material costs, interest rates or currencies three or five years out,’ Mr Atkin will say. ‘What is very easy, however, is to appreciate that speeding up a process, reducing waste, eliminating direct labour and improving tolerances and reliability will enhance both the products and their manufacture, as well as the experience of the enduser. These benefits will be longterm and valid, irrespective of the output, exchange rate, raw material costs and all the other variables.’

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CASE 12.2 CONT. Among the few recent success stories in UK manufacturing, according to Mr Atkin, are excavator maker JCB and the Dyson vacuum cleaner producer, which are both privately owned, while the Rolls-Royce aero-engine producer is, he says, an exception among quoted UK manufacturers to have been a consistently strong performer on global markets. Avent was privately owned for all the 33 years in which Mr Atkin was in charge. These four companies, Mr Atkin will say, have understood the importance of marketing their products on a worldwide basis – something that leads to a culture of continuous development of products so these can be improved to meet the new requirements of customers.

Turning to other examples, Mr Atkin will say that successful manufacturers such as US semiconductor maker Intel, and BMW and Toyota, two of the world’s biggest car producers, have made as a centre of their businesses ‘an unbroken trend of consistent [product] development, decade after decade’. This is a culture, Mr Atkin will say, that makes it relatively easy to build up strong teams of engineering and marketing experts within the company that will stay for long periods. It also makes it easier to establish long-term brand loyalty. Source: Peter Marsh, ‘Entrepreneur fires broad attack on manufacturers’, Financial Times, 17 January 2006, p. 5. Copyright © 2006 The Financial Times Limited.

Discussion points 1. What ‘generic’ resources might an entrepreneurial business in India possess? (Think other than just financial resources.) 2. In what sense(s) is ‘marketing’ a resource within an entrepreneurial business?

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CHAPTER 13

The entrepreneurial venture and the entrepreneurial organisation Chapter overview The fundamental task of the entrepreneur is to create or to change an organisation. This chapter explores what is meant by ‘organisation’. The first section explores the way in which entrepreneurs (and other managers) use metaphors (either consciously or unconsciously) to create a picture of the organisations they manage. The second section looks at how entrepreneurs use organisations to control the resources that make up the venture. The third and fourth sections develop a broader view of organisation and view the entrepreneur as operating within a network of resources. The final section considers how this can provide an insight into developing a practical entrepreneurial strategy.

13.1 The concept of organisation The notion of organisation is fundamental to management thinking. An organisation is what a manager works for, and organising it is what they do. The entrepreneur may create a new organAn appreciation of how isation or develop an existing one. Whichever of these options different ideas of organisation they choose, they create a new organisational world. Organising aid understanding of the resources is the means to the end of creating new value. If entreentrepreneurial approach preneurship is to be understood then the nature of organisation to management. needs to be appreciated. There are a number of ways in which we can approach the concept of organisation. We cannot see any organisation directly; all that we can observe is individuals taking actions. We call upon the idea of organisation to explain why those actions are co-ordinated and directed towards some common goal. If we wish to understand how an organisation co-ordinates those actions, we must create a picture of the organisation using metaphors. Thus, we can think of the organisation both as an entity, an object in its own right, and as a process, a way of doing things. The type of metaphor used is important because it influences the way in which management challenges

Key learning outcome

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are perceived and approached. It underlies the entrepreneur’s management style. There are three types of metaphor. Active metaphors are created consciously and explicitly as a strategy for developing understanding. An example here is the use of ideas from evolutionary biology to create a model of populations of organisations, which was discussed in section 6.1. Dormant metaphors are those that are clear when we think about them, but we do not often do so. An example here would be the use of the word ‘organisation’ itself. Its root is clearly related to that of ‘organ’ and ‘organism’, suggesting a biological metaphor. Another example is the use of the word ‘corporate’, which is derived from corpus, the Latin word for body (we also talk of a corpus of knowledge). Finally, extinct metaphors are those that are so deeply embedded in our thinking that we only rarely challenge them. Examples here are to ‘see’ an opportunity (we don’t actually see it) or for a business to ‘feel’ its way forward (a business cannot actually ‘feel’ anything). All three types of metaphor are common in business. The student who knows a little geology might recognise the words ‘active’, ‘dormant’ and ‘extinct’ as referring to different types of volcano. We are using a metaphor to understand metaphors! Gareth Morgan (1986) provides an extensive and critical study of how we understand organisation through metaphor. Some conceptualisations of organisation which are important to understanding entrepreneurship are described below.

The organisation as a co-ordinator of actions People do not work in isolation in an organisation. They get together to co-ordinate and share tasks. Differentiating tasks allows a group of people to achieve complex ends that individuals working on their own could not hope to achieve. An organisation is a framework for co-ordinating tasks. It provides direction, routines and regularities for disparate activities. An organisation has goals which are what the people working together in the organisation aim to achieve as a group. The organisation acts to align and direct the actions of individuals towards the achievement of those goals. Entrepreneurs are powerful figures within their own organisations. Indeed, the organisation is the vehicle through which they achieve their ambitions, it extends their scope and allows them to do things that they could not do as an individual. The organisation is the tool that entrepreneurs use to create their entire new world. They use their influence and leadership to shape the organisation and to direct it towards where they wish to go.

The organisation as an independent agent An agent is simply something that acts in its own right. Regarding the organisation as an agent means that we give it a character quite separate from that of the people who make it up. The organisation takes actions on its own behalf and has its own distinguishing properties. Thus we can talk about the organisation ‘having’ a strategy which it uses to pursue ‘its’ goals. We can talk about the assets ‘it’ owns and the culture ‘it’ adopts. This conceptualisation is important from a social and legal perspective. The business organisation is regarded as a legal entity in its own right, quite separate from the identities of its owners and managers. The firm has rights and responsibilities which are distinct from those of its managers. Recognising the organisation as an independent agent is important because it reminds us that the organisations created by entrepreneurs have an existence independent of their creators.

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Organisations are made up of people who contribute their labour to the organisation on the basis that they will receive something in return. The organisation is the means that people use to pursue their own ends. The idea that the organisation is a network of contracts is based on the notion that people work together within a framework of agreements defining the contribution that each individual will make to the organisation as a whole, and what they can expect from the organisation in return. These agreements are referred to as contracts. Organisational contracts take a variety of forms. They may be quite formal and be legally recognised, for example a contract of employment. Frequently, however, a major part of the contract will not be formalised. Many of the commitments and responsibilities that people feel towards their organisation and those they feel it has towards them are unwritten. They are based on ill-defined expectations as to how people should work together and act towards one another. These aspects of the contract may not even be recognised until they are broken by one party. Organisations are built on trust and the nature of the contracts that hold the organisation together are a major factor in defining its culture. The idea of the organisation as a network of contracts is important because it reminds us that individuals do not completely subsume their own interests to those of the organisation; rather, the organisation is the means by which they pursue their own goals. They will pursue the organisation’s interests only if they align with their own. This concept of the organisation also highlights the fact that the individual’s relationship with their organisation goes beyond the written legal contract. It is also defined by trust and unspoken expectations. Individuals will only be motivated to contribute to the organisation if those expectations are met, and their trust is not broken.

Chapter 13 The entrepreneurial venture and the entrepreneurial organisation

The organisation as a network of contracts

The organisation as a collection of resources Organisations are created from resources including capital (money), people and productive assets such as buildings and machinery. The resource-based view of the firm sees it in terms of the collection of resources that make it up. The organisation is built from resources that can be bought and sold through open markets. What makes a particular firm unique is the combination of resources that comprise it. Innovation is simply finding new combinations of resources. Having access to appropriate resources and using them both creatively and efficiently is central to entrepreneurial success. It should not be forgotten that people are the key resource since only they can make capital and productive resources work in new and different ways. The idea of the firm as a collection of resources reminds us that the entrepreneur must be an effective manager of resources, which means being a manager of people as much as a manager of assets and processes.

The organisation as a system A system is a co-ordinated body of things, or elements, arranged in a pattern of permanent or semi-permanent relationships. The notion that the business organisation is a system develops from the idea that a firm takes resource inputs and attempts to convert them into outputs of higher value. The greater the value that is added, the more productive the system.

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The elements of the organisational system are the people who make it up and the manner in which they are grouped. The actions that people take are defined by the pattern of relationships that exist between them. Permanent relationships and consistent actions lead to regular routines and programmes. The systems view of organisation explains the way organisations develop and evolve by drawing on ideas such as feedback loops and control mechanisms. The idea that the organisation is a system is valuable because it emphasises the dynamic nature of the organisation. It is what the organisation does that matters. It also draws attention to the fact that routines take on a life of their own as the system develops its own momentum. Control mechanisms freeze the organisation’s way of doing things. This is valuable. They lock in the organisation’s source of competitive advantage. However, in order to remain innovative, the entrepreneurial organisation must avoid inertia, which requires a continual assessment of the way it does things and a willingness to challenge existing routines if necessary. Entrepreneurial businesses achieve success by being more flexible and responsive to environmental signals than established firms. New contributions to systems thinking from areas such as chaos theory and non-equilibrium dynamics are providing a valuable perspective on the way that entrepreneurial businesses function and how they succeed.

The organisation as a processor of information Information is a critical part of business success since information, properly used, leads to knowledge, and knowledge can lead to competitive success. The organisation can be thought of as a device for processing information, for example information on what needs the customer has, what products will satisfy those needs, how they can be prepared and delivered efficiently, how their benefits can be communicated to customers, and so on. In this view, the performance of the firm is determined by the quality of the information it has and how well it uses it. Further, by co-ordinating the intelligence of the people who constitute it, the organisation as a whole can exhibit intelligence. It not only uses information, but can constantly learn how to use information better. Innovation is at the heart of entrepreneurship and innovation must be based on knowledge. The idea of the organisation as an information processor highlights the fact that the success of the entrepreneurial organisation lies not just in its innovation but also in the way it uses that innovation and learns to go on using it. The entrepreneurial organisation achieves flexibility and responsiveness through its willingness to learn about its customers and itself. These different perspectives on the organisation are not mutually exclusive; indeed, to some extent they are complementary. None of the perspectives gives a complete picture of what the entrepreneurial firm is about; rather, each gives a different set of insights into what the firm is, how it performs its tasks, the relation it has to the people who make it up and what the basis of its success might be. If entrepreneurs are to fully understand their business then they must learn to use all these perspectives to gain a complete view.

13.2 Organisation and the control of resources Entrepreneurs use resources to achieve their aims in that they combine resources in a way which is innovative and offers new value to customers. This is the pursuit of opportunity.

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Directed action

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Resources are brought together under the control of an organisation. The power of entrepreneurs to control resources directly is limited because there is only so much that they can do as indiAn understanding of the way viduals. Therefore, entrepreneurs must shape the organisation the entrepreneur controls they build and use the organisation to configure the resources to resources in their organisation. which they have access. As the organisation grows and increases in complexity, tasks must be delegated down the organisational hierarchy. Controlling the resources in the organisation means controlling the actions of the people in the organisation who use them. If entrepreneurs are to be effective in leading and directing their organisation then they must understand how the resources that make it up can be controlled. Entrepreneurs must make a decision as to what they will control themselves and what control they will pass on to others. The balance of this decision will depend on the size and complexity of the organisation, the type and expertise of the people who make it up, the type of resources with which the organisation is working and the strategy it adopts. This decision must be subject to constant revision as the organisation grows, develops and changes. Even if an entrepreneur has delegated the management of resources to other people within the organisation, this does not mean that he or she has given up all control over them. A number of control mechanisms are retained (see Figure 13.1).

Key learning outcome

The entrepreneur may retain control by directing that specific tasks are undertaken. The course to be followed will be instructed in detail. The actions are likely to be short term, or repetitive, with well-defined outcomes. By directing specific actions the entrepreneur is using others to undertake tasks that they would perform themself but lack the time to do so.

Figure 13.1 Factors influencing individual action in the entrepreneurial venture

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Routines and procedures Routines and procedures are used to establish patterns of action to be repeated. No direct control is exercised, but people are expected to follow the course of actions set down. The actions defined by the routine may be specified either in outline or in detail. The possibility of deviating from the pattern or modifying it will vary depending on the degree of control desired and the need to constrain the outcomes of the actions. When the organisation is too complex to be controlled by directed action, the entrepreneur may concentrate on controlling through procedures.

Organisational strategy A strategy is a framework for thinking about, and guiding the actions of, individuals within the organisation. The organisation’s strategy will be directed towards the achievement of specific goals. It will define the major areas of resource deployment (usually through budgeting) and outline the main programmes of activity. The strategy may be imposed by the entrepreneur, or it may be developed through discussion and consensus. People within the organisation might be given a great deal of latitude to develop their own projects of action within the strategy. They will, however, be expected to be guided by the strategy, work towards its goals and operate within its resource constraints. A strategy, even if well defined, offers a greater scope for interpretation than does a routine.

Organisational culture The concept of organisational culture is an important one. A culture is the pattern of beliefs, perspectives and attitudes which shape the actions of the people within the organisation. An organisation’s culture is largely unwritten. Its existence may not even be recognised until someone acts outside its norms. Culture is important in creating motivation and setting attitudes. It can be a critical aspect of competitiveness. For example, a positive attitude towards customer service, constantly seeking innovation or greeting change positively are all determined by culture. Things such as these cannot be enforced through rules and procedures, so culture is difficult to manage. It is a state of mind rather than a resource to be manipulated. However, the entrepreneur can help to establish a culture in their organisation by leading by example and by being clear and consistent about what is expected from people, what behaviour is acceptable to the organisation and what is not. Peters and Waterman (1982), in their highly influential study of US business, In Search of Excellence, identified culture as a critical factor in the success of an organisation.

Communicated vision A vision is a picture of the better world the entrepreneur wishes to create. The vision is the thing that draws the entrepreneur forward and gives them direction. The entrepreneur can, by sharing that vision, communicate the direction in which the organisation must go. If the people who make up the organisation see the vision and accept what it can offer, then the organisation as a whole will gain a sense of direction. However, a vision only specifies an end, not a means. It indicates where the organisation can go, not the path it must take.

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The hierarchy of resource control devices These means of controlling resources form a hierarchy, as shown in Figure 13.1. As it is ascended, the entrepreneur becomes less specific in their direction. Their control becomes less direct and immediate. On the other hand, they give the people who work with them more latitude to use their own talent and insights and so enable them to make a more substantial contribution to the business. The exact mix of controls used will depend on the size of the organisation, the people who make it up, the tasks in hand and the entrepreneur’s personal style. The controls adopted, and the way they are used, will form the basis of the entrepreneur’s leadership strategy.

13.3 Markets and hierarchies

Key learning outcome An appreciation of the distinction between the market and the hierarchy as forms of organisation.

The business world is full of organisations which offer goods and services to each other and to individual consumers. These goods and services are traded in markets. Organisations and markets represent different ways in which individuals can arrange exchanges between themselves. A market consists of a range of sellers offering their goods to a number of buyers. It is characterised by short-term contracts centred on exchanged products, as shown in Figure 13.2. Buyers

Chapter 13 The entrepreneurial venture and the entrepreneurial organisation

A vision leaves open the potential for a wide range of possibilities and courses of action. Different courses must be judged in terms of how effective they will be in leading the organisation towards the vision.

Figure 13.2 The market as a form of organising exchange

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Figure 13.3 Hierarchical organisation

are free to select the seller they wish to buy from. The seller must offer goods at a price dictated by the market. Classical economics assumes that the goods of one supplier are much the same as the goods of any other, although, in practice, sellers may be able to differentiate their products from those of competitors. If this differentiation offers advantages to the buyer, then the seller may be able to sustain a price higher than the market norm. In a market, the relationship between the buyer and seller is centred on the product exchanged between them. The seller has no obligation other than to supply the product specified, and the buyer has no obligation other than to pay for it. The relationship is short term, with the buyer being free to go to another supplier in the future. Markets are not the only means that people use to organise exchange. They also form organisations such as business firms. Organisations are sometimes referred to as non-market hierarchies, indicating the way in which the individuals who make them assign responsibilities. In a hierarchy, individuals still supply a product, their labour, to the organisation. Different parts of the hierarchy will supply products and services to other parts and to the organisation as a whole. The factory may pass on its products to the marketing department for example, or the accounts department may supply financial services. In a hierarchy the relationship between individuals goes beyond the mere product or service they agree to supply. It has a long-term character based on both formal and informal criteria. A hierarchical organisation is based on long-term commitments, as depicted in Figure 13.3. A hierarchy represents a loss of economic freedom. Within an organisation, individuals must use each other’s services. They cannot shop around in the market for a better deal. Why, then, do organisations form? The answer is that markets do not come for free. There is a cost associated with assessing what is available: gathering information may be expensive. If, instead, individuals set up long-term contracts, then this cost is reduced. Further, if the product is complex and the relationship short term, the seller may be tempted to cheat and supply less than expected. The buyer may face a cost associated with monitoring what the seller supplies. The monitoring cost is reduced if the buyer and seller trust one other. Trust is best built in a long-term relationship, and most easily built if the buyer and seller are parts of the same organisation. The ‘market’ and the ‘hierarchy’ are pure types lying at the opposite ends of a spectrum of organisational types. Organisations in the real world lie somewhere in between. They

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have some of the characteristics of a hierarchy, with relationships based on long-term agreements and formal contracts, and some of the characteristics of markets in which individuals come and go, offering their labour and services on a competitive basis. This is true not only within organisations but also between them. Organisations do not just rely on markets, they set up contracts and make long-term commitments to each other. The network provides a more realistic model of how entrepreneurial ventures actually operate than either of the pure types of the market and the hierarchy. This observation has led to the development of a powerful economic approach to understanding both why organisations form and the shape they take. This approach is known as transaction cost economics, introduced in Chapter 6. The fundamental idea behind transaction cost economics is that some market exchanges have costs associated with them. These costs arise because, with some transactions, one party may believe that there is a chance that the other party will renege on the deal. This means that they must invest in setting up binding contracts and then policing them. If these contract costs become too high, then it may be better for the parties to work together within an organisational setting, so locking their interests together. There is a cost associated with this move in that the efficiency that the market might have provided is lost. However, if this loss is lower than the expected transaction cost, setting up the organisational structure will still be the more efficient option. Oliver Williamson has been at the forefront of the development of the transaction cost perspective, and a full exploration of the insights of this approach can be found in his 1985 book The Economic Institutions of Capitalism and his 1991 article. It is often the case that entrepreneurs prefer to work within an organisational setting rather than ‘expose’ themselves to market uncertainties. One area of resistance that is often encountered is entrepreneurs’ unwillingness to share the secrets of their innovation with outsiders, whom they fear might ‘steal’ it. Another is they might doubt the commitment of external investors (particularly banks and venture capitalists) to the broader aims of the venture, asserting that they are ‘only out for themselves’. As a result of these concerns, entrepreneurs try to bring as many transactions within their organisation as possible. However real such concerns may be, the entrepreneur must be aware of the costs, both direct and in terms of loss of flexibility, in adopting organisation-based rather than market-based solutions.

13.4 Networks Individuals use both organisations and markets to facilitate exchanges between themselves. Markets offer a freedom to choose whereas permanent hierarchies emerge when trust is important. An understanding of the Real-life organisations possess some characteristics of both concept of the network and markets and hierarchies. A business organisation has a definite its role in the entrepreneurial character. It is an agent with legal rights and responsibilities, it process. has a name. People will know whether they work for it or not. It will have some sort of internal structure. A business organisation does not exist in isolation. It will be in contact with a whole range of other organisations. Some of these relationships will be established through the market but others may have a longer-term, contractual nature. Businesses set up contracts with suppliers. They may agree to work with a distributor to

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develop a new market together. An organisation providing investment capital to the venture may be invited to offer advice and support. An entrepreneur may call upon an expert friend to offer advice on marketing. An old business associate may provide an introduction to a new customer. Rather than think about an organisation as closed and sitting in a market, it is better to think of it as being located within a network of relationships with other organisations and individuals. In this view the firm does not have a definite boundary. The individuals who make it, and the organisations it comes into contact with, merge into one another. The network is built from relationships which possess both hierarchical and market characteristics. These relationships will be established on the basis of market-led decisions, formal contracts, expectations and trust. When a new venture is established it must locate itself in a network. This means that it must work to establish a new set of relationships with suppliers, customers, investors and any others who might offer support. The new venture will need to compete with established players. This means that it must break into and modify the network of relationships that they have established. A tight network is one in which relationships are established and the parties to them are largely satisfied with these relationships. A loose network is one in which relationships are distant and easily modified. A tight network will be hard to break into; a loose one will be easier. Once a firm is located in a tight network it will find it easier to protect its business from new challengers. Understanding the nature of the network is important to the success of the entrepreneurial venture. Managing the network will be a crucial part of the strategy for the venture. In particular, the entrepreneur must make decisions in relation to the following questions: • What is the existing network of relationships into which the new venture must break? • What is the nature of the relationships that make up the network? Is the network tight or loose? Are the relationships based on formal contracts or on trust? • How can the new venture actually break into this network of relationships? (Who must be contacted? In what way? What must they be offered?) • How can the network be used to provide support to the venture? • What resources (capital, people, productive assets) will the network provide? • How can risk be shared through the network? • How can relationships in the network provide a basis for sustaining competitive advantage? The process of developing answers to these questions will be explored in Part 5 of this book. In short, a network is a kind of glue which holds a business community together. An entrepreneur initiating a new venture must be active in breaking into a network. Once this has been achieved, the network can be called upon to support them (see Figure 13.4). Thompson (2003) provides a theoretical account of networks and their analysis.

Key learning outcome An understanding of how the network may be used to increase the power of the entrepreneurial organisation.

13.5 The extended organisation and the hollow organisation The idea that an organisation is wider than that part of it which is legally defined as the firm provides the entrepreneur with an

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Figure 13.4 Network formation and the entrepreneurial start-up

opportunity. The network offers entrepreneurs the possibility of moving beyond the limits of their own organisation and achieving a great deal more than they could in isolation. Two types of organisation in particular use the potential of the network.

The extended organisation The extended organisation is one which uses the resources of other organisations in its network to achieve its goals (Figure 13.5). Access to these resources is gained by building long-term, supportive and mutually beneficial relationships. Particularly important are suppliers who provide the venture with the inputs it needs, associated organisations in the same

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Figure 13.5 Co-operative relationships in the entrepreneurial network

business who can help manage fluctuations in demand, and distributors who can get the firm’s goods or services to its customers. Distributors need not be limited to the functions of storing and transporting goods. They can also be active partners in developing a new market and add their support to achieving and sustaining a strong competitive position. The business may also develop a productive relationship with other businesses that supply the same customers with non-competing products. Here information on customers and their needs can be exchanged and market research costs shared. It may also be possible to share selling and distribution costs.

The hollow organisation The hollow organisation is one which exists not so much to do things itself but to bring other organisations together. In effect it creates value by building a new network or making an existing one more efficient (Figure 13.6). The formal organisation is kept as small as possible – it may only be a single office – and it sticks to its essential or core activities. A common example of a hollow organisation is one which simply ‘markets’ products. It will buy these products from the company which manufactures them. It will use independent distributors to get the product to customers. It may call upon the services of separate market research and advertising agencies. It may even contract-in its sales team. The hollow organisation does not manufacture, distribute or advertise goods or services. It simply exists to bring together the organisations that perform these functions. It is rewarded from the value it creates by co-ordinating their activities. An excellent example of what can be achieved by adopting a hollow organisational strategy is that of Naxos Records, a venture founded by the Hong Kong-based German entrepreneur Klaus Heymann. This is a business which has established a market-leading

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position in the low-cost classical CD market. Yet the core organisation does little itself except co-ordinate the production and marketing of the product. Musicians and orchestras (often from eastern Europe) are commissioned as they are needed. Recording facilities are hired in. Production and packaging of the CD are outsourced (usually in the Far East), and distribution is via independent retailers.

Chapter 13 The entrepreneurial venture and the entrepreneurial organisation

Figure 13.6 The hollow organisation

Factors affecting the choice of organisational form Both the extended organisation and the hollow organisation are attractive options for the entrepreneur. There are a number of reasons for this: • • • • • • •

they are easy to set up; the initial investment needed is small and entry costs are low; they allow the entrepreneur to concentrate on their core skills; they are flexible and can be easily modified; fixed costs are minimised; they allow the entrepreneur access to the resources of other organisations; growth is relatively easy to manage.

Competition to set up extended and hollow organisations can be quite intense because they are both such attractive options for starting new ventures. If they are to be successful, entrepreneurs must be quite sure of the strategy they are adopting. In particular they must be confident about: • where the business will be located in the value-addition chain; • the value they are adding, i.e. why customers will benefit from what the business has to offer;

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• why the product they are offering is different from what is already on offer; • how they will manage the relationships on which the business will depend; • how they will sustain those relationships in the face of competitors trying to break the relationships it has established. These are important ideas which will be developed further in Part 5 of this book. The internet has made a great impact on the world of business. Internet ventures such as the book retailer Amazon and the computer supplier Dell have been high-profile stock market successes. The merger of the media company Time Warner with the online service provider America On-Line (AOL) created great interest and initially a considerable mark-up on the stock-market value of the separate companies. The internet is primarily a communication system, albeit one of great sophistication and reach. The reason that it is creating such high expectations is the way it is enabling information to be stored and accessed by organisations and the facility it offers to pass information between them. Advocates of the potential competitive advantages that the internet is offering to business are keen to draw a distinction between what is referred to as e-commerce, the use of the internet as an adjunct to selling and promotional activities, and e-business, the use of the internet to enhance the performance of the organisation’s entire operational stance. E-business goes beyond just selling. It is concerned with managing the business’s whole value-addition chain and creating an active, two-way dialogue with the customer, not just sending a message to them. Strategically, the internet is encouraging the development of hollow organisations. This is because it is so powerful in co-ordinating in an efficient and relatively low-cost way the activities of otherwise separate organisations. Many new internet start-ups are concerned not so much with manufacturing or even direct service delivery as with providing a facility that brings traditional suppliers and potential consumers together. Customers appreciate the power of the internet in terms not only of making purchase easy but also of its ability to provide information, making the purchase decision more informed. Suppliers recognise the potential to create new business through a relatively low-cost route. However, many also appreciate the tendency of the internet to make buyer price comparison easier, and so competition keener. The key challenge for the internet-based hollow organisation is not so much gaining entry, which is quite straightforward, as gaining long-term competitive advantage. Low entry costs are attractive for entrepreneurs, and investors, because they reduce risk. However, they also mean that competitors find it easy to follow. Achieving competitive advantage is more difficult. Internet distributors, like any other distributor, cannot significantly alter the final product or service the consumer uses. Internet distributors have lower costs than traditional distributors, but costs can only be reduced so far. In any case, offering the buyer a lower price reduces the venture’s profits. Ultimately, successful internet ventures will be those which build a relationship with customers based on range of offerings, quality of service and reputation supported by a trusted brand. The internet may be changing the business world, but it is not changing its fundamental rules.

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• The entrepreneur must bring the resources they use together in the form of an organisation.

• Organisations are best understood through the use of metaphors: the things they are like.

• The open market and the closed hierarchy are pure forms of organisation. • The entrepreneurial organisation is best thought of as a network of relationships defined through markets and formal hierarchies. The network lies somewhere between the two pure forms.

• Entrepreneurs can create new value by building extended or hollow organisations which co-ordinate the activities of other organisations.

Research themes The role of networks in internet ventures

Chapter 13 The entrepreneurial venture and the entrepreneurial organisation

Summary of key ideas

The internet has provided a number of opportunities for entrepreneurs. As a technology it has particularly facilitated the development of ventures based on networked and hollow organisational forms. Good case studies of many internet-based ventures are now available. Using such case studies (the more the better), identify networked organisational forms in which the venture itself has only a low resource base but is active in co-ordinating and focusing the activities of other (established and probably much larger) organisations. What is the structure of network linkages? To what extent does the venture prioritise relationships with these other organisations? How does the venture manage that relationship, and, in particular, how does it establish and maintain unique access to that organisation and keep competitors out? How does the venture add value as far as customers are concerned? What are the implications for the venture gaining sustainable competitive advantage (refer to Chapter 25 for ideas here)? Select case studies of internet ventures that have been both successful and not. Be prepared to compare the venture with established competitors using a more traditional organisational form. What does this suggest about the possibilities, strengths and limitations of the networked organisational form? What are the key success factors for success with the organisational form?

Key readings A seminal proposal about the role of networks in the entrepreneurial process is: Birley, S. (1985) ‘The role of networks in the entrepreneurial process’, Journal of Business Venturing, Vol. 1, pp. 107–17.

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And an interesting application of the idea to the process of entrepreneurial organisation creation is: Larson, A. (1993) ‘A network model of organisation formation’, Entrepreneurship Theory and Practice, Vol. 12, No. 2, pp. 5–15.

Suggestions for further reading Anderson, J.C., Håkansson, H. and Johanson, J. (1994) ‘Dyadic business relationships within a business network context’, Journal of Marketing, Vol. 58, pp. 1–15. Anderson, P. (1992) ‘Analysing distribution channel dynamics: loose and tight couplings in distribution networks’, European Journal of Marketing, Vol. 26, No. 2, pp. 47–68. Birley, S., Cromie, S. and Myers, A. (1991) ‘Entrepreneurial networks: their emergence in Ireland and overseas’, International Small Business Journal, Vol. 9, No. 4, pp. 56–74. Boisot, M.H. (1986) ‘Markets and hierarchies in a cultural perspective’, Organisation Studies, Vol. 7, No. 2, pp. 135–58. Cheung, S.N.S. (1998) ‘The transaction cost paradigm’, Economic Inquiry, Vol. 36, No. 4, pp. 514–21. Falemo, B. (1989) ‘The firm’s external persons: entrepreneurs or network actors?’ Entrepreneurship and Regional Development, Vol. 1, No. 2, pp. 167–77. Jarillo, J.C. (1988) ‘On strategic networks’, Strategic Management Journal, Vol. 9, pp. 31–41. Jones, G.R. and Hill, C.W.L. (1988) ‘Transaction cost analysis of strategy–structure choice’, Strategic Management Journal, Vol. 9, pp. 159–72. Larson, A. (1992) ‘Network dyads in entrepreneurial settings: a study of the governance of exchange relationships’, Administrative Science Quarterly, Vol. 37, pp. 76–104. Larson, A. (1993) ‘A network model of organisation formation’, Entrepreneurship Theory and Practice, Vol. 12, No. 2, pp. 5–15. Morgan, G. (1986) Images of Organisation. London: Sage. Perry, M. (1996) ‘Network intermediaries and their effectiveness’, International Small Business Journal, Vol. 14, No. 4, pp. 72–9. Peters, T. and Waterman Jr, R.H. (1982) In Search of Excellence. New York: Harper & Row. Szarka, J. (1990) ‘Networking and small firms’, International Small Business Journal, Vol. 8, No. 2, pp. 10–22. Thompson, G.F. (2003) Between Hierarchies and Markets: The Logic and Limits of Network Forms of Organisation. Oxford: Oxford University Press. Tyosvold, D. and Weicker, D. (1993) ‘Co-operative and competitive networking by entrepreneurs: a critical indent study’, Journal of Small Business Management, Jan., pp. 11–21. Williamson, O. (1985) The Economic Institutions of Capitalism. New York: Free Press. Williamson, O. (1991) ‘Comparative economic organization: the analysis of discrete structural alternatives’, Administrative Science Quarterly, Vol. 36, pp. 269–96.

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CASE 13.1

25 January 2006

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The security of mutual support PAUL TYRELL The founder John Horton, 59, worked as a software engineer at GEC and a technical director at Acorn Computer before co-founding Net-tel, the company that eventually became Clearswift. He stood aside as chief executive after completing his first round of venture capital investment and is now company secretary. He also oversees government-grade, highsecurity projects. The story of how I came to meet Richard Anton starts with an American entrepreneur, Andy Demari, who collaborated with Net-tel on various projects in the early days. He put me in touch with an ex-colleague of his from Olivetti [the Italian computer maker], who had become a fund manager for Pino, a small Milan-based venture capital firm. Pino was interested but could not handle the size of deal we needed on its own and suggested Amadeus as a lead investor. As it turned out, I knew the head of Amadeus already. It was Hermann Hauser, the founder of Acorn Computer, which invented the ARM chip (used in most of the world’s mobile phones and personal digital assistants). I had worked closely with him for five to six years and knew he was incredibly bright. As far as I was concerned, any company he was involved with would have to be good. Richard and I met up in Cambridge and I immediately found him supportive. He had invested in other software companies in the past, knew a lot about the industry and was very sharp. He led us through the process of

shaping up for investment without taking advantage of our ignorance in any way. Ultimately, the Amadeus investment committee could have vetoed the deal, but we really felt the company was on our side during the due diligence. There were three investors in the first round, which brought in about £6.5m. Until then, I was the chief executive – the other cofounders had moved on. But my background was that of a technical director and we really needed a professional chief executive, as well as extra support in sales and marketing. Amadeus felt we needed a large option pool to beef up our management team. I disagreed – Richard was effectively asking us to dilute ourselves for our employees, and that was new territory for me. However, he eventually persuaded me. We lined up Don Taylor (previously a director at the software firm Oracle) as our chief executive before the funding round was finished, and he helped us to focus and develop the company significantly. A similar disagreement concerned the marketing spend necessary to consolidate our acquisition of Content Technologies in 2002. However, overall our relationship has been quite smooth – Richard has simply tempered my aggressive entrepreneurialism. He has joined us at trade shows, making himself visible to potential customers as well as investors, and today we participate in business-school seminars run by Amadeus about the relationships between VCs and entrepreneurs.

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CASE 13.1 CONT. The backer Richard Anton, 41, has extensive experience in private equity and high technology. From 1994 to 1996 he was an early-stage investor for Apax Partners, the private equity firm. He then served as director of business development and finance at two of his investments in the software industry, Autonomy and Neurodynamics. He joined Amadeus in 1998. I was interested in John Horton from our first meeting, primarily because he had a credible background in technology. I was already interested in the space in which he was operating – Autonomy had looked at e-mail filtering and I had tracked developments in the technology ever since I worked for Autonomy. John had a plan to move his business into full-service content security – indeed, he had made some early moves to achieve that. And I thought it had a lot of potential. I was aware of the new types of threat emerging and of the potential for e-mail to be a vector for those threats. I could see opportunities in both in-bound and out-bound filtering. We could license technology to service providers so they could do the filtering themselves, or we could sell direct to [business] customers. Overall, Net-Tel struck me as a treasure chest of good technology that had not yet been fully exploited commercially. John is strong technically and understands the defence market extremely well. He is the stable core of the business – the memory bank. He is also very reliable – when something different needs doing, he’ll pick it up. But perhaps his most impressive quality is that he is supportive to the professional management team I helped to bring in. Often founders act as, or are perceived to be, back-

seat drivers. By contrast, John understood he had to pass on the baton. He is able to review the strengths and weaknesses of the business completely objectively, as if he were both executive and non-executive. What I brought to the partnership was experience of commercial positioning, finance and management recruitment. At the beginning I visited the company regularly and made a point of meeting customers and potential industry partners to validate the proposition with them. I was closely involved in the acquisition of Content Technologies. I also involved myself in all issues of management succession – for example, Andy Demari, our initial chairman, was suitable for the early days post-investment, but he has his own business to run on the west coast of the US. We replaced him with Carl Symon, who ran IBM in the UK during the 1990s and is currently on the board of three FTSE companies. We needed that heavyweight experience for the next period of growth. John and I disagreed over the size of the option pool necessary to bring in people like Carl, but only because he didn’t know what the market norms really were. We resolved things by going through a kind of budget, writing down on a whiteboard all the significant heads we had to hire and totalling the equity they would expect to receive. Since the second funding round, my involvement has been more hands-off, but I’m still a non-executive director and always attend board meetings. The team is in place to realise Clearswift’s potential – the company went through a loss-making period while it absorbed the Content Technologies acquisition, but is now in a position to prepare for an initial public offering. Source: Paul Tyrell, ‘The security of mutual support’, Financial Times, 25 January 2006, p. 16. Copyright © 2006 The Financial Times Limited.

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6 February 2006

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Biotechnology chief lauds Scottish skills ANDREW BOLGER Scotland’s flourishing life sciences sector could attract millions of pounds of research work that currently goes to the US, according to the founder of Biocon, India’s biggest biotechnology company. Kiran Mazumdar-Shaw, chairman and managing director of the Bangalore-based company, said Scotland was well placed to take over drug discovery and clinical development work from US companies. There are more than 550 life sciences organisations in Scotland, employing more than 26,500 people, according to Scottish Enterprise. Scotland is home to 15 per cent of the UK’s life sciences companies, and has more than 50 academic institutions and 80 companies engaged in drug discovery. There are also more than 100 Scottish-based medical devices companies. Interviewed by the Financial Times on a visit to Scotland, Ms Shaw said: ‘Last year we spent $2m (£1.14m) in this area and in future years that will grow to tens of millions of dollars – work that I think I could very easily shift here. There is a lot of pre-clinical toxicology that needs to be done. India has some gaps that Scotland could fill very easily.’ Although India enjoys a considerable cost advantage, Ms Shaw explained that some products needed global trials. ‘You can easily do development work outside the US as long as you conform with FDA [Food and Drug Administration] standards,’ she said. The entrepreneur, whose company has a market capitalisation of $1.1bn, was speaking after attending her first meeting of the international advisory board of Scottish Enterprise.

The board is part of the governmentfunded development body’s ‘globalscot’ network, a group of 900 senior business leaders based overseas who try to help Scottish companies and the economy. Ms Shaw was introduced to the network by John Shaw, her Scottish husband, who was chairman and managing director in India of Madura Coats, the textiles group, from 1991 to 1998. He has since joined Biocon. Ms Shaw said it had been ‘an eye-opener’ for her to discover the strength of Scotland’s skills base, which meant work could be done more quickly than in the US. She was also excited by Scotland’s potential as a base for epidemiological studies, because of the links between government, universities and life sciences companies. The Scottish executive has announced it will invest £4.4m to study the ways genetic and lifestyle factors cause heart disease, osteoporosis and mental illness. Generation Scotland, the programme being run in conjunction with the universities of Aberdeen, Dundee, Edinburgh, Glasgow and the National Health Service, wants to recruit up to 50,000 Scottish volunteers for the research. The findings will help identify groups at high risk of developing inherited conditions and allow early treatments with new drugs. Andy Kerr, health minister, said: ‘We have the potential to develop novel therapies which not only help patients but also help the Scottish biotechnology economy.’

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CASE 13.2

Source: Andrew Bolger, ‘Biotechnology chief lauds Scottish skills’, Financial Times, 6 February 2006, p. 4. Copyright 2006 The Financial Times Limited.

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Discussion point 1. In what ways are Richard Anton and Kiran Mazumdar-Shaw trying to create entrepreneurial organisations?

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CHAPTER 14

Intrapreneurship Chapter overview Intrapreneurship is something of a holy grail for management: the promise of entrepreneurial dynamism, agility and adeptness in exploiting opportunities combined with the stability, market power and low risk of the established business. However, there are problems in combining the two.

14.1 The nature of intrapreneurship In recognising the power of the entrepreneurial organisation, it is important not to be too dismissive of what the established ‘nonentrepreneurial’ organisation has to offer its stakeholders. After An appreciation of the all, an established business is only established because it has potential and role of enjoyed success. The entrepreneurial organisation and the estabintrapreneurship in lished organisation both have advantages. The entrepreneurial established organisations. shows an acceptance of (even a need for) change and an ability to exploit new opportunity. The established demonstrates an ability to consolidate around success, manage risk and control resource flows. A combination of the two, that is, an organisation which recognised the basis of its success and was able to manage it to reduce risk and yet at the same time was flexible to the shifting needs of its stakeholders, remained attuned to new market opportunities and responsive to the need for change, would suggest itself as an ideal type of business. The intrapreneur provides a means of achieving the established–entrepreneurial synthesis. The intrapreneur is a role defined by Pinchot (1985) in his book, Intrapreneuring. In essence, the intrapreneur is an entrepreneur who works within the confines of an established organisation. The intrapreneur’s role would parallel that of the entrepreneur. In particular he or she would be responsible for developing and communicating organisational vision; identifying new opportunities for the organisation; generating innovative strategic options; creating and offering an organisation-wide perspective; facilitating and encouraging change within the organisation; challenging existing ways of doing things and breaking down bureaucratic inertia. This role has also been described as that of a ‘change master’ (Kanter, 1985).

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Intrapreneurial activity can be directed at four levels within and outside the organisation. These differ in the impact they will have on the organisation and its surroundings, their effect on the venture’s stakeholders, the resources they will require and the level of risk they entail. • The management of specific projects. All businesses engage in new projects of some type. Projects such as new product development, the exploitation of a new market opportunity (perhaps international through exporting or strategic alliance), the integration of a new technology into the firm’s operations or the acquiring of new funding are especially important to the maturing entrepreneurial venture that wants to keep its competitive edge. Such projects may be best managed in an entrepreneurial way that cuts across conventional organisational boundaries. They may be made the responsibility of a particular cross-disciplinary team that operates with intrapreneurial flair. Ahuja and Lampert (2001) develop a model of how intrapreneurism helps large firms to achieve breakthrough inventions. • The setting up of new business units. As the venture becomes larger, new and distinct business functions and units come into their own. A particular part of the business may operate best if it has a distinct character and a degree of independence. The setting up of new business units is a demanding project. Not only must the structural and external strategic issues be considered, but there are also the resourcing issues (including human), and the relationship with the parent business to be taken into account. Again, an intrapreneurial team, the members of which may have a future role in the new unit, may best manage this sort of project. • Reinvigorating the whole organisation. The success of entrepreneurial ventures is largely based on their flexibility and responsiveness to new and unmet customer demands. Such flexibility can be lost as the business grows and its attention is drawn to internal concerns. Reintroducing the inventive spirit back into the business may be a radical process. Making the organisation entrepreneurial again is clearly an intrapreneurial project. An intrapreneur must lead such a project with entrepreneurial vision for the organisation’s future, with an entrepreneurial approach to using power, leadership and motivation and an ability to overcome organisational resistance to change. • Reinventing the business’s industry. Entrepreneurs make a difference. The world is not the same after they have built their venture. The most successful entrepreneurs do not just enter a market: they reinvent the industry in which they operate by introducing new technology, delivering new products or operating in a new, more effective way. There is no reason why the maturing entrepreneurial venture should not hold on to this ambition. A business can win by playing to the rules well; but it can also win by changing the rules to suit itself. Clearly though, such a project is wide in its scope and challenging to implement. It demands an eye on the future, strategic vision, comfort with risk and an ability to lead people forward. It is at this level that intrapreneurship meets up with and becomes entrepreneurship. Intrapreneurism offers an exciting option for the consolidating entrepreneurial venture. It promises a way to build on success while retaining the original dynamism of the venture. It suggests a way to reduce risk while still pursuing fleeting opportunities. However, any organisational form which promises such high rewards must also present some challenges. There are limitations to intrapreneurship, a point developed by Ross (1987).

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Existing managers’ comfort

Key learning outcome

Allowing a role for the intrapreneur to develop demands that the existing senior managers must create space for the intrapreneur to operate. That means letting go of some degree of control. Existing senior (and not so senior) managers may not feel comfortable with this. In effect, allowing the intrapreneur to operate means that senior managers must give up, or at least share a part of their power at a core rather than a peripheral level. After all, as Young (1999) points out, intrapreneurial management is about breaking rules. And this means the rules that existing managers see as their role to protect and may even have created in the first place.

A recognition that the potential for intrapreneurship may be limited.

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14.2 The challenges to intrapreneurship

Decision-making control Entrepreneurs exist to challenge orthodoxies. They seek a better way of doing things. They must be dissatisfied with the status quo. This same dissatisfaction must also motivate the intrapreneur. Unlike the entrepreneur, however, the intrapreneur must operate within some sort of organisational decision-making framework. If they did not, then they would not actually be working for the organisation at all. The question here is to what extent the intrapreneur can be allowed to challenge existing decision-making procedures and to what extent they must be bound by them. A balance must be created between allowing the intrapreneur freedom to make their own moves and the need to keep the business on a constant strategic path.

Internal politics The intrapreneur must question the existing order and drive change within the organisation. For many individuals and groups within the organisation, such change will present a challenge. As a result, the intrapreneur is likely to meet resistance, both active and passive, to the ideas they bring along. An ability to predict and understand that resistance, and developing the leadership skills necessary to overcome it, present a considerable challenge to the manager. Intrapreneurs are a rare breed. Tom Peters (1989) has suggested that intrapreneurs must be able to ‘thrive on chaos’.

Rewards for the intrapreneur The intrapreneur, if they are to be effective, must bring along the same type and level of skills that entrepreneurs themselves offer. The question is, can the organisation really offer the intrapreneur the rewards (economic, social and developmental) they might come to expect in return for using them? In short, if someone is an effective intrapreneur, how long will it be before the temptation of full-blown entrepreneurship is felt and they move off to start a venture of their own? Clearly, intrapreneurship presents itself as a spectrum which, as a style of management, acts to connect ‘conventional’ management with entrepreneurial management. It offers a way to

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bring the advantages of both types of management together. In this it is a compromise. The entrepreneur can only facilitate intrapreneurship within the business by recognising the nature of this compromise and making decisions in relation to it. The central question relates to how much latitude the venture’s strategy gives individuals to make their own decisions. The question is not just strategic. An entrepreneur must decide to what extent they will be willing to accept dissent from the intrapreneur. Will it be received as a challenge? How does active dissent fit with the leadership strategy the entrepreneur has nurtured? Entrepreneurs must also ask how the reward structure they have set up encourages and discourages individual decision making. What does the individual get in return for venturing on behalf of the business? What sanctions come into force if things go wrong? The entrepreneur must remember that such rewards and sanctions are not always formal and explicit. Further, the entrepreneur must recognise the level of resistance that agents driving change meet from the organisation and accept responsibility for helping the intrapreneur to overcome this. No less than any other member of the organisation, the intrapreneur needs support, encouragement and leadership.

Summary of key ideas • Intrapreneurship – the entrepreneur in the established organisation – would seem to offer a great prize: the possibility of entrepreneurial dynamism with the stability and market power of the proven firm.

• Intrapreneurs can operate at several levels: – – – –

managing specific projects; setting up new business units; reinvigorating the organisation; reinventing industries.

• However, the potential for intrapreneurship is limited by: – existing managers’ comfort with rule-breaking intrapreneurs; – keeping the intrapreneur aligned with the organisation’s strategy; – the ability to provide the effective intrapreneur with sufficient rewards (financial and developmental).

Research themes Defining the intrapreneur Refer back to the discussion of defining the entrepreneur in Chapter 1. Consider the two studies undertaken by Gartner (1988, 1990) to ascertain the definitions of the entrepreneur that various people (politicians, managers, experts) suggested and how the responses were analysed.

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Repeat the study (or at least using a similar methodology) focusing in on the terms ‘entrepreneur’ and ‘intrapreneur’. You may find human resource and development managers within established firms to be a good response group. (You will find that by using e-mail your study will not be as expensive to conduct as Gartner’s!) Compare your findings to those of Gartner. Is there a greater consensus on what an intrapreneur is? How is the intrapreneur distinguished from the entrepreneur?

Conceptualising the intrapreneur Review the discussion about economic approaches to the entrepreneur in Chapter 7. To what extent can the points made from various economic perspectives be said to apply to the intrapreneur as much as to the entrepreneur? Can any of them distinguish the intrapreneur from the entrepreneur? Attempt to relate your conclusions in the form of some diagram or conceptual map.

Key readings Two contrasing readings, the first emphasising the opportunity of intrapreneurship, the second emphasising its limitations, are: Stopford, J.M. (1994) ‘Creating corporate entrepreneurship’, Strategic Management Journal, Vol. 15, pp. 521–36. Wesley Morse, C. (1986) ‘The delusion of intrapreneurship’, Long Range Planning, Vol. 19, No. 6, pp. 92–5.

Suggestions for further reading Ahuja, G. and Lampert, C.M. (2001) ‘Entrepreneurship in the large corporation: a longitudinal study of how established firms create breakthrough inventions’, Strategic Management Journal, Vol. 22, pp. 521–43. Coulson-Thomas, C. (1999) ‘Individuals and enterprise: developing intrapreneurs for the new millennium’, Industrial and Commercial Training, Vol. 31, No. 7. Gartner, W.B. (1998) ‘“Who is an entrepreneur?” is the wrong question’, American Journal of Small Business, Spring, pp. 11–32. Gartner, W.B. (1990) ‘What are we talking about when we talk about entrepreneurship?’, Journal of Business Venturing, Vol. 5, pp. 15–28. Jennings, R., Cox, C. and Cooper, G.L. (1994) Business Elites: The Psychology of Entrepreneurs and Intrapreneurs. New York: Routledge. Johnson, D. (2001) ‘What is innovation and entrepreneurship? Lessons for larger organizations’, Industrial and Commercial Training, Vol. 13, No. 4, pp. 135–40.

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Kanter, R.M. (1985) The Change Masters. London: Unwin Hyman. Koon, P.A. (2000) ‘Developing corporate intrapreneurs’, Engineering Management Journal, Vol. 12, No. 2, pp. 3–7. Moon, M.J. (1999) ‘The pursuit of managerial entrepreneurship: does organization matter?’, Public Administration Review, Vol. 59, No. 1, pp. 31–43. Morris, M.H. and Jones, F.F. (1999) ‘Entrepreneurhip in established organizations: the case of the public sector’, Entrepreneurship: Theory and Practice, Vol. 24, No. 1, pp. 71–91. Pearson, G.J. (1989) ‘Promoting entrepreneurship in large companies’, Long Range Planning, Vol. 22, No. 3, pp. 87–97. Peters, T. (1989) Thriving on chaos. London: Macmillan. Pinchot, III, G. (1985) Intrapreneuring. New York: Harper & Row. Prassad, L. (1993) ‘The etiology of organizational politics: implications for the intrapreneur’, SAM Advanced Management Journal, Vol. 58, No. 3, pp. 35–41. Robinson, M. (2001) ‘The ten commandments of intrapreneurs’, New Zealand Management, Vol. 48, No. 11, pp. 95–7. Ross, J. (1987) ‘Corporations and entrepreneurs: paradox and opportunity’, Business Horizons, July/Aug., pp. 76–80. Stopford, J.M. (1994) ‘Creating corporate entrepreneurship’, Strategic Management Journal, Vol. 15, pp. 521–36. Wesley Morse, C. (1986) ‘The delusion of intrapreneurship’, Long Range Planning, Vol. 19, No. 6, pp. 92–5. Young, A.P. (1999) ‘Rule breaking and a new opportunistic managerialism’, Management Decision, Vol. 37, No. 7, pp. 582–8.

Selected case material CASE 14.1

25 July 2005

FT

Smart companies take an ‘intrapreneurial’ spirit PAUL TYRELL How do large companies such as Apple Computer continue to innovate and respond rapidly to new opportunities, as if they were start-ups? Apple seemed to produce the iPod out of thin air in 2001 – at the time, a personal digital music player was not regarded as the obvious progeny of a personal computer manufacturer. Yet the company has since

re-entered the FT Global 500 ranking of the world’s largest companies after a four-year absence. The iPod now accounts for one-third of Apple’s revenues and its ‘halo effect’ has contributed to a 35 per cent increase in sales of the company’s Macintosh computers over the past year.

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was given huge resources and top personnel to develop cutting-edge technology in secret. Some of the world’s most famous military aircraft – such as the SR-71 Blackbird, the high-speed and radar-resistant reconnaissance aircraft – emerged from its hangars. Still operating from an Air Force base in California, Skunk Works is now a registered trademark and a widely used term for any secret innovationled project. During the 1970s, similar units were set up inside many organisations to think ‘disruptively’ – to look at products or markets outside their usual offering. One of the most famous was ‘Project Chess’, the twelve-man team at IBM that developed the first personal computer in 1981. Similarly, after the Macintosh computer was launched in 1984, Steve Jobs described its development as an ‘intrapreneurial venture’ within Apple – since the machine would compete with the Apple II, previously the company’s core product. Today the term intrapreneurship encompasses two main concepts: first, ‘corporate venturing’, which usually describes the search for spin-off opportunities; and second, the fostering of an entrepreneurial culture in large organisations, with the main objective of innovation. The first of these has a dismal track record. Recent research by Ashridge and London business schools concluded that less than 5 per cent of corporate venturing units created new businesses that were taken up by a parent company. Nevertheless, Julian Birkinshaw, a professor at London Business School, suggests that in certain conditions large companies can create value by acting like venture capitalists. These include ‘harvest venturing’, where surplus resources are used in commercial ventures, and ‘ecosystem venturing’, where the company supports entrepreneurial moves

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The iconic music player has also given critical mass to an entirely new market – the selling of digital music online. Even with his expertise in marketing, Steve Jobs, Apple chief executive, could never have predicted such success. Yet he was prepared for it in part thanks to a company culture in which innovative opportunities are spotted, nurtured and championed in an entrepreneurial manner – in short, a culture that is ‘intrapreneurial’. The term has its roots in an Economist article of 1976 by its then-deputy editor, Norman Macrae. Among other things, Mr Macrae argued that ‘dynamic corporations of the future should simultaneously be trying alternative ways of doing things in competition with themselves.’ In a follow-up article, published in 1982, he suggested large organisations should form internal markets in which groups of staff would compete for modules of work and proportionate remuneration, rather than simply being paid for attendance. The term ‘intrapreneur’ was coined at about the same time by a husband-and-wife team, Gifford and Elizabeth Pinchot, who cited Macrae’s 1976 article as their inspiration. Both entrepreneurs and business consultants, the Pinchots suggested individuals could act like entrepreneurs within a large organisation to the benefit of both employee and employer, provided they were willing to risk something of value to themselves – a portion of their salary, for example. Such intrapreneurs could exchange a completed project for a cash bonus or capital to invest internally in future projects. The idea of setting up semi-autonomous units dedicated to innovation had a famous precedent. Lockheed Martin, the US aerospace company, set up its ‘Advanced Development Projects Unit’, nicknamed ‘Skunk Works’, during the Second World War. A small facility, it

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CASE 14.1 CONT. among its stakeholders – investing in its suppliers, for example, to ensure that components are always available. Evidence suggests that an ‘intrapreneurial’ culture may be more powerful. Professor Birkinshaw says that companies now treat the generation of ideas as a vital task. ‘If you went back 50 years and asked someone on the production line who was responsible for quality, they’d point to the quality assurance guy at the end of the line,’ he says. ‘Now quality is everyone’s responsibility. Similarly, when you ask someone in a large organisation today who is responsible for new ideas, the venturing laboratory is no longer a satisfactory solution. You need to get everybody alert to opportunities and acting on them.’ Corporations should aim to be ‘ambidextrous’, Prof. Birkinshaw says. In other words, ‘good at both traditional, boring, efficiencyoriented functions and at spotting and acting on sexy new ideas’. A sales manager, for example, may sell to a specific group of clients, but through their awareness of others they may identify an entirely untapped group, or even a new line of business. In such a situation, the successful company will have a culture that supports them – one that is ‘empowering as well as aggressively performance-oriented’. Moreover, such a company is more likely to have a culture that supports learning, says Dylan Jones-Evans, director of the newly formed National Entrepreneurship Observatory for Wales. Professor Jones-Evans was part of a team that recently surveyed the 120 most innovative companies in South Korea, as classified by the government. He found that the most successful were those that continually tried to learn from their competitors and other external sources of information about their markets.

‘As organisations grow out of their entrepreneurial stage, many suffer from what we call founders’ disease,’ he says. ‘They develop their core competence to such an extent that it becomes all they concentrate on. As a result, they’re left behind by the dynamic environment around them.’ Recent research by Clark Gilbert, a professor at Harvard Business School, suggests the best innovations result from thinking about external forces. ‘Intrapreneurial’ ventures should be ‘opportunity-based rather than resourcebased’, he says, explaining that most large organisations try unsuccessfully to develop new ideas from their existing resources and competencies, rather than look outside for ideas. ‘The problem in so many existing markets is that product lines have already overshot what most consumers can absorb,’ he adds. In such an environment, companies should be aiming for ‘disruptive’ ideas of the sort described by economist Joseph Schumpeter when, in 1934, he described the ‘creative destruction’ of established businesses by entrepreneurs. ‘We find big firms are interested in disruption only when they think it will overlap or attack their business,’ says Prof. Gilbert. ‘Yet it always leads to growth in the overall market. The personal computer did disrupt the mainframe but it caused the total market for hardware to grow. ‘Easyjet is disrupting the airline industry but it’s also bringing growth in the consumption of air travel. Often, big firms are so worried about cannibalising that they fail to realise they’re poised on the edge of huge growth opportunities.’ Source: Paul Tyrell, ‘Smart companies take an “intrapreneurial” spirit’, Financial Times, 25 July 2005, p. 11. Copyright © 2005 The Financial Times Limited.

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Know the limits of corporate venturing JULIAN BIRKINSHAW AND ANDREW CAMPBELL With growth back on the agenda after a period of austerity and cost cutting, it is worth reflecting on the lessons arising from similar periods in the past. In the late 1990s, more than three-quarters of companies in the Fortune 100 and an equivalent number of FTSE 100 companies set up corporate venturing units as part of their search for growth. For example, BAT, the tobacco company, set up two units: Imagination, to search for new ideas, and Evolution, to develop the ideas into new businesses. While these units helped the company explore a number of areas, they failed to develop any significant new businesses. Recent research into corporate venturing units and corporate incubators by both Ashridge and London business schools concluded that less than 5 per cent of corporate venturing units created new businesses that were taken up by the parent company. Moreover, many failed to make any positive contribution. So why do corporate venturing units fail to help their parent companies find new legs? There are three reasons. First, early stage venturing is a tough job, even for professional, independent venture capital (VC) companies. Many VC companies earn less than their cost of capital unless they are fortunate enough to invest in one of the rare big winners. Angels, another form of independent investor in early stage ventures, also frequently fail to earn a good return on their investments. Without some advantage, corporate venturers are unlikely to beat these odds. Second, corporate venturers rarely have an advantage over the professionals. Those

business opportunities where the company does have a clear advantage are normally dealt with through the strategic planning process. At BAT, for instance, acquisitions of tobacco companies in new regions would not be allocated to a corporate venturing unit. Instead, BAT’s venturing focused on areas such as e-commerce, where its sources of advantage were questionable. Further, individuals in a corporate venturing unit rarely match their independent competitors. They may include some of the most entrepreneurial managers in the company, but they do not usually have the accumulated experience of seasoned venture capitalists. Third, the new ventures that start up within a corporate venturing unit often attract little attention or commitment from the core of the company. Because they are developed within a separate unit, they are not part of the strategic planning discussions that drive resource allocation. When the parent company is short of resources, either because of an economic downturn or because the new activities begin to compete with existing businesses, the new ventures lose out. Since it takes longer to nurture a new venture than most business cycles, competition for resources is almost inevitable. These obstacles to corporate venturing appear to be insurmountable. In our research, we could find no examples of new legs being developed from a venturing unit that passed the test of being ‘significant, permanent new businesses’ – meaning that they are profitable, are part of the parent company’s portfolio and amount to 20 per cent of sales or $1bn in value. Even when the research was extended

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CASE 14.2 CONT. back to venturing units set up in the 1970s or 1980s, none of them spawned a new business that passed our significance and permanence tests. Corporate venturing units do not, it appears, deliver growth. Managements looking for new growth have two routes: strategic planning (thinking through the options and choosing one or more with reasonable chances of success), or opportunistic investments (reacting to events or external proposals when they appear sufficiently promising). In a separate strand of research, we assembled a database of companies that had created new businesses that passed the significance and permanence tests. In only one of these cases did the new business begin its life in a corporate venturing unit or corporate incubator. Two-thirds were the result of carefully considered strategic decisions and one-third were more opportunistic. So, if corporate venturing does not create new businesses, does it have any place within large companies? The answer is yes. The techniques of corporate venturing can be harnessed for four purposes:

• Harvest venturing – This is appropriate when some corporate resources, such as technology, managerial skills, brands and even fixed assets, are surplus to requirements. It uses the techniques of venturing to convert existing corporate resources into commercial ventures, and then into cash. Lucent New Ventures Group was an example of harvest venturing before it was sold to Coller Capital. Set up to exploit Lucent’s technology, the unit evaluated over 300 opportunities, started 35 ventures and drew in $350m (£192m) of external venture capital.

• Ecosystem venturing – This is appropriate when the success of a business unit depends on a community of connected businesses, such as suppliers, agents, distributors, franchisees, technology entrepreneurs or manufacturers of complementary products. If this ecosystem is short of venture capital funds there is an opportunity for the company to act as a support to entrepreneurs in the community. The benefit to the company is the vibrancy of the community and the impact this has on its core businesses, rather than the prospect of capital gain from the investments. Intel Capital and Microsoft both use corporate venturing to stimulate their ecosystems. Intel Capital’s early investments were made in suppliers, often to guarantee availability of components. As the component industry matured, Intel switched to investing in software companies and supercomputer makers to promote the use of Intel technology. • Innovation venturing – This is appropriate when an existing function within a business unit, normally research or new product development, is underperforming because there is insufficient energy directed towards innovation. There must also be some belief that entrepreneurial energy is latent inside the company and can be fostered by stimulating ‘intrapreneurs’ or by tapping into external entrepreneurs. A unit with a venturing approach is set up to take on part of the function that is underperforming. By providing the right conditions, internal or external managers with entrepreneurial instincts will take more risks and invest more energy in developing new technologies or ways of working. Shell’s GameChanger programme was set up in 1996 to increase innovation in

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Nokia Venture Partners was set up to make minority investments in wireless internet projects. As one of the partners explained: ‘We do not do strategic investments [for Nokia] but the reason we exist is strategic for Nokia.’ Managers planning any kind of venturing unit need to be clear about which type they are setting up and why. ‘New leg venturing’ and units with mixed objectives do not work. Unless managers are clear about which of the four types they want, they will not build the necessary business model or skills to be successful. Companies wanting to do more than one kind of venturing need more than one type of venturing unit.

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the technical function of Shell’s exploration business. The idea was to take 10 per cent of the technical budget and spend it in a ‘venturing’ way. This new approach to innovation was taken up by other divisions in Shell and is viewed as having produced a step-change in some areas. • Private equity venturing – This is appropriate under rather limited circ*mstances. It is equivalent to a diversification into the private equity business, so the company needs to believe that it has better access to a flow of good deals than independent private equity companies. Also, managers must be confident that the deal flow they are tapping into is in the early stages of an upswing. To make money in the cycle of boom and bust, managers need to invest early and exit before the shakeout.

Source: Julian Birkinshaw and Andrew Campbell, ‘Know the limits of corporate venturing’, Financial Times, 9 August 2004, p. 11. Copyright © 2004 The Financial Times Limited.

Discussion points 1. Sketch the outline of a compensation and reward package for an ‘intrapreneur’. (Think in terms of fixed salary, performance bonuses and non-financial rewards.) 2. What parallels and distinctions might be drawn between the intrapreneur as innovator and the intrapreneur as the establisher of new business units? How might these two roles be compared with those of the traditional entrepreneur?

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CHAPTER 15

The changing role of the entrepreneur in the consolidated organisation Chapter overview This chapter is concerned with an exploration of the way in which the entrepreneur’s role changes as the organisation’s rate of growth slows and it consolidates its position in the marketplace. The role of the entrepreneur is compared and contrasted with that of the chief executive. It is considered why, despite its many strengths, entrepreneurial control may not always be right for the mature venture. The chapter concludes with a consideration of the responsibility of the entrepreneur to plan to pass on control to others after they have departed the organisation.

15.1 The entrepreneur versus the chief executive The vast majority of organisations offer a role for a single, most senior manager. This position has a number of titles. In for-profit Key learning outcome businesses it is often the managing director or president. An appreciation of the Generically, the role is referred to as the chief executive officer differences between the roles (CEO). Whereas all organisations have a chief executive officer of of the entrepreneur and the some description, not all are led by someone we would recognise chief executive officer. as an entrepreneur. So, while the entrepreneur may be a chief executive officer, the chief executive officer is not necessarily an entrepreneur. Clearly, both roles present considerable management challenges. Both demand vision, an ability to develop strategic insights and provide leadership. That said, the two roles are distinct in a number of ways.

Internal co-ordination versus external promotion The resource-based view of the organisation (see section 26.7 below) emphasises the role that managers have in bringing in the resources that are critical to the success of the venture: capital, information, people and the goodwill of customers. The entrepreneur, especially when

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the venture is at an early stage and has limited management resources, will take on the responsibility for bringing in most of these things. He or she will be the venture’s salesperson, its finance expert, its recruitment specialist and so on. The chief executive of even a moderately large organisation will not have direct responsibility for doing these things. He or she may not even have responsibility for delegating them, at least directly. What they will have responsibility for is setting up management structures within the organisation which will enable these tasks to be co-ordinated and carried out in a way that is effective and is responsive to the overall strategic direction chosen by the business. They may also recognise a need to manage the organisation’s culture. The chief executive is, responsible not so much for acquiring resources as for making sure that those which are acquired are used at a strategic level, in the best possible way. In these terms, the entrepreneur provides a bridge between the small business manager and the chief executive of a large firm. In growing the venture, the entrepreneur transforms the role of acquiring resources into that of creating and maintaining structures to manage resources. The role changes from one of external promotion (that is, managing the venture in its wider network) to one of internal co-ordination.

Managing continuity versus driving change As related in section 6.1, entrepreneurs are interested in driving change. So too are chief executives. In a fast-changing world, organisations must change if they are to survive and prosper. The management of change is now properly recognised as one of the key responsibilities of senior management, in whatever sector their organisation is operating. Entrepreneurs and chief executives are both interested in changing their organisations in response to the opportunities presented to them. However, there is a difference in the degree of change that entrepreneurs wish to see and that which chief executives would normally wish to occur. Entrepreneurs are interested in radical change. The entrepreneur’s vision is created out of a tension between what is and what might be. For that vision to be powerful, the difference between what is and what might be achieved must be great. Chief executives, on the other hand, are more likely to be interested in slower and more measured incremental change. This is understandable. After all, their organisations have proved their success, at least historically. They must be doing something right! Incremental change can build on that success: strengths are managed in while weaknesses are managed out. Radical change threatens to throw away the strengths as well as address the weaknesses.

Management by ‘right’ versus management by appointment The third feature that distinguishes entrepreneurs from chief executives is the basis on which they obtain authority to manage the business and the influence this has on the power base they develop. As noted in section 1.6, authority and power are quite different things. Power is an ability to influence the course of actions within the organisation. Authority merely offers the potential to influence the organisation by virtue of a position within it. Authority is an invitation to power, not power itself. Chief executives obtain their authority to run the business by virtue of appointment to the position. They may arrive at this position as a result of internal promotion or by being

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recruited into the organisation. The appointment process is governed by established organisational procedures. The views not only of internal managers but also of important investors may be sought. Once in this position, the power of the chief executive arises from the way they control resources and systems and the leadership they offer. Entrepreneurs also gain authority from the position they occupy, their management of resources and systems, and the leadership they give to the organisation. However, an entrepreneur has an additional source of authority providing not only authority to run the business, but also a right to run it. Whereas the chief executive is employed by the organisation, the organisation is perceived to ‘belong to’ the entrepreneur. This perceived right can be derived from the entrepreneur’s ownership of the business. However, owning the organisation they lead is not a necessary characteristic of the entrepreneur. The business is actually owned by those who invest in it. More important is the entrepreneur’s historical relationship to founding the organisation and their association with building it up. This difference is important not only for the way the entrepreneur actually manages the organisation but also for the way in which they are exposed as a result of its performance. While we would expect a chief executive to be ousted if the organisation fails to perform, we can still be surprised when an entrepreneur who is seen to have created the organisation is handed the same fate. Of course, these three criteria do not create hard and fast categories. We are dealing with fuzzy concepts in the same way as we were when we discussed the distinction between the small business and the entrepreneurial venture in section 2.1. Whom we regard as an entrepreneur and whom we see as ‘merely’ a chief executive is a matter of judgement based on a consideration of the balance between all three criteria. As with the distinction between the small business manager and the entrepreneur, we should not rush to make a judgement as to who is, or is not, an entrepreneur. We should not look towards the individual to assess whether they are an entrepreneur or not; rather, we should look at what and how they manage in terms of the balance between internal and external co-ordination, the change they seek to create and the way authority is ascribed to them, i.e. the basis of their power (Figure 15.1).

15.2 The dangers of entrepreneurial control in the mature organisation Entrepreneurial management has a lot to offer. The entrepreneur’s vision offers the potential for leadership. That vision and leaderKey learning outcome ship can be used to give the venture direction. It provides an impetus An appreciation of some for the changes that are necessary if a venture is to survive and of the limitations of an prosper in a rapidly changing world. However, as a style of manentrepreneurial style of agement, entrepreneurship is merely one style among many, and management in the mature while entrepreneurship is a very powerful style of management it, venture. like any other style, has its limitations. Entrepreneurial management is concerned with the whole organisation. In the early stages of the venture this allows the entrepreneur to manage the organisation in an integrated way. The entrepreneur can put balanced emphasis on attracting all the resources the organisation requires: money, people,

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Figure 15.1 The difference between an entrepreneur and a chief executive

customers and knowledge. Unfortunately, this may lead the entrepreneur to underestimate the value of the management of particular functions. They may be quite dismissive of the need for a dedicated approach to marketing or finance or human resource management as the venture grows and matures (relate this to the heuristics described in section 18.6 below). This can lead the entrepreneur to underestimate the contribution that specialists can make to the venture. Having made a success of the venture themselves they can become suspicious of the need for ‘experts’. As a result, the entrepreneur may find it difficult to give specialist managers sufficient room to make the decisions they need to make. Further, entrepreneurial management is concerned with driving change. This is a key and positive aspect of the entrepreneur’s approach. It is only from change that new value can be created. However, it is often the case that the entrepreneur exhibits a greater desire for change than do other stakeholders. The entrepreneur may still be seeking new ways to push the venture forward while investors and employees seek consolidation and stability. As a result, there may be a conflict over the type of investments undertaken by the mature venture. A number of high-profile run-ins occurred between highly successful entrepreneurs and institutional investors at the end of the 1980s in both the USA and the UK as the financial climate became more difficult. For example, both Anita and Gordon Roddick, founders of The Body Shop and Alan Sugar, founder of Amstrad, became involved in expensive share buy-backs to increase their personal control of their enterprises. This touches on a wider issue. All organisations develop an inertia or resistance to change. Entrepreneurs and the organisations they create are not immune to this. While the entrepreneurial organisation is founded on an innovation, there is no guarantee that it will be

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innovative in its innovation. Often, the innovation sets a pattern of strategic activity which the venture attempts to repeat in another sector. The initial success may not always translate to other sectors. Alan Sugar and his Amstrad venture were phenomenally successful with a formula which presented uncomplicated, easy-to-use and low-cost hi-fi systems to the general public. However, the same formula was not repeated so successfully with business computers, a sector where the customer-buying criteria were quite different. All in all, an entrepreneurial style of management has a great and valuable role to play in the mature organisation. However, it is essential that entrepreneurs recognise that the way they involve themselves with, and apply their talents to, the mature organisation differ from the way they did so when the organisation was in a fast-growing state. This is a theme explored by Hamm (2002).

15.3 The role of the founding entrepreneur in the mature organisation

Key learning outcome An appreciation of the types of role the entrepreneur can undertake in the mature organisation.

The role of the entrepreneur must change as the venture develops. Growth offers founding entrepreneurs the same opportunity as it offers every other member of the organisation: the chance to develop and specialise the role they play within the organisation. Some of the more important types of specialisation are described below (see also Figure 15.2).

Chief executive The most obvious role for the entrepreneur to play is that of chief executive. In this the entrepreneur has a clearly defined position at the head of the organisation. He or she retains the power to make and influence key decisions about the way the business should be

Figure 15.2 The roles of the entrepreneur in the mature organisation

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Visionary leader As discussed in section 13.2, the entrepreneur has a variety of means at their disposal when it comes to influencing the direction the organisation takes and the way it manages its resources. Entrepreneurs do not have to direct every decision personally. They can use indirect means of communicating vision, directing strategy and controlling the organisation’s culture. This means that the entrepreneur can specialise the role they play along the leadership dimension. By taking on the role of a visionary leader, the entrepreneur avoids making decisions personally. Rather, they create an environment which brings out the best in the organisation’s people by motivating them and giving them an overall sense of direction. This is the kind of role played by the Virgin chief, Richard Branson, who, while providing leadership to his organisation, leaves most of the decision making to his professional managers.

Chapter 15 The changing role of the entrepreneur

conducted. The chief executive role is, of course, one which the entrepreneur can drift into by virtue of always being at the head of the business. However, the points made in the previous section about the differences between the way the entrepreneur leads the growing business and the way that the chief executive manages the mature business must be considered here in relation to the evolution of that role.

Manager of business development Entrepreneurs sometimes find it difficult to let go of the entrepreneurial approach they have developed. They do not find the chief executive role a comfortable one. Yet they can still recognise the need for a consolidatory approach to the management of the mature venture. They may resolve this dilemma by concentrating on the development of new business, a task which is well suited to an entrepreneurial style. The entrepreneur then delegates management of the established business to another manager. If the business is made up of a number of independent business units then this arrangement can be made explicit. The entrepreneur can leave the running of the business units to their managers and can concentrate on making new acquisitions, for example. On the other hand, if the business is a single, coherent organisation then the arrangement may be more implicit and be based on internal delegation. An example here might be Rupert Murdoch with his News International and BSkyB business ventures. While taking a very active interest in the established business, Murdoch is most active at the cutting edge of his growing empire.

Technical specialist Sometimes the entrepreneur may decide to give up the chief executive position altogether and take on what, at face value, appears to be a subordinate role within the organisation. In this role they will specialise in some way, perhaps in managing product development or marketing. Though uncommon, this sometimes occurs in high-technology organisations which have been founded by technical experts. An example of this is Martin Woods, a physicist, who while based at the Cavendish Laboratories founded the successful Oxford Instruments Company, a major manufacturer of components for hospital scanners. Once the venture had passed the stage where product innovation was the most important thing, and marketing and financial management became of greater importance, Dr Woods passed on the day-to-day

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running of the company to marketing and finance professionals and moved back to the laboratory as the company’s research and development director.

Promoter of the venture The entrepreneurial venture must continue to attract the support of external stakeholders, not least customers and financial backers. The entrepreneur may take on the role of figurehead and work at promoting the organisation to these stakeholders. An important example of this kind of approach is that of Anita and Gordon Roddick and The Body Shop organisation. The conventional chief executive role is largely played by Gordon while Anita Roddick represents the organisation in the media, promotes it to existing and new franchise holders and seeks out new ingredient suppliers in the developing world.

Entrepreneur in an alternative venture Entrepreneurs can, of course, decide that the consolidated organisation has little to offer them. They may decide to liquidate their holding and use the resources to start another venture. This is precisely what the serial entrepreneurs Howard Hodgeson of Hodgeson Holdings and James Dyson have done in the past.

15.4 Succession in the entrepreneurial business The average life of a business is probably about the same as the working life of a manager. However, this average can be misleading. It includes a lot of businesses which last only a few years, A recognition of the and a few which have existed for hundreds. The successful entreimportance of managing preneurial venture should be expected to last a lot longer than the leadership succession when career span of the founding entrepreneur. This longevity raises the entrepreneur leaves the issue of succession. the venture. Succession creates a number of issues for the venture. Even though the business has an existence independent of the entrepreneur, the entrepreneur is more than an ‘optional extra’. He or she is an integral part of the organisation. The loss of the entrepreneur represents the loss of one of its key resources. The entrepreneur must be replaced. How the entrepreneur is to be replaced, by whom, when, and in what way, represent critical decision areas for the business. As Harris and Ogbonna (1999) make clear, founding entrepreneurs leave a strategic as well as a personal legacy. Reuber and Fischer (1999) develop a perspective on founder contribution that emphasises that the founder’s knowledge and experience is not so much a ‘stock’ but a continual ‘stream’ that flows into the organisation.

Key learning outcome

The need for continuity . . . All organisations need some continuity. The entrepreneur, especially if they are a motivating leader, offers a reference point about which the organisation can cohere. After the entrepreneur has gone that coherence may be lost. As a result the business risks losing focus and direction.

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On the other hand, all organisations must recognise the need for change in response to a rapidly changing environment. Founding entrepreneurs, while they may be effective managers of subsequent change, may also impart an inertia to the business which makes some changes difficult. Bringing a new leader presents an opportunity which, if used properly, offers the chance to effect necessary and beneficial changes in the way the business is run.

Choosing a successor Change at the top is a contingency which may be planned for. The entrepreneur may not like to think in terms of ending their relationship with the venture but they owe it to all the other stakeholders to consider the possibility and prepare for it. A major part of this is identifying a successor. It is important here for the entrepreneur to recognise the opportunity for change. The business will have moved a long way from its foundation. The characteristics the entrepreneur originally brought to the venture may not be the same ones that it needs from a chief executive now. In choosing a successor, the entrepreneur must look for someone who is right for the business, not someone who is a copy of themselves. The entrepreneur should also look for advice in choosing a successor. The opinions of other managers and key outsiders (particularly investors) may be valuable and influential. A successor may be sought within the business or they may be brought from outside. There are a number of questions that must be asked about any candidate for succession:

Chapter 15 The changing role of the entrepreneur

. . . and for change

• Do they have the necessary technical knowledge of the business sector? • Do they have the right business skills? • Do they have the ability to manage and develop the relationships the entrepreneur has established? • Do they have an ability to lead the business? • How will the leadership style offered compare with that of the outgoing entrepreneur? • Do they have the ability to take on the entrepreneur’s vision and continue to communicate it? • Do they have the ability to provide a sense of continuity? • Yet are they also capable of offering a new perspective? • Will they be acceptable to all the stakeholders in the venture? A 1992 issue of the Journal of Accountancy (Vol. 174, No. 4, p. 24) offers a comprehensive checklist for managing family succession. Fox et al. (1996) consider the management of these issues.

Mentoring The entrepreneur may be replaced as the head of the business. However, this is only a transfer of title. Being made the new chief executive offers a promise only of authority, that is, the potential to create change, not of power, which is an ability to create change. (Consider the points made in section 1.6.) Exercising power demands not only a position but also influence over the organisation’s resources. This means not just tangible resources but also the intangibles of generating vision and control of the symbolic dimensions of organisational life.

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Mentoring may offer a means by which these things may be transferred. The entrepreneur selects a successor well ahead of the time when succession actually need take place and the successor is then trained to take over. This process involves the transfer of knowledge, education and support and a passing on of power. The successor is made visible as a successor. The organisation is made to recognise the successor as its future leader. The entrepreneur educates his or her successor not only in the details of the business but also in terms of how it may be led and controlled. The actual transfer of power may be gradual, with the successor given responsibility for distinct aspects of the business over time.

Remember the business Choosing a successor is not easy. It demands that the entrepreneur admit to being mortal. It may also be tempting for the entrepreneur to favour a relative as successor if a relative wishes to take over. Many family members do not wish to take up the reins, though (Stavrou, 1999). Morris et al. (1996) detail some of the challenges that family successors meet on taking over the business. While the offspring of entrepreneurs often show great business acumen and leadership ability, there is no reason why they must do so. Entrepreneurship is learnt, not inherited. Keeping a business within the family may be appropriate (especially if it is privately owned). However, the entrepreneur has a responsibility to all the organisation’s stakeholders. The entrepreneur should always remember the business and select a successor who is able to manage it as effectively as they themselves could. Succession is an important issue and it is one which good entrepreneurs address openly, rationally and honestly. Successful entrepreneurs build entire new worlds. There is no reason why that new world should not continue after they have left it. The businesses they leave are testaments to the differences they have made.

Summary of key ideas • The roles of the entrepreneur and the chief executive are subtly different, although they overlap in many ways. The entrepreneur is more interested in creating change, and may be more willing to take risks than the role of chief executive properly calls for. This can expose the mature venture to unnecessary risk.

• Consolidation gives entrepreneurs an opportunity to specialise their roles within their organisations.

• Effective entrepreneurs manage the process of succession (the handing over of power within the venture) positively and effectively when it is time for them to move on.

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Entrepreneurs’ management of the succession process Use a case study approach to explore and describe the way that entrepreneurs manage their succession. Use published information supplemented by personal interviews. You may need to spend some time building up trust with the subject organisation if this type of study is to be effective. In particular, inquire into the entrepreneur’s feelings about the succession, the concerns of key stakeholders such as employees and investors, the managerial issues that were identified and the approach taken to dealing with them. How far in advance was succession planned for? To what extent was mentoring used to groom a successor? Did the entrepreneur back out quickly or was the handover a more gradual process? Use the ideas developed in this chapter to guide the inquiry. What went right with the process and what went wrong? How would key players handle things differently if they had the chance to do them again? If more than one study is conducted, then comparisons and contrasts may be made. Are there any generalisations that might be made about how the process should be managed?

Chapter 15 The changing role of the entrepreneur

Research themes

Key readings Two good papers that deal with the legacy of the entrepreneur in the consolidating and consolidated organisation are: Harris, L.C. and Ogbonna, E. (1999) ‘The strategic legacy of company founders’, Long Range Planning, Vol. 32, No. 3, p. 333. Reuber, A.R. and Fischer, E. (1999) ‘Understanding the consequences of founders’ experience’, Journal of Small Business Management, Vol. 37, No. 2, pp. 30–45.

Suggestions for further reading Fox, M., Nilakant, V. and Hamilton, R.T. (1996) ‘Managing succession in family-owned businesses’, International Small Business Journal, Vol. 15, No. 1, pp. 15–25. Gabarro, J.J. (1985) ‘When a new manager takes charge’, Harvard Business Review, May/June, pp. 110–23. Hamm, J. (2002) ‘Why entrepreneurs don’t scale’, Harvard Business Review, Dec., pp. 110 – 15. Harris, L.C. and Ogbonna, E. (1999) ‘The strategic legacy of company founders’, Long Range Planning, Vol. 32, No. 3, p. 333. Kransdorff, A. (1996) ‘Succession planning in a fast-changing world’, Management Decision, Vol. 34, No. 2, pp. 30–4.

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Morris, M.H., Williams, R.W. and Nell, D. (1996) ‘Factors influencing family business succession’, International Journal of Entrepreneurial Behaviour and Research, Vol. 2, No. 3, pp. 68–81. Reuber, A.R. and Fischer, E. (1999) ‘Understanding the consequences of founders’ experience’, Journal of Small Business Management, Vol. 37, No. 2, pp. 30–45. Slatter, S., Ransley, R. and Woods, E. (1988) ‘USM chief executives: do they fit the entrepreneurial stereotype?’ International Small Business Journal, Vol. 6, No. 3, pp. 10–23. Stavrou, E.T. (1999) ‘Succession in family businesses: exploring the effects of demographic factors on offspring’s intentions to join and take over the business’, Journal of Small Business Management, Vol. 37, No. 3, pp. 43–61. Wills, G. (1992) ‘Enabling managerial growth and ownership succession’, Management Decision, Vol. 30, No. 1, pp. 10–26.

Selected case material CASE 15.1

4 February 2006

FT

An ambitious man of steel PETER MARSH Lakshmi Mittal will be relaxing today in his luxurious London home, eight days after launching an A18.6bn (£12.7bn) hostile bid by his Mittal Steel company for Luxembourgbased Arcelor in an effort to build a huge steelmaker with an output three times larger than its three closest rivals combined. The move sparked a furious reaction from Guy Dollé, Arcelor’s chief executive, who has portrayed the Indian billionaire as a man not to be trusted, and from political leaders in France and Luxembourg, who have urged resistance. The 55-year-old responded with a hectic charm offensive as he toured European capitals in his Gulf Stream jet to press his case. ‘This is the biggest battle Lakshmi has faced but he won’t be put off,’ says a former employee. ‘He’s tough and savvy but he’s dealt with politicians before and normally comes out on top.’ Nonetheless, the extent of

the furore has surprised the quietly spoken Mr Mittal, who – up to a $4.5bn deal 15 months ago to buy the US’s International Steel Group and make his company the world’s biggest steelmaker – has generally shunned publicity. Although share prices in both the Netherlandsbased Mittal and Arcelor have risen, denoting some enthusiasm for the transaction, steel experts are divided as to the wisdom of uniting Mittal with the world’s second biggest steelmaker, a company with a differing style and traditions. ‘This deal looks like a giant bet,’ says Georges Ugeux, chairman of Galileo Global Advisors, a New York financial group. The inherent riskiness of the move fits in with the thrust of Mr Mittal’s 30-year love affair with steel – an industry only recently rehabilitated (partly thanks to China’s surging demand) from its image as a business graveyard. Mr Mittal’s forays in the field started in

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sometimes difficult to pin down,’ says Rodney Mott, a leading US steel executive and former chief executive of ISG, who worked briefly for Mr Mittal until last April before leaving over a disagreement. Mr Mott – who says he bears Mr Mittal ‘no grudges’ – says of Mr Mittal’s style: ‘There’s an element of “command-andcontrol” about him and he can be intimidating.’ A contrasting view comes from Wilbur Ross, a US billionaire financier who, as former chairman of ISG, has become a non-executive of the Mittal board since the takeover. Mr Ross says that – even though Mr Mittal owns such a huge part of the company, a stake that would be diluted to just over half should the Arcelor takeover go through – ‘he is a lot less dictatorial as a chief executive’ than many others he knows in conventional US companies. In India, Mr Mittal is widely feted – at least in public – as a business hero whose endeavours have highlighted the talent in one of the word’s fastest expanding economies. The applause has grown in the past year as Mr Mittal announced plans for a $9bn steel plant in eastern India, his first investment in his homeland. ‘If you look at his ambition and persistence, it blows your mind,’ says Vikram Kirloskar, chairman of Kirloskar Systems, an Indian industrial group. ‘I’m a huge admirer,’ says Lord Paul, an India-born businessman who chairs the London-based Caparo engineering group. Under the surface, however, some in the Indian business community consider Mr Mittal with disdain, particularly over stories of his lavish lifestyle – illustrated by his extravagant London home, bought for a reputed £70m, and the six-day wedding party for his daughter two years ago in Paris. Mohan Mittal, too, is said to have warned his eldest son about the potential dangers of growing too fast and sailing too close to the wind. Lakshmi is considered less close to his father than his two younger brothers – Pramod and Vinod – who together run

Chapter 15 The changing role of the entrepreneur

his 20s, when he began work in a steel company started by Mohan Mittal, his father, in 1952 in Calcutta. Since then, Lakshmi Mittal has built up through acquisitions a global business spanning four continents and 220,000 employees. A highlight was a 1995 move to buy for $700m a virtually derelict steel plant in Kazakhstan that his company transformed into one of the world’s most efficient steel mills. He later added plants in countries as removed as the US and South Africa, and developed a particular knack for taking over formerly communist-run operations including in Poland, the Czech Republic and Ukraine; and he has a minority share in a leading Chinese steel maker. Mittal is 88 per cent owned by Mr Mittal and his family – making him one of the world’s richest men, worth roughly $18bn. The entrepreneur’s family comes from the Marwari merchant caste in Rajasthan in northwest India, known for its trading and dealmaking mentality. Some of this style was illustrated at a private dinner Mr Mittal hosted for Mr Dollé at his London home on January 13, two weeks before the formal bid for Arcelor. Mr Dollé was taken aback when Mr Mittal asked him over a pre-meal drink whether he would be open to a merger. The Frenchman said No, and the conversation turned to other things. Schooled in continental European business formalities, Mr Dollé later criticised Mr Mittal for breaking what he saw as ‘the unwritten rules’ of commercial conduct. But to Mr Mittal such informal conversations are part of business life. ‘Mr Mittal is urbane and diplomatic but there’s a streak in him of the hustler,’ says someone who knows him well. ‘He has an agenda and he expects an outcome from every meeting.’ Part of the style is that while Mr Mittal knows what is on the agenda, others may not. ‘Mr Mittal is confident and forthright and you feel good when you are around him, but he is

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CASE 15.1 CONT. Mumbai-based Global Steel, a relatively small steel company. Like Mittal, Global Steel has evolved from Mohan’s original steel business but its record, in contrast, looks pedestrian. As financial experts ponder the merits of the Arcelor bid, it is worth recalling Mr Mittal’s difficult period in the late 1990s when steel prices were low. Back then, a relatively small part of Mr Mittal’s empire was in a publicly quoted arm and the rest was in a private group whose finances were opaque. The private and public parts of the empire were united in a single company that was

formally registered only last year, taking in ISG. ‘Everyone knew Mr Mittal was in trouble around 2000,’ says one steel industry expert. Fortunately for the steel magnate, external events came to his rescue, in the shape of China’s sudden jump in demand, laying the foundations for his company’s future growth. As Mr Mittal ponders the likely outcome of his bid for Arcelor he will no doubt consider that – like all hustlers the world over – he will need some extra luck in the future if he is to come out on top. Source: Peter Marsh, ‘An ambitious man of steel’, Financial Times, 4 February 2006, p. 11. Copyright © 2006 The Financial Times Limited.

CASE 15.2

23 February 2005

FT

Rakuten head hits out over accounting rules MICHIYO NAKAMOTO AND DAVID PILLING WITH ADDITIONAL REPORTING BY BARNEY JOPSON Hiroshi Mikitani, one of Japan’s best-known entrepreneurs, intends to launch an aggressive campaign to convince regulators to change how they account for goodwill, saying that current plans discourage Japanese companies from building up strength through acquisitions. Under changes to Japanese accounting standards being introduced from April next year, companies will be required to amortise goodwill over two to 20 years. Mr Mikitani, chairman of Rakuten, Japan’s largest internet shopping mall, said Japanese regulators were ‘stupid’ because they did not understand the needs of emerging business. He said Japan should adopt US-style regulations allowing companies to keep the

goodwill of acquired companies as an asset, without having to depreciate it and depress profits. ‘We are going to lobby,’ he told the FT. ‘It’s going to be very disadvantageous for highgrowth companies like us. In the US, you can keep [goodwill] as an asset for ever.’ Rakuten suffered an extraordinary loss of ¥52bn ($499m) in the year to March 2004, reflecting the impact of writing off goodwill related to two acquisitions it made that year. Mr Mikitani has generally chosen to amortise goodwill in a single year and has been fairly successful in persuading investors to ignore the short-term negative effect on stated profits.

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impairment charge should the value of their brand deteriorate rapidly. Even someone of Mr Mikitani’s influence will struggle to overturn the regulator’s decision to enforce the amortisation of goodwill on a systematic basis, Mr Niimi said. Regulators were fully aware of arguments in favour of the US method before they decided on the change and were unlikely to alter their opinion now, he said. Source: Barney Jopson, Michiyo Nakamoto and David Pilling, ‘Rakuten head hits out over accounting rules’, Financial Times, 23 February 2005, p. 34. Copyright © 2005 The Financial Times Limited.

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‘The accounting community don’t understand and think we are doing things too aggressively,’ Mr Mikitani said. ‘But this is a matter of judgement for our investors.’ Takaaki Niimi at accountants Ernst & Young Shin-Nihon said it was ‘selfish’ to argue that amortisation presented a heavy burden. If a company acquired an asset that generated future revenues, it should also have a cost, he said. Just as companies must depreciate physical assets, they should have to amortise goodwill. ‘Amortisation is more reasonable [than impairment],’ Mr Niimi said. Under next year’s new rules, companies will also be liable for an

Discussion points 1. Write a job description for Lakshmi Mittal. 2. How does Hiroshi Mikitani’s political lobbying fit with his role as an entrepreneur?

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CHAPTER 16

Entrepreneurial vision Chapter overview The presence of a powerful, motivating personal vision is one of the defining characteristics of entrepreneurial management. This chapter is concerned with exploring the concept of vision and understanding how it can be used by the entrepreneur to give t