1 Confidential - for classroom use only The Nature of Entrepreneurship.

1Confidential - for classroom use only

The Nature of Entrepreneurship


Invention and Innovation:A Theoretical Entrepreneurial Process

Science

Technology

R&D

Innovation

New Ventures

Management and business strategy

Invention, creativity, and innovation are strongly tied to entrepreneurship

- Self-reliant, inquiring, flexible, original and independent people are most likely to engage in innovative behavior

Per R.M. Kanter (Harvard),

- innovators must develop a vision of something new

- must generate a power base to profess the idea

- and must build commitment and systems to sustain the new endeavorSimon Bridge, Ken O’Neill and Stan Cromie, Understanding Enterprise, Entrepreneurship and Small Business, London: MacMillan Press, 1998.


The Timmons Model of the Entrepreneurial ProcessThe Timmons Model defines three key ingredients for entrepreneurial success:

Opportunity. The entrepreneurial process is opportunity driven. An opportunity sets the business

context for something to be done that has value. Opportunity identification can be facilitated by

individuals and teams that work in environments that encourage communication and creativity.

Catalysts for opportunities can also be new business teams, venture groups, etc. The parameters of

an opportunity can be defined in terms of market demand, market size and structure, and margin

potential/financial contribution. If numbers can’t be developed to help describe an opportunity, then

it is probably nothing more than an idea.

Resources. Every business idea requires an assortment of resources to be marshaled to help develop the

idea into a true opportunity that can be exploited. A business plan lays out the financial resources

needed, along with the other business assets and people required. The important point about

resources is that nimbleness and control of the right resources is more valuable than ownership of

large resource pools when it comes to being successful with a new business venture.

Team. Having the right people on an entrepreneurial team is the key ingredient for success. This starts

with an entrepreneurial leader who establishes an entrepreneurial culture and organization based

upon key skills, including the ability to rapidly learn and teach, to effectively deal with adversity,

and to exhibit integrity, dependability and honesty. The entrepreneurial team needs these same

qualities along with experience and a track record of success, motivation, and commitment, along

with other attributes including communications skills, tolerance for ambiguity and creativity. http://www.babsoninsight.com/contentmgr/showdetails.php/id/585


More on the Timmons ModelThe entrepreneur is the person who perceives an opportunity and creates an organization to pursue it.

– Ideas are a dime a dozen. Developing the idea, implementing it, and building a successful business are the important things.

– Would be entrepreneurs who are unable to name a customer are not yet ready to start a business.

The entrepreneurial process involves all the functions, activities, and actions associated with perceiving opportunities and

creating organizations to pursue them.

– The entrepreneurial process includes the personal, sociological, and environmental factors that give birth to a new enterprise.

A person gets an idea for a new business either through a deliberate search or a chance encounter. Whether or not he decides

to pursue that idea depends on factors such as his alternative career prospects, family, friends, role models, the state of the

economy, and the availability of resources.

William D. Bygrave, “The Entreprenuerial Process” in The Portable MBA in Entrepreneurship (John Wiley & Sons: 2004).


The Illusions of EntrepreneurshipScott A. Shane

(Yale: 2008)


The Reality of EntrepreneurshipOur myths tell us that “entrepreneurs are … a rare breed,” “a kind of genius who is

born, not made,” which gives us a very inaccurate image of what the typical

entrepreneur is like. Some people think that the typical entrepreneur is a jet-setting,

Silicon Valley-residing engineer who, along with a couple of his buddies, has raised

millions of dollars of venture capital to start a new company to make a patent-protected

gizmo. This company will, of course, employ thousands of people, go public in four

years, and generate huge gobs of money for its founders and investors.

The reality couldn’t be more different. First, entrepreneurship is as a common vocation,

much more common than our myths suggest.– 11.1 percent of U.S. households have a self-employed head.

– 11.3 percent of households own a business.

– Business owners compose 13 percent of the nonagricultural labor force.

– In 2005, approximately 13 percent of people in the United States between the ages of 18 and 74 were in

the process of starting a business.

– In fact, each year in the United States, more people start a business than get married or have children. And

as much as 40 percent of the U.S. population will be self-employed for some part of their work life!


Myths of Entrepreneurship…a few things about entrepreneurship that might surprise you:

1. America s becoming less entrepreneurial; a smaller proportion of the population starts businesses today than did so in

1910.

2. The United States isn’t a very entrepreneurial country; Peruvians are three-and-a-half times as likely as Americans to

start their own businesses.

3. Entrepreneurs are more likely to start businesses in less attractive, run-of-the-mill industries, like construction or

retail trade, than they are to start businesses in more attractive, glitzy technology based industries.

4. The most common reason why people start businesses is to avoid working for others.

5. People who change jobs often, who are unemployed, and who make less money are more likely than other people to

start their own businesses.

6. The typical start-up isn’t innovative, has no plans to grow, has one employee, and generates less than $100,000 in

revenue.

7. Only one-third of people who start businesses manage to get a new business “up and running” within seven years.

8. The typical start-up is capitalized with $25,000, taken primarily from the founder’s savings.

9. The typical entrepreneur works more hours but earns less money than he would have earned had he worked for

someone else.

10. Start-ups create fewer jobs than most people think; only 1 percent of people work in companies less than two years

old, while 60 percent work in companies more than ten years old.

The typical entrepreneur is not a special person with hidden psychological power that allows

him to build great companies or great wealth; he’s a middle-aged white guy who just wants to

earn a living and doesn’t want to work for somebody else.


The Importance of EntrepreneurshipEntrepreneurship is central to the success of a capitalist economy. But the formation of the

typical start-up is not. The fine print is that new company formation per se isn’t what matters;

rather it’s the creation of a small number of super-high-potential new companies, which among them

generate almost all the economic growth and job and wealth creation that comes from having an

entrepreneurial economy.

Take, for example, the handful of venture capital-backed companies that are formed every year. Since

1970, venture capitalists have funded an average of 820 new companies per year. These 820

start-ups—out of the more than 2 million efforts to start businesses in this country every year—have

enormous economic impact. In 2003, companies that were backed by venture capitalists employed

10 million people, or 9.4 percent of the private sector labor force in the United States, and generated

$1.8 trillion in sales, or 9.6 percent of business sales in this country. In 2000, the 2,180 publicly

traded companies that received venture-capital backing between 1972 and 2000 comprised 20

percent of all public companies in the United States, 11 percent of their sales, 13 percent of their

profits, 6 percent of their employees, and one-third of their market value, a figure in excess of $2.7

trillion dollars. Between 2003 and 2005, venture capital-backed start-ups made up 23 percent of the

companies that went public. In short, almost all of the value generated by start-ups comes from

this handful of firms.


What the Budding Entrepreneur Needs to KnowAnyone who is thinking of becoming an entrepreneur needs to know the factors that

contribute to the success of new businesses.

1. For instance, they need to be aware that larger businesses that are more heavily

capitalized, organized as corporations, started on a full-time basis by a team of

entrepreneurs who have a written business plan and are seeking to provide

products to customers missed by others will, on average, be more successful than

other new businesses.

2. Moreover, entrepreneurs need to know that such things as emphasizing marketing and

financial controls, focusing their activities on a single market, and not competing on

price will enhance their performance.

3. Furthermore, they need to be aware that start-ups founded by people who obtain an

education and then get experience working in the industry in which they plan to start a

business, and who are starting their businesses with the goal of making money, have

better financial performance, on average, than other start-ups.


Finding Fertile GroundScott A. Shane

(Prentice Hall: 2005)


IntroductionTwenty-five percent of all new businesses started in the United States do not live one year, more than

half of new business created in this country die before their fifth birthday, and only two-thirds of new

businesses survive eight years. Moreover, most entrepreneurs make very little money.

…the key difference between the successes and the masses—the selection of the right business

concept to exploit a valuable opportunity.

On average, entrepreneurs are more successful if they create high-technology start-ups than if

they initiate low-technology start-ups.

…the number one factor predicting the proportion of start-up firms in an industry that become

one of the Inc 500 fastest growing companies or have gone public is the proportion of technical

employees in the industry. They also know that the number one predictor of new business failure is

the industry in which the firm is founded, with retail businesses and restaurants having extremely high

failure rates.


The Key LessonsSuccessful technology entrepreneurs approach entrepreneurship differently from other entrepreneurs,

not because they are smarter than or different from other people, but because they have learned how

to identify valuable opportunities for new technology companies. This book presents ten rules for

entrepreneurs to follow to develop a business concept that will provide the basis for a successful

high-technology company:

1. Select the right industry

2. Identify valuable opportunities

3. Manage technological transitions

4. Identify and satisfy real market needs

5. Understand customer adoption

6. Exploit established company weaknesses

7. Manage intellectual property

8. Create barriers to imitation

9. Choose the right organizational form

10. Manage risk and uncertainty


1. Select the Right Industry Researchers have identified four dimensions of industry that affect the relative performance of new

firms: knowledge conditions, demand conditions, stage of the industry life cycle, and market

structure.

Industry knowledge conditions are composed of five factors that affect the relative performance of

new firms in an industry. New firms perform poorly in industries in which the production process is

complex, the amount of new knowledge created in an industry is high, knowledge is not well codified,

the locus of innovation resides within the value chain, and complementary assets in marketing and

manufacturing are important.

Industry demand conditions are composed of three factors that affect the performance of new firms

in an industry. In industries in which markets are large, growing quickly, and heavily segmented, new

firms perform well. The industry life cycle also affects the relative performance of new firms in an

industry. New firms perform better when industries are younger than they do when industries are older.

New firms also perform better when a dominant design does not exist in an industry than when a

dominant design does exist in an industry.

Four aspects of industry structure affect the performance of new firms in an industry. New firms

perform poorly in industries that are capital intensive, advertising intensive, concentrated, and have

large firms.


2. Identify Valuable OpportunitiesA few key primary sources of entrepreneurial opportunities exist, that is, technological change,

political/regulatory change, social/demographic change, and change in industrial structure.

Technological change is a source of opportunity because it makes things possible that were not possible

before and makes it possible to do things in more efficient ways. A number of dimensions of

technological change influence its value as a source of opportunity: the magnitude of the change, its

generality, its commercial viability, and its effect on industrial structure.

Political and regulatory change is a source of opportunity because it makes productivity enhancing

activity possible and because it makes it possible to shift value from one economic factor to another.

Deregulation creates opportunities by allowing entrants to offer new alternatives. Regulation creates

opportunity by increasing demand or offering subsidies that affect the cost-benefit trade-off for

products and services.

Social and demographic change is a source of opportunity because it alters preferences, thereby changing

demand. Three important types of social and demographic changes that open up entrepreneurial

opportunity are demographic shifts, social trends, and exogenous shifts in perceptions. Changes in

industrial structure are a source of entrepreneurial opportunity because they make it possible for new

suppliers to enter and because they make it possible to change competitive dynamics.


2a. What Forms Should the Efforts TakeThe second step in the process of identifying valuable opportunities is to figure out the form that the efforts to

exploit the opportunity will take. Opportunities do not have to take the form of new products and services.

They also take the form of new markets, new raw materials, new production processes, and new ways of

organizing.

One of the key factors affecting entrepreneurial performance is the ability to minimize imitation. Because new

raw materials, production processes, and ways of organizing are easier to keep secret than new products, they are

better than other forms of opportunity exploitation for minimizing imitation.

Another step in the process of identifying valuable opportunities is to identify where in the innovation chain

the change occurs. This is important because the type of innovation that leads to the opportunity varies by stage

of the chain. Moreover, the tendency of people to create new firms in response to these innovations varies across

the stage of the innovation chain. Furthermore, the innovation chain indicates that some industries are better than

others for creating new firms.

The final step in the process of identifying valuable opportunities is to understand how individuals identify

opportunities for new businesses. Factors central to this process are access to information and information-

processing capability. Some people are more likely than others to gain access to the information that signals

the presence of an entrepreneurial opportunity because of their position in social networks, because of

their jobs and life experiences and because of the search processes they adopt. Some people are more likely

than others to process information in a way that allows them to identify entrepreneurial opportunities because of

their mental schemas, their perception of risk, and their creativity.


3. Manage Technological TransitionsTechnological development follows an evolutionary pattern in which scientists and engineers work

within frameworks that limit problem-solving approaches to a prevailing paradigm. At certain points

in time, new technologies appear that radically shift the underlying technological paradigm. These

radical shifts provide an excellent opportunity for entrepreneurs to enter industries, as long as

they can successfully manage the technological transition.

Managing a technological transition first requires you to understand Foster's technological development S-

curve. The S-curve shows that technologies initially experience slow performance improvement because

of the process of learning. Then breakthroughs are made and technologies improve dramatically. In the

final phase, improvement slows as laws of diminishing returns kick in. At this point a new technology

often appears, leading to a transition to a new S-curve.

As a technology entrepreneur, Foster's S-curve has several implications for you. The transition to a

new S-curve is almost always undertaken by new firms rather than established firms, which have

little incentive to make the transition. The new technology generally begins with worse performance

than the old technology, making it very difficult for the new firm to compete initially with established

firms. The timing of new firm entry is important. Too early entry means too slow technology

improvement for new firms to be competitive with established firms using the old technology, and too

late entry means a missed opportunity to other entrepreneurs entering with the new technology.


3a. Dominant DesignsManaging technological evolution also involves understanding dominant designs and how they influence

competition by new and established firms in an industry. New firms tend to perform better before a dominant

design has been established than after a dominant design is in place because prior to convergence on

dominant designs, barriers to entry are low, product competition is strong, learning curves are limited,

efficiency is relatively unimportant, and organizational hierarchies are not effective in the predominant

design phase. All of these things favor new firms over established ones.

Managing technological evolution requires you to consider the role of technical standards. Technical standards are

created by firm agreement, government action, the characteristics of technology itself, and the strategic actions of

entrepreneurs. Because establishing a firm's product as the technical standard generates large financial returns to

entrepreneurial activity, successful entrepreneurs often take specific strategic actions to make their product a

technical standard: adopting a low price, making their new products and services work effectively with

complementary technologies, and launching simple products.

A final aspect of managing technological evolution that is important for you to consider is managing the

differences in the pattern of development of increasing and decreasing returns businesses. Businesses have

increasing returns when up-front costs are high relative to marginal costs, when network externalities are present,

when complementary technologies are important to the effective use of a product or service, when producer learning

is strong, and when switching costs are high. Under conditions of increasing returns, an effective entrepreneurial

strategy involves achieving a first mover advantage, partnering early with the producers of complementary

technologies, and betting aggressively.


4. Identifying and Satisfying Real Market NeedsHow do you figure if there is a real customer need for the products or services that you have created? By

answering basic questions. Do customers have an unsolved problem that no existing product or service

solves? If no existing product or service solves a problem that customers are looking to have solved,

then a real need exists.

Another basic question to ask is if there is a significantly better way of solving a customer's problem than an

existing product or service provides.

Of course, identifying a customer need is only part of the process of satisfying a real customer need. You also

have to come with a product or service that meets the need.…Of course, identifying a customer need is only

part of the process of satisfying a real customer need. You also have to come with a product or service that

meets the need. Of course, identifying a customer need is only part of the process of satisfying a real customer

need. You also have to come with a product or service that meets the need.

The best opportunities for you to exploit as a technology entrepreneur are those where a market is new

and demand is unknown because the advantages and capabilities of established firms are minimized in

these situations. The types of advantages that established firms have—things like having moved up the

learning curve and having created capabilities—are least important when a market is new.

One of the hardest parts about identifying a real need is distinguishing between things that are absolutely

necessary for a customer to have, as opposed to things that are nice to have, and things that are

unnecessary to meet customer needs.

The next step in the process of introducing a new product or service is to make sure that no one else has a better

alternative than the one that you have developed.


5. Understanding Customer Adoption…adopters of new products and services are typically normally distributed because a small proportion of adopters

make the adoption decision early and a small proportion make the adoption decision late, while most adopters

make the adoption decision in the middle of the process. Important implications for entrepreneurs emerge from this

pattern. Different adopters have different preferences, and these preferences influence what you, as a technology

entrepreneur, must do to get customers to adopt your new product or service. In addition, the proportion of the market

adopting at any point in time is not linear. Rather, it is S-shaped, initially starting small, accelerating, and then

declining.

...entrepreneurs transition from innovators to the majority of the market. This transition is important because most

entrepreneurs need widespread adoption of their products and services to earn sufficient returns to survive over time,

yet most entrepreneurs are unable to navigate this transition. To transition successfully, you, as a technology

entrepreneur, must adapt your product or service to the different demands of the majority of customers, provide

evidence of the value of the new product or service, and offer a complete package that solves customer problems.

You must also select the right customers to target to transition to the majority of the market. This focus is necessary

given the limited resources of new firms. The right set of customers to target is the set for whom the new product or

service will increase productivity, cut costs, or provide the ability to do something that they otherwise could not do.

The observation that markets are dynamic means that static estimates of markets are not very useful for

entrepreneurs. It also means that understanding diffusion and substitution patterns is crucial to their success. Among

the important things that you need to understand to be a successful entrepreneur that emerge from this is that the

characteristics of the customers, the characteristics of the product or service, the type of substitution, and the timing of

the process, all influence the patterns of diffusion and substitution.


6. Exploiting Established Company WeaknessAlthough established firms have these advantages, they also suffer from several weaknesses that provide a way

for entrepreneurs to compete against them. Established firms focus on efficiency as a way to develop

competitive advantages over other existing firms, creating blinders to new product and service opportunities.

Their focus is on generating value from existing capabilities, leading them to ignore and discount opportunities

where new capabilities need to be created. Established firms need to satisfy their existing customers, and so often

neglect opportunities in which new market segments could be targeted with new products and services, and they

have existing organizational structures that constrain communication patterns and information flow and so make

it difficult for established companies to exploit certain opportunities. Established companies need to reward

people for doing their existing jobs, and this constrains them from rewarding people for undertaking innovation.

They have hierarchies to manage their existing operations, which inhibits product development.

Opportunities with certain characteristics are also better for new firms to exploit. New firms perform better at

exploiting discrete technologies than systemic ones because discrete technologies can be exploited without

replicating an existing firm’s system of assets. New firms perform better at exploiting opportunities

embedded in human rather than physical capital because physical capital cannot be moved as easily as human

capital from established firms to new firms. New firms perform better at exploiting general purpose

technologies than single purpose technologies because general purpose technologies offer new firms strategic

flexibility, which helps them with raising money, with managing risks, and because general purpose technologies

often require established companies to invest in markets and production processes that are outside their current

capabilities, something that they rarely are willing to do. Finally, new firms perform better with uncertain

opportunities because the evaluation of these opportunities demands market research techniques other than the

focus group and survey approaches at which large established firms are generally advantaged.


7. Managing Intellectual PropertyMost new products and services are easy to imitate, particularly by large established companies…. established

companies can often imitate the new products and services that entrepreneurs develop simply because they are working

on similar projects, and their own research and development provides them with needed information to imitate.

The fact that other companies, particularly large established ones with better manufacturing and marketing capabilities

than start-ups, can imitate their new products and services is problematic for you, as a technology entrepreneur, because

the profits that you earn from introducing a new product or service are eroded by imitation. Therefore, to be successful,

you must make concerted efforts to minimize imitation through two alternative means: secrecy and patenting.

Secrecy is a process by which you maintain your unique ability to generate a new product or service by not allowing other

people to gain access to the information about how to create the new product or service. Secrecy is most effective as a

strategy under several conditions. There are few alternative sources of information other than the entrepreneur to learn

how to create the new product or service. The product or service is complex. There are limited numbers of people who

could make use of information about the creation of the new product or service in such a way as to be able to replicate

it. The knowledge necessary to create the product or service is tacit. The process by which the product or service created

is poorly understood.

An alternative to secrecy available to you is patenting…. While patents are valuable for deterring imitation, they have

several limitations. Patenting is only possible for a small number of types of products or services. To obtain a patent that

has strong enough claims to deter imitation, you have to demonstrate that the new product is a significant improvement

over prior art. Multiple patents are often needed to protect a single product. Patenting is expensive, particularly given

the need to seek multiple patents to protect a given product and the need to seek patent protection in multiple geographic

locations. Patents are not always very strong, particularly when the claims are limited by prior art. Patents require

disclosure of the invention, which may prove to be more costly to you than the offsetting benefit of monopoly

protection. Patents are not very effective in many industries, particularly those based on mechanical or electrical

technology.


8. Appropriating the Returns to InnovationIn addition to the use of patents and secrecy, firms capture the returns from the introduction of new products and services through the

control of resources, building brand-name reputations, exploiting learning curves, first mover advantages, and control of

complementary assets in manufacturing and marketing.

Controlling resources is a strategy in which you buy up or contracts for the key sources of supply for producing the new product or service. This

strategy is most effective when there is a bottleneck in the production process, making one resource crucial and rare.

Establishing a reputation is a strategy in which you invest in advertising to create a brand name. The brand name deters customers from shifting to

competing products by creating the perception that the entrepreneur’s product has features that make it worth additional cost. However,

because advertising takes time to work and is subject to economies of scale, this method of capturing the returns to the introduction of new

products and services does not work well for most technology entrepreneurs.

Exploiting the learning curve is a strategy in which one firm moves ahead of other firms in terms of efficiency as a result of learning from the

process of delivering a product or service. Exploiting a learning curve is most effective as a strategy when an entrepreneur is an early entrant

in an industry and when the knowledge gained from experience is proprietary. However, exploiting the learning curve is not likely to be an

effective strategy for capturing the returns to new product or service introduction when you first found your firm.

Being the first mover is a strategy in which you benefit from being the first provider of a product or service, even when there is nothing to be

gained from experience. Being a first mover can be an advantage or a disadvantage. It is an advantage when network externalities exist and

when real or psychological switching costs are high. The first mover advantage can be effective in capturing the returns to new product or

service introduction when you first found your firm.

A final strategy involves exploiting complementary assets—other assets that are used jointly to deliver a new product or service—as the

basis of the firm’s competitive advantage. This strategy is most effective when patent protection in an industry is weak, and the industry has

converged on a dominant design. In general, as a technology entrepreneur, you will have a hard time competing in industries in which

complementary assets are important because you are unlikely to have these assets in place at the time that your company is founded . If these

assets are not specialized, then you can contract for these assets and sometimes compete with established firms. However, when

complementary assets are specialized, you stand virtually no chance of success because then you cannot obtain control over those

assets through contracting, leaving you without a way to obtain these assets before established firms imitate your new product or

service.


9. Choosing the Right Organizational FormMost people believe that entrepreneurship involves creating a new firm that does all of its own product

development, production, and distribution. Although it is true that entrepreneurs often use hierarchical

approaches to exploiting opportunities, by creating new organizations that own all stages of the value

chain from purchasing supplies to marketing and distribution, you can also exploit opportunities with

more market-based mechanisms, such as licensing or strategic alliances…. Therefore, an important

question for you to consider as you plan to become a technology entrepreneur is, What is the right mode of

exploitation for my opportunity? In general, several different sets of factors affect this decision: Cost,

speed, capabilities, and information.[

You do not always have to create a new company that owns all stages of the value chain from product

development to manufacturing to distribution as a way to exploit an opportunity. You can also use contractual

modes such as licensing and strategic alliances. Contractual modes of opportunity exploitation are good to use

when opportunities are expensive to exploit. They are also good to use when you need to exploit opportunities

quickly, and do not have time to build the value chain from scratch. It is a good idea to use contractual modes

when you lack the capabilities to exploit the opportunities yourself. You should use hierarchical modes of

opportunity exploitation when the technologies that they are exploiting are systemic, based on tacit

knowledge, face no technical standards, and where complementary assets are specialized. Finally, you

should use hierarchical modes of opportunity exploitation when the information problems of disclosure,

holdup, and free riding are dominant; and use contractual modes of exploitation when the information

problems of employee adverse selection and shirking are dominant.

http://proquestcombo.safaribooksonline.com.proxy1.library.jhu.edu/0131423983/art02lev1sec10#ch09en01


10. Managing Risk and UncertaintyNew ventures face technical, market, and competitive uncertainties that require you to undertake risk

management activities. You can reduce the risk that your new venture faces by searching for additional information, minimizing the magnitude of investments, and by maintaining flexibility. You can reallocate risks to those parties better able to manage risk or who seek risk. This includes such actions as transferring risk to diversified investors, reallocating risk to experienced or specialized stakeholders better able to manage it, shifting risk to those parties for whom the activities are less risky, and shifting risks to risk seekers. You can also manage risk by legitimating your new venture. You can do this by obtaining endorsements from representatives of the status quo, adhering to established rules and norms, and by engaging in collective action.

Successful entrepreneurs use two financial tools to evaluate opportunities: real options and scenario analysis. Real options help to make accurate decisions under uncertainty by not requiring the evaluation of things that are truly unknown and by permitting evaluation in successive stages. Scenario analysis helps to make accurate decisions by allowing evaluation in terms of ranges rather than point estimates and by allowing the identification of key assumptions about the relationships between variables.

Successful entrepreneurs convince stakeholders to bear some of the risk of their ventures. They do this by displaying attributes associated with successful entrepreneurs, by approaching customers and suppliers simultaneously, and by escalating commitment in a step-by-step manner.


Defining Entrepreneurship


Promoter Trustee Continuum: Entrepreneurs and Managers

Promoter Key Business Dimension

Trustee

Driven by perception of opportunity Strategic orientation Driven by resources currently controlled

Revolutionary with short duration Commitment to opportunity

Evolutionary with long duration

Multi-staged with minimal exposure at each stage

Commitment of resources

Single-staged with complete commitment upon decision

Episodic use or rent of required resources

Control of resources Ownership or employment of required resources

Flat with multiple informal networks Management structure

Formalized hierarchy

Value-based Team-based Unlimited

Compensation/ Reward Policy

Resource-based Driven by short-term data Promotion focused Limited

Howard Stevenson, A Perspective on Entrepreneurship, (HBS Case: 1983).

Entrepreneurship is a cohesive behavioral approach to management that pursues opportunity without regard to resources currently controlled.

There are six dimensions of business practice where the focus is on either opportunity or efficient use of resources:


Opportunity Recognition as Pattern RecognitionHow do entrepreneurs identify opportunities for new business ventures? One possibility,

suggested by research on human cognition, is that they do so by using cognitive frameworks

they have acquired through experience to perceive connections between seemingly unrelated

events or trends in the external world.

In other words, they use cognitive frameworks they possess to “connect the dots” between

changes in technology, demographics, markets, government policies, and other factors.

The patterns they then perceive in these events or trends suggest ideas for new products

or services—ideas that can potentially serve as the basis for new ventures.

This pattern recognition perspective on opportunity identification is useful… it helps integrate

into one basic framework three factors that have been found to play an important role in

opportunity recognition:

1. engaging in an active search for opportunities;

2. alertness to them; and

3. prior knowledge of an industry or market.

In addition, it also helps explain interrelations between these factors (e.g., the fact that active

search may not be required when alertness is very high).


The Entrepreneur and Judgment

The entrepreneur is someone who specializes in taking judgmental decisions about the

coordination of scarce resources.

Individuals with similar tastes, acting under similar circumstances, but with different

information at their disposal, may well make different decisions. The entrepreneur exhibits

an extreme form of this. The entrepreneur believes that the totality of the information

available to him, in respect of some decision, is unique. On account of this, he will decide

one way when everyone else would decide another. The entrepreneur believes that he is

right, while everyone else is wrong.

Thus the essence of entrepreneurship is being different — being different because one has a

different perception of the situation. It is this that makes the entrepreneur so important. Were

he not present, things would have been done very differently. In this way the entrepreneur’s

perception of the situation exerts a material influence on the allocation of resources.

The entrepreneur hopes to profit from this difference in perception by ‘taking a position’ vis a

vis other people.

Entrepreneurship is a continuing function rather than a once-for-all or intermittent activity Mark Casson, The Entrepreneur (Barnes & Noble Books: 1982)


Historical Perspectives1. Per Richard Cantillon, the entrepreneur is someone who exercises business judgment in the face of uncertainty,

who buys at certain prices in order to sell at uncertain prices.

2. Per Joseph Schumpeter, the entrepreneur changes the very nature of competition from a new commodity, new

technology, new source of supply, new type of organization – competition which commands a decisive cost or

quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at

their foundations and their very lives.

3. Per Robert Livesay, entrepreneurship is the art of aggressive management, practiced by an innovative, growth-

oriented manager.

4. Per Robert Baron, the entrepreneur uses cognitive frameworks to “connect the dots” between changes in

technology, demographics, markets, government policies, and other factors, and then perceive in these events or

trends suggest ideas for new products or services.

5. Per Howard Stevenson, entrepreneurship is a cohesive behavioral approach to management that pursues

opportunity without regard to resources currently controlled.

6. Per John Kao, entrepreneurship is creativity, and creativity means generating new ideas and approaches

7. Per Robert Hisrich entrepreneurship is the process of creating something new with value

8. Per Hebert and Link, the entrepreneur is someone who specializes in taking responsibility for and making

judgmental decisions that affect the location, the form, and the use of goods, resources, or institutions.

9. Per Mark Casson, the entrepreneur is someone who specializes in taking unique judgmental decisions about the



A Summary of Historical Perspectives

Hebert and Link summarize the definition of the entrepreneur as someone who

specializes in taking responsibility for and making judgmental decisions that affect

the location, the form, and the use of goods, resources, or institutions

This definition incorporates the ideas of risk, uncertainty, innovation, perception, and change

– Uncertainty is a consequence of change whereas innovation is a precept of change

This person has a comparative advantage in decision making and make decisions that

run counter to the conventional wisdom either because he has better information or a

different perception of events and opportunities

Entrepreneurial activities are performed in all societies by individuals whose judgment

differs from the norm

The basic features of the entrepreneur are perception, courage, and action

– Entrepreneurial action also implies that entrepreneurs have the courage to embrace

risks in the face of uncertainty


Appendices

1. More Definitions of Entrepreneurship

2. The Entrepreneurship Process as Pattern Recognition

3. Summary of Mark Casson’s The Entrepreneur

4. Historical Approaches to Entrepreneurship


Appendix:More Definitions of

Entrepreneurship


The Key Issues

What is entrepreneurship?

– How is entrepreneurship related to innovation?

– How is entrepreneurship related to the creation of new ventures?

Who are entrepreneurs?

– What makes them entrepreneurs?

– Do personal attributes matter?

– Do entrepreneurs create opportunities or merely react to those

opportunities that already exist but have not been recognized?

– What is their role in a new venture? In an existing business?


Traditional Approaches to Describing EntrepreneurshipEntrepreneurial model

Central focus or purpose Assumption Behavior and skills

Situation

‘Great Person’ School

The entrepreneur has an intuitive ability – a sixth sense – and traits and instincts with which he or she is born

Without this ‘inborn’ intuition, the individual , would be like the rest of us mortals, who ‘lack what it takes’

Intuition, vigor, energy. Persistence, and self-esteem

Start-up

Psychological Characteristics School

Entrepreneurs have unique values, attitudes, and needs that drive them

People behave in accordance with their values; behavior results from tempts to satisfy needs

Personal values, risk-taking, need for achievement, and others

Start-up

Classical School The central characteristic of entrepreneurial behavior is innovation

The critical aspect of entrepreneurship is in the process of doing rather than owning

Innovation, creativity, and discovery

Start-up and early growth

Management School

Entrepreneurs are organizers of an economic venture; they are people who organize, own, manage and assume the risk

Entrepreneurs can be developed or trained in technical functions of management

Production planning, people organizing, capitalization, and budgeting

Early growth and maturity

Leadership School

Entrepreneurs are leaders of people; they have the ability to adapt their style to the needs of people

An entrepreneur cannot n entrepreneur cannot alone, but depends on others

Motivating, directing, and leading

Early growth and maturity

Intrapreneurship School

Entrepreneurial skills can be useful in complex organizations; intrapreneurship is the development of independent units to create, market, and expand services

Organizations need to adapt to survive; entrepreneurial activity leads to organizational building and entrepreneurs becoming managers

Alertness to opportunities, maximizing decisions.

Maturity and change

Simon Bridge, Ken O’Neill and Stan Cromie, Understanding Enterprise, Entrepreneurship and Small Business , London: MacMillan Press, 1998.


Entrepreneurship as a Management Function

Per Henry Mintzberg (McGill), a manager must

1. ensure that his organization produces its specific goods or services efficiently.

2. ensure that his organization serves the ends of those persons who control it.

These two basic purposes are operationalized through ten interrelated roles performed by all managers.

These roles fall into three groupings:

1. Interpersonal roles, which derive from the manager’s authority and status– Figurehead

– Leader

– Liaison

2. Informational roles, which derive from the interpersonal roles and the access they provide to

information– Nerve center

– Disseminator

– Spokesman

3. Decisional roles, which derive from the manager’s authority and information– Entrepreneur

– Disturbance handler

– Resource allocator

– NegotiatorHenry Mintzberg, The Nature of Managerial Work, Harper & Row Publishers (New York: 1973).


The Heart of EntrepreneurshipAt the outset we should discard the notion that entrepreneurship is an all-or-none trait that some people or

organizations possess and others don’t. Rather, we suggest viewing entrepreneurship in the context of a

range of behavior. To simplify our analysis, it is useful to view managerial behavior in terms of extremes.

At one extreme is what we might call the promoter type of manager, who feels confident of his or her

ability to seize opportunity. This manager expects surprises and expects not only to adjust to change but

also to capitalize on it and make things happen. At the other extreme is the trustee type, who feels

threatened by change and the unknown and whose inclination is to rely on the status quo. To the

trustee type, predictability fosters effective management of existing resources while unpredictability

endangers them.

Most people, of course, fall somewhere between the extremes. But it’s safe to say that as managers closer to

the promoter end of the scale they become more entrepreneurial, and as they move toward the trustee end of

the scale they become less so or, perhaps, more administrative).

When it comes to their own self-interest, the natural tendency of most people is toward the promoter end of the

behavior spectrum; they know where their interests lie and pursue them aggressively. A person’s most

valuable assets are intelligence, energy, and experience—not money or other material things— which are

well suited to the promoter role.

A close relationship exists between opportunity and individual needs. To be an entrepreneurial opportunity, a

prospect must meet two tests:

1. it must represent a desirable future state, involving growth or at least change; and

2. the individual must believe it is possible to reach that state. Howard Stevenson, and David Gumpert, The Heart of Entrepreneurship, (Harvard Business Review: Mar-Apr 1985).


The Heart of Entrepreneurship (contd.)Based as they often are on changes in the marketplace, pressures for extension of entrepreneurship tend to be external to

the company. Limitations on entrepreneurial behavior tend to come from inside, the result of high-level decisions and

the exigencies of hierarchy.

In making decisions, administrators and entrepreneurs often proceed with a very different order of questions. The typical

administrator asks: – What resources do I control?

– What structure determines our organization’s relationship to its market?

– How can I minimize the impact of others on my ability to perform?

– What opportunity is appropriate?

The entrepreneur, at the other end of the spectrum, tends to ask: – Where is the opportunity?

– How can I capitalize on it?

– What resources do I need? 1

– How do I gain control over them?

– What structure is best?

Naturally, the first step is to identify the opportunity, which entails an external (or market) orientation rather than an

internal (or resource) orientation. The promoter type is constantly attuned to environmental changes that may suggest

a favorable chance, while the trustee type wants to preserve resources and reacts defensively to possible threats to

deplete them.

Entrepreneurs are not just opportunistic; they are also creative and innovative. The entrepreneur does not necessarily want

to break new ground but perhaps just to remix old ideas to make a seemingly new application.

By contrast, trustee type companies turn opportunities into problems for fear of losing strength. For the entrepreneurial

mentality, on the other hand, external pressures stimulate opportunity recognition. These pressures include rapid

changes in: technology, consumer economics, social values, political action and regulatory standards.Howard Stevenson, and David Gumpert, The Heart of Entrepreneurship, (Harvard Business Review: Mar-Apr 1985).


Promoter Trustee Continuum: Entrepreneurs and Managers

Promoter Key Business Dimension

Trustee

Driven by perception of opportunity Strategic orientation Driven by resources currently controlled

Revolutionary with short duration Commitment to opportunity

Evolutionary with long duration

Multi-staged with minimal exposure at each stage

Commitment of resources

Single-staged with complete commitment upon decision

Episodic use or rent of required resources

Control of resources Ownership or employment of required resources

Flat with multiple informal networks Management structure

Formalized hierarchy

Value-based Team-based Unlimited

Compensation/ Reward Policy

Resource-based Driven by short-term data Promotion focused Limited


Entrepreneurship is a cohesive behavioral approach to management that pursues opportunity without regard to resources currently controlled.

There are six dimensions of business practice where the focus is on either opportunity or efficient use of resources:


Pressures Pulling a Firm Along the ContinuumPromoter:

Pressures toward this sideKey Business

DimensionTrustee:

Pressures toward this side

Diminishing opportunity streams Rapidly changing:

Technology Consumer economics Social values Political rules

strategic orientation Social contractsPerformance measurement criteria Planning systems and cycles

Action orientation Short decision windows Risk management Limited decision constituencies

commitment to opportunity

Acknowledgment of multiple constituencies Negotiation of strategy Risk reductionManagement of fit

Lack of predictable resource needs Lack of long-term control Social needs for more opportunity per resource unit International pressure for more efficient resource use

resource commitment process

Personal risk reductionIncentive compensation Managerial turnover Capital allocation systems Formal planning systems

Increased resource specialization Long resource life compared to need Risk of obsolescence Risk inherent in any new ventureInflexibility of permanent commitment to resources

control over resources Power, status, and financial rewards Coordination Efficiency measures Inertia and cost of change Industry structures

Coordination of key non-controlled resourcesChallenge to legitimacy of owner’s control Employees’ desire for independence

management structure Need for clearly defined authority and responsibility Organizational culture Reward systems Management theory

Financial backers Individual expectations Competition

compensation policy Societal norms Impacted information Demands of public shareholders



Defining Entrepreneurship: John Kao (Harvard)

Entrepreneurship is fundamentally less about technical skills than about people and their passions….Clearly,

the entrepreneur must be skilled at identifying and pursuing opportunity. Yet human issues are also predominant.

Equally, the entrepreneur’s task involves finding leverage through the efforts of others to amplify his or her own

vision.

1. First, entrepreneurship and creativity are seen as intimately related, timeless human qualities. Creativity

implies generating new ideas and approaches. Entrepreneurial behavior involves the ability to identify

opportunities based on these new ideas and approaches, and to turn them into something tangible. Outstanding

organizations have always sought to mobilize both these qualities. Entrepreneurship and creativity are not

topics of the moment but valuable corporate resources that can be managed for competitive advantage.

2. Second, the would-be entrepreneur needs facility in an array of human and organizational skills: self-

understanding; interpersonal leadership; conflict resolution; stress management; tolerance for ambiguity: team

and project management; creating appropriate rewards and incentives; and organization design.

3. Third, rigorous examination of entrepreneurial and creativity-dependent companies provides fresh

insights into the relationships between organizations, strategies, and environments . Such companies

operate in highly uncertain environments and exhibit great fluidity in their internal structure. Thus, they are

continually challenged to generate mechanisms for fostering organizational integration and coherence. In

addition, these firms evolve rapidly. Studying them reveals a panorama of the stages and dilemmas of

leadership and organizational development. Put another way, they provide a significant laboratory for

examining issues of generic importance to all managers. John Kao, Entrepreneurship, Creativity, and Organization (Prentice Hall: 1989).


Entrepreneurship and CreativityEntrepreneurship and creativity result from the interrelationship of three elements:

1. The first element, the “person,” is obvious. New ideas are not generated or implemented by organizations or technology but come

into being through the efforts of dedicated people. Thus, it is important to understand peoples’ personalities, motivations, skills, levels

of experience, and psychological preferences.

2. The “task” is what a given group of people or an organization does . Tasks be determined by an individual’s personality or private

vision. They are shaped by organizational strategy, as well as influenced by the external environment. For the entrepreneur, relevant

tasks include generating new ideas or insights about new opportunities (creative tasks) and making those ideas come into some

tangible form (operational/managerial tasks). As the entrepreneur develops an organization to serve as an appropriate lever for his or

her vision, the nature and variety of tasks must inevitably change as the organization evolves and becomes more complex.

3. The “organizational context” is the immediate setting in which creative and entrepreneurial work takes place . Such issues as

organizational structure and systems, the definition of work roles, and group culture affect significantly the nature of the creative or

entrepreneurial environment. Such factors may limit or facilitate creativity and entrepreneurship, and become an increasing factor to

contend with as the organization evolves.

Finally, these elements exist in an “environment,” which refers to the out5ide world surrounding the organization. It is obviously

significant as a source of external resources such as capital, people, information, and expertise, as well as various forms of professional

services. It, too, can facilitate or impede creative and entrepreneurial endeavor to the extent that an appropriate infrastructure, for

example, is either absent or present. The environment also defines the competitive situation, which may be composed of such factors as

competitors. Regulatory forces, and the development state of technology.

In summary:– Entrepreneurship is creativity

– Creativity means generating new ideas and approaches

– Entrepreneurial behavior means identifying business opportunities based on these new ideas and approaches

– Entrepreneurial behavior then converts these opportunities into something tangible through the assumption of risk and the

mobilization of resources

– Entrepreneurship and creativity are the source of competitive advantageJohn Kao, Entrepreneurship, Creativity, and Organization (Prentice Hall: 1989).


Defining Entrepreneurship: Marc Dollinger (Indiana)

Entrepreneurship is the creation of an innovative economic organization (or network of

organizations) for the purpose of gain or growth under conditions of risk and uncertainty.– The foundation for this definition is the resource-based theory of sustained competitive advantage.

– The resource-based theory is the most appropriate to understand new venture creation because it best describes how entrepreneurs

themselves build their businesses using the resources and capabilities they currently possess or can realistically acquire. Successful

entrepreneurship is not simply an analytical exercise. Industry and competitor analysis—the application of the theory of industrial

organization economics-alone is insufficient.

– The resource-based theory argues that the choice of which industry to enter and what business to be in is not enough to ensure success. The

theory says that the nature and quality of the resources, capabilities, and strategies the entrepreneur possesses and can acquire can

lead to long-term success.

Entrepreneurship is characterized by

– creativity and innovation

– resource gathering and the founding of an economic organization

– the chance for gain under risk and uncertainty

Entrepreneurs use resources that are

1. rare

2. valuable

3. hard to copy

4. have no good substitutes to obtain a competitive advantageMarc J. Dollinger, Entrepreneurship: Strategies and Resources (Prentice Hall: 2003).


Defining Entrepreneurship: Jeffrey Timmons (Babson)

At the heart of the entrepreneurial process is the founder: the opportunity seeker, the creator

and initiator; the leader, problem solver, and motivator; the strategizer and guardian of the

mission, values, and culture of the venture. Without this human energy, drive, and vitality, greatest

ideas – even when they are backed by an overabundance of resources and staff – will fail, grossly

underperform, or simply never get off the ground.

Brilliant musical, scientific, or athletic aptitude and potential do not equal the great musician, the great

scientist, or the great athlete. The difference lies the intangibles: creativity and ingenuity, commitment,

tenacity and determination, a passion to win and excel, and leadership and team-building skills. In

summary:

1. Entrepreneurship is a way of thinking, reasoning, and acting that is opportunity obsessed,

holistic in approach, and leadership balanced, for the purpose of value creation and capture.

2. Entrepreneurship results in the creation, enhancement, realization, and renewal of value, not

just for owners, but for all participants and stakeholders.

3. At the heart of the entrepreneurial process is the creation and/or recognition of opportunities,

followed by the will and initiative to seize these opportunities.

Jeffrey A. Timmons and Stephen Spinelli, New Venture Creation (McGraw-Hill Irwin: 2009).


Defining Entrepreneurship: Jeffrey Timmons (Babson)

Undoubtedly many attitudes and behaviors characterize the entrepreneurial mind, and there is no single set of

attitudes and behaviors that every entrepreneur must have for every venture opportunity. Further, the fit concept

argues that what is required in each situation depends on the mix and match of the key players and how promising and

forgiving the opportunity is, given the founders’ strengths and shortcomings. A team might collectively show many

desired strengths, but even then there is no such thing as a perfect entrepreneur .

– A consulting study by McKinsey & Co. of medium-sized growth companies (i.e., companies with sales

between $25 million and $1 billion and with sales or profit growth of more than 15 percent annually over five

years) confirms that the chief executive officers of winning companies were notable for three common traits:

perseverance, a builders mentality, and a strong propensity for taking calculated risks.

– Testimony given by successful entrepreneurs also confirms attitudes and behaviors that successful

entrepreneurs have in common:

(1) the ability to respond positively to challenges and learn from mistakes,

(2) personal initiative, and

(3) great perseverance and determination.

A consensus has emerged around seven dominant Themes of Desirable and Acquirable Attitudes and Behaviors:

1. Commitment and determination

2. Courage

3. Leadership

4. Opportunity obsession

5. Tolerance of risk, ambiguity, and uncertainty

6. Creativity, self-reliance, and adaptability

7. Motivation to excel

Jeffrey A. Timmons and Stephen Spinelli, New Venture Creation (McGraw-Hill Irwin: 2009).


Defining Entrepreneurship: Robert Hisrich (Case Western Reserve)

Entrepreneurship is the process of creating something new with value

– by devoting the necessary time and effort

– assuming the accompanying financial, social, and psychic risks

– and receiving the resulting rewards of monetary and personal satisfaction and independence

In almost all of the definitions of entrepreneurship, there is agreement that we are talking about a kind of behavior that

includes:

(1) initiative taking,

(2) the organizing and reorganizing of social and economic mechanisms to turn resources and situations to practical account,

(3) the acceptance of risk or failure.

To an economist, an entrepreneur is one who brings resources, labor, materials, and other assets into combinations that

make their value greater than before, and also one who introduces changes, innovations, and a new order. To a

psychologist, such a person is typically driven by certain forces—the need to obtain or attain something, to experiment, to

accomplish, or perhaps to escape the authority of others. To one businessman, an entrepreneur appears as a threat, an aggressive

competitor, whereas to another businessman the same entrepreneur may be an ally, a source of supply, a customer, or someone

who creates wealth for others, as well as finds better ways to utilize resources, reduce waste, and produce jobs others are glad to

get.

Entrepreneurship is the dynamic process of creating incremental wealth. The wealth is created by individuals who assume

the major risks in terms of equity, time, and/or career commitment or provide value for some product or service. The product or

service may or may not be new or unique, but value must somehow be infused by the entrepreneur by receiving and locating

the necessary skills and resources.Robert D. Hisrich, et. al., Entrepreneurship (McGraw-Hill Irwin: 2005).

Confidential - for classroom use only 46

Appendix:The Entrepreneurship Process as

Pattern RecognitionRobert A. Baron

“Opportunity Recognition as Pattern Recognition”in Academy of Management Perspectives (Feb 2006)


Opportunity Recognition as Pattern Recognition

How do entrepreneurs identify opportunities for new business ventures? One possibility, suggested

by research on human cognition, is that they do so by using cognitive frameworks they have acquired

through experience to perceive connections between seemingly unrelated events or trends in the

external world.

In other words, they use cognitive frameworks they possess to “connect the dots” between changes

in technology, demographics, markets, government policies, and other factors.

The patterns they then perceive in these events or trends suggest ideas for new products or

services—ideas that can potentially serve as the basis for new ventures.

This pattern recognition perspective on opportunity identification is useful in several respects.

1. First, it helps integrate into one basic framework three factors that have been found to play an

important role in opportunity recognition: engaging in an active search for opportunities;

alertness to them; and prior knowledge of an industry or market. In addition, it also helps explain

interrelations between these factors (e.g., the fact that active search may not be required when

alertness is very high).

2. Second, a pattern recognition perspective helps explain why some persons, but not others,

identify specific opportunities.

3. Third, a pattern recognition framework suggests specific ways in which current or would-be

entrepreneurs can be trained to be better at recognizing opportunities.


Three Factors that Play a Role in Opportunity Recognition

Previous work has examined many different factors that play a role in the recognition of opportunities for new business

ventures. Among these, however, three have been identified as especially important and received most attention:

1. engaging in an active search for opportunities;

2. alertness to opportunities (the capacity to recognize them when they emerge); and

3. prior knowledge of a market, industry, or customers as a basis for recognizing new opportunities in these areas.

Further confirming the importance of active search is the finding, reported in one intriguing study, that entrepreneurs belonging to

the Chicago area Entrepreneurship Hall of Fame were found to be less likely to identify their opportunities from public

information such as magazines, newspapers, and trade publications; rather, they actively sought such information in more unique

sources, such as personal contacts and more specialized publications.

Alertness, emphasizes the fact that opportunities can sometimes be recognized by individuals who are not actively searching for

them, but who possess “a unique preparedness to recognize them. . .” when they appear…. defined as “alertness to changed

conditions or to overlooked possibilities.” This definition suggests that opportunities can be noticed even by persons who are not

actively seeking them; indeed, when alertness is high, entrepreneurs may engage in what has been termed “passive search,” a

state in which they are receptive to opportunities, but do not engage in a formal, systematic search for them. What are the

foundations of entrepreneurial alertness? It has been suggested that alertness rests, at least in part, on cognitive capacities

possessed by individuals— capacities such as high intelligence and creativity. These capacities help entrepreneurs to identify new

solutions to market and customer needs in existing information, and to imagine new products and services that do not currently

exist.– intelligence has been found, in several investigations, to be linked to founding new ventures

– creativity, another aspect of cognition, has also been found to play a role in alertness

– optimism—the belief that events will generally result in favorable outcomes—has been positively linked to opportunity recognition

Finally, turning to the third factor mentioned above, prior knowledge, a wealth of evidence indicates that information gathered

through rich and varied life experience (especially, through varied business and work experience) can be a major “plus” for

entrepreneurs in terms of recognizing potentially profitable opportunities. For example, it has been found that prior knowledge of

customer needs and ways to meet them greatly enhances entrepreneurs’ ability to provide innovative solutions to these problems

—in other words, to identify potentially valuable business opportunities.


Opportunities and Opportunity Recognition: Some Basic Propositions

Proposition 1: Opportunities emerge from a complex pattern of changing conditions—

changes in technology, economic, political, social, and demographic conditions. They come

into existence at a given point in time because of a juxtaposition or confluence of conditions

which did not exist previously but is now present.

Proposition 2: Recognition of opportunities depends, in part, on cognitive structures

possessed by individuals—frameworks developed through their previous life

experience. These frameworks, which serve to organize information stored in memory in

ways useful for the persons who possess them, serve as “templates” that enable specific

individuals to perceive connections between seemingly unrelated changes or events. In other

words, they provide the cognitive basis for “connecting the dots” into patterns suggestive of

new business opportunities.

In other words, these models propose that one reason why specific persons (and not

others) perceive such patterns is that they possess the cognitive frameworks that permit

them to do so. In contrast, this “equipment” is lacking or less well-developed in persons

who do not perceive these patterns.


The Potential Role of Pattern Recognition in Opportunity Recognition


SummaryTwo additional points are also worth noting.

1. First, in addition to search, alertness, and prior knowledge, another factor—the breadth of

entrepreneurs’ social networks—has recently received growing attention, and also appears to

play an important role in opportunity recognition. Further, social networks may be especially

helpful to entrepreneurs in terms of honing or refining these frameworks (prototypes,

exemplars).

2. Second, as the model in the above figure suggests, not all patterns connecting diverse events,

changes, or trends perceived by entrepreneurs serve as the basis for founding new ventures.

Such patterns lead to new ventures only when they suggest new products or services that

seem, on initial examination, to be feasible.

In sum, three factors that have been found to play important roles in opportunity

recognition by entrepreneurs are

3. search,

4. alertness, and

5. prior knowledge.

These factors and others can all be understood within the context of pattern recognition.

Integrating them in this manner provides increased insight into the basic nature of opportunity

recognition.


Appendix:The Entrepreneur

Mark Casson (Barnes & Noble Books: 1982)


Integrating the Two Definitions

The definition of the entrepreneur is one of the most crucial and difficult aspects of

the theory. There are two main approaches to defining anything: the functional

approach and the indicative approach. – The functional approach says quite simply that ‘an entrepreneur is what an entrepreneur does’.

– The indicative approach provides a description of the entrepreneur in terms of his legal status,

his contractual relations with other parties, his position in society, and so on.

The problem with the theory of entrepreneurship is that these two approaches have

never been integrated. The functional approach should predict the emergence

of a particular group of people embodying a unique complex of

characteristics — characteristics which enable them to carry out their

function most efficiently. Given that at least some of the characteristics are

observable, they could then form the basis for an indicative definition of the

entrepreneur.

It is one of the main objects of this book to achieve a convergence of the two

approaches along these lines.


The Function of the EntrepreneurThe entrepreneur is someone who specializes in taking judgmental decisions about the


An entrepreneur is someone …; in other words the entrepreneur is person, not a team, or a committee, or an

organization. Only individuals can take decisions; corporate bodies only arrive at decisions by aggregating votes.

Individuals in committee make strategic decisions on how to influence other people’s voting and on how to vote

themselves; it is these decisions that are entrepreneurial, not the decision of the committee as a whole.

…who specializes . . .; everyone is involved in taking judgmental decisions at one time or another, but this does not

make them a specialist at it. A specialist carries out his function not only on Hs own behalf but on behalf of other

people.

…in taking judgmental decisions...; the concept of choice, and hence of decision-making, is central to economic theory.

A judgmental decision is one where different individuals, sharing the same objectives and acting under similar

circumstances, would make different decisions. The difference arises because they have different perceptions of the

situation arising from different access to information, or different l1 quantitative one, in the sense that it takes a

longer time, or involves a greater expenditure of resources, in making the same decision, but a qualitative one,

namely that the decision made is actually different.

…about the coordination…; coordination may be defined as a beneficial reallocation of resources. Coordination is thus

a dynamic concept, as opposed to allocation, which is a static one. The concept of coordination captures the fact

that the entrepreneur is an agent of change: he is not concerned merely with the perpetuation of the existing

allocation of resources, but with improving upon it.

…of scarce resources.; the restriction to scarce resources limits the field of study to that usually identified as economic.


Entrepreneurship and Neoclassical Economics

At an intuitive level, the basic objection to neoclassical economics is that it depersonalizes the

market process

– Transactors are faceless economic agents

– The only personal characteristics that matter are their tastes for consumer goods

– The are linked by an equally impersonal mechanism – the invisible hand of Adam Smith, which

neoclassical economics translates into an assumption of perfectly competitive market equilibrium

In this book the theoretical reconstruction proceeds on two fronts. The first is to recognize that

individuals differ not only in their tastes but in their access to information. Individuals with

similar tastes, acting under similar circumstances, but with different information at their

disposal, may well make different decisions. The entrepreneur exhibits an extreme form of this.

The entrepreneur believes that the totality of the information available to him, in respect of

some decision, is unique. On account of this, he will decide one way when everyone else

would decide another. The entrepreneur believes that he is right, while everyone else is wrong.

Thus the essence of entrepreneurship is being different — being different because one has a

different perception of the situation. It is this that makes the entrepreneur so important. Were

he not present, things would have been done very differently. In this way the entrepreneur’s

perception of the situation exerts a material influence on the allocation of resources.


Entrepreneurs Place Bets

The entrepreneur hopes to profit from this difference in perception by ‘taking a position’ vis a vis other

people. He may take up a position by contracting with them, or merely by adjusting his own behaviour in the light

of his expectations about how they will behave. Suppose that the entrepreneur chooses the contractual route.

– Intuitively, he places bets with those who dissent from his view, in the hope that he will be rewarded when his

beliefs turn out to be correct. Many of the predictions of the economic theory of entrepreneurship come from

considering the tactical aspects of this strategy.

The most important tactical problem is that the entrepreneur can only contract with other people on

favourable terms if he can protect the information on which (he believes) his superior judgment is based.

– If he fails to maintain secrecy then he will be faced with competition from other people who share his views, and the

terms on which he can contract will become less favourable as a result.

– He must also recognize that the people with whom he contracts will require assurances that he can pay up if he is

proved wrong – a constraint which may prove difficult, and quite irritating, for someone who has little wealth but is

certain that he is right.

– The obvious strategy is to seek someone to underwrite the risk that he (the entrepreneur) is wrong. But since everyone

else believes he is wrong, to whom can be turn? He can only obtain underwriting by persuading someone else that he

is right. And therein lies the catch, for anyone else who believes the entrepreneur is right is ipso facto a potential

competitor.

– As we shall see, it may be possible to establish special institutions to resolve this problem. But it should be apparent

that, in the absence of such institutions, access to capital may prove a substantial barrier to entry into

entrepreneurship.


A Definition of Entrepreneurship Therefore, the entrepreneur is that person whose judgment differs from that of

other people and who intervenes in order to exploit his superior judgment by buying

up economic resources that would have been misallocated.– It is also necessary that the entrepreneur be able to turn his judgment to good account

by contracting with parties of inferior judgment on terms favorable to himself – the

entrepreneur intermediates exchanges.

The fact that the entrepreneur has often to create an institution to make markets

between himself and other transactors extends the range of issues about which the

entrepreneur has to make judgments. – Although he does not have to perform all the activities within the institution himself, he is

responsible for the structure of the institution, and in particular, for the way in which

specific tasks are delegated, and he way that the delegates are supervised.

– As a consequence, the theory if the market-making firm feeds back upon the original

conceptualization of the entrepreneur. It describes a specific range of issues with which

many entrepreneurs are heavily preoccupied, and upon which entrepreneurial judgment has

to be continuously exercised.


A Continuing Function

Entrepreneurship is a continuing function rather than a

once-for-all or intermittent activity

– There will be a demand for entrepreneurial services so long as

opportunities for coordination exist

– The number of opportunities will not run down over time because

discoveries will continue so long as human beings remain

inquisitive

As new information becomes available, entrepreneurs question

the efficiency of their plans

– There are two kinds of information – new discoveries or updates

– Any distinction between the roles of instigating change or reacting

to change based on these kinds of information is unimportant


Entrepreneurs and Monopolies

The essence of entrepreneurship is superior judgment and the reward to this

judgment depends critically upon the entrepreneur enjoying monopoly

power

We must distinguish between a monopoly of the information on which the

judgment is based and a monopoly of the situation to which the judgment relates– To achieve a monopoly of information, the entrepreneur must discover the

information before anyone else, and once it has been discovered others must be

excluded from it

– Although a monopoly of information may be lost, the monopoly of its exploitation may

be retained

• Barriers to competition are only important where the exploitation of the opportunity is a

continuous process

• If the opportunity can be pre-empted entirely be a once-for-all initiative, then nothing remains

for potential competitors to exploit

• This indicates an important distinction between coordination involving stocks (fixed

economic resources) and coordination involving flows (work processes)


The Competitive Search for Information

Strictly speaking, the only item that has to be monopolized

is the information that a particular profit opportunity exists

(i.e. commercial information)

– Each entrepreneur enters the search process with fairly wide-

ranging background information as a result of both incidental

experiences and purposive search in the past

– All entrepreneurs are searching for the last few items of raw

information

– Information sources are localized and searching one area will

lead to one type of commercial information while searching in a

different area will lead to another kind of commercial information


Synthesizing Information

Different types of information synthesis can be effected with different

combination of pieces, and people with imagination may be able to achieve

a synthesis with a given combination that other people would be unable to

visualize

– It is the imagination that dictates what kinds of synthesis are believed to be possible and

so lends direction to the search process

– By and large, entrepreneurs wish to avoid searching areas of information that

other entrepreneurs are searching in because the greater the number searching in

a given area, the lower the probability that any given one of them will be the first

to make a discovery

– Entrepreneurs are attracted to where the highest rewards are to be found and the ability

to pre-empt competition by priority is crucial in attracting entrepreneurial activity

– Hence the patent system – entrepreneurs are attracted to areas where patents and other

forms of barrier to entry are available to consolidate a temporary lead over competitors


Entrepreneurship, Innovation and InformationSchumpeter distinguished between invention, which is a scientific activity not necessarily motivated by economic advancement, and innovation

– The inventor develops a technique which the innovator seeks to exploit for the creation of wealth– Innovation involves a judgmental decision whether to commit scarce resources to the application of the

invention

The entrepreneur's recognition of an opportunity for coordination rests upon a synthesis of information– In the case of technological innovation, the entrepreneur needs to synthesize technical information on the new

methods of production with information about the scarcity of factors of production in order to assess whether the new technique, besides its technical virtues, will also reduce costs of production

– In the case of product innovation, the entrepreneur needs to synthesize information about buyers’ preferences for product quality with information about the production costs of the new design of good

The entrepreneur does not necessarily possess any single item of information that no-one else does – his advantage lies in the fact that some items of information are complementary and that his combination of complementary items of information is different form everyone else’s

Thus, the key to successful entrepreneurship is not to have more specialized or detailed knowledge than anyone else but simply to have the right sort of coverage of information

– The entrepreneur must be capable of assimilating diverse information– The successful entrepreneur is the one who is first to achieve the synthesis of information through his

network of primary sources of information– There is increasing cost to synthesizing information from diverse sources– Synthesizing information is a continuous process– The entrepreneur needs good judgment in how to act on information received from sources because acting on

wrong information can lead to losses


Entrepreneurial Decision MakingAgain, the entrepreneur is someone who specializes in taking judgmental decisions about the coordination of scarce resources.

The decision-making function consists almost entirely of information processing – the collection, analysis, communication and storage of information.

Decision making services are scarce because decision-making involves the use of resources which have a positive opportunity cost.

Activities Qualities

First stage: formulation of the decision problemSpecification of the objectiveSpecification of the potential strategiesSpecification of the constraintsDerivation of the decision rules

Self-knowledgeImaginationPractical knowledgeAnalytical ability

Second stage: generating the dataData collectionData estimation

Search skillsForesight

Third stage: execution of the decisionApplication of the data to the decision ruleInitiation of the implementation process

Computational skillsCommunication skills


Three Stages of Decision Making

The logic of a decision suggests that there are three main stages of decision-making, each involving several activities

(see the left hand column of the table).

1. The first stage in any decision is to formulate the problem . This involves specifying the objective, the options

and the constraints, and deriving from them a decision rule. The objective is defined upon a set of targets, or goals.

When there is more than one target the objective indicates the way that different targets should be traded off against

each other. The options are the alternative strategies. Each strategy involves setting particular values for each of the

available instruments, that is for the variables under the decision-maker’s control. Typically one of the strategies

will be a null strategy, which involves preserving the status quo. In the context or entrepreneurship this means that

the allocation of resources will remain unchanged. The other strategies represent alternative methods of exploiting

an opportunity for coordination. The optimal strategy is the one that maximizes the value of the objective.

2. The next stage in the decision is to generate the data. The data establishes numerical values for the state

variables. The data may already be available from secondary sources, or it may have to be gathered from primary

sources on the initiative of the entrepreneur. When all available data sources have been tapped the data set may still

remain incomplete. The decision-maker must then supply his own estimates of the unknown variables. In doing so

he may wish to exploit other variables. As a result, he may need to tap more varied sources of information than

those from which his direct observations were obtained.

3. The final stage is the execution of the decision. This involves the application of the decision rule to the completed

data set, and the initiation of the implementation process.


Entrepreneurial Qualities for Decision MakingWhere the entrepreneur is deficient, he needs to hire complementary qualities, and therefore needs two additional skills – delegation and organizational designAll entrepreneurial qualities are to some extent innate, but not all of them are entirely innate:

Quality Essential to all non-trivial decisions

Scarce and unequally distributed

Difficult to screen for

Capable of enhancement

Essential, scarce and difficult to screen for

Scarce, difficult to screen for and capable of enhancement

Self-knowledge X X

Imagination X X X X

Practical knowledge X X

Analytical ability X X X

Search skills X X X

Foresight X X X X X X

Computational skills X X X

Communication skills X X

Delegation skills X X X X

Organization skills X X X


Appendix:Historical Approaches to

EntrepreneurshipRobert Hebert and Albert Link

The Entrepreneur(New York: Praeger, 1988)


OriginsIn Savary’s Dictionnaire Universel de Commerce (Paris, 1723) the word “entrepreneur” is defined as one who undertakes a

project; a manufacturer; a master builder. – In 16th and 17th century France, the most frequent usage of the term connoted a government contractor, usually of military

fortifications or public works.

– The word was commonly translated into English as merchant, adventurer, and employer

Entrepreneurship implies economic activity, and economics, as Ludwig von Mises informed us, is human action.

Therefore two questions confront us immediately: What is it that makes man distinctly human? And, What is that

combination of gifts that makes entrepreneurs stand out from the wider population? Both answers have a common root.

The first question is problematic, and almost any answer given is likely to be controversial. The late Jacob Bronowski, a

highly respected scientist and humanist, found the answer to mm’s uniqueness in his forward-looking imagination: – There are many gifts that are unique in man; but it the centre of them all, the root from which all knowledge grows, lies the ability

to draw conclusions from what we see to what we do not see, to move our minds through space and time, and to recognise

ourselves in the past on the steps to the present.

Is it the function of the entrepreneur to create profit opportunities or merely to react to those opportunities that exist

but have not yet been recognized? …both claims have been advanced. It would seem, however, that both kinds of

behavior spring from the same center of imagination in the human psyche. Does it not take an act of forward-looking

imagination to recognize a profit opportunity and act on it? Are not the same data received, interpreted, and acted upon

differently different individuals? How can we explain these differences? Are they not merely different powers of

imagination?

What, then, are the earmarks of the entrepreneur? What gifts of intellect, imagination, critical judgment, capacity for

resolute action and sustained effort, courage, and detachment are required if a person is to bring novelty into the business

scene and to shape in some degree its ongoing historical evolution? Is the continual and sometimes dramatic

transformation of the means, ends, and methods of business the work of a type of moving spirit, a class of exceptional

people? If so, what are they like, what precisely is exceptional in their psyches, their situations in life, their sources of

inspiration? Finally, what sets their thoughts on fire and spurs them to action?


A Spectrum of DefinitionsPer the OECD:

There are, in effect, two definitions of, or approaches to, the word ‘enterprise’ and the practice of it. One, which can be termed a ‘narrow’ one, regards enterprise as business entrepreneurialism, and sees its promotion and development within education and training systems as an issue of curriculum development which enables young people to learn, usually on an experimental basis, about business start-up and management. The second approach, which can be termed the ‘broad’ one, regards enterprise as a group of qualities and competencies that enable individuals, organisations, communities, societies and cultures to be flexible, creative, and adaptable in the face of, and as contributors to, rapid social and economic change.

Per Simon Bridge, et. al.:

There are many different usages, and therefore definitions, of the word ‘enterprise’. These different meanings are related to each other, however. There are not just two or three distinct discrete meanings but instead a range of meanings, each one merging with those close to it but perceptibly different from those far from it. It is not possible to indicate that one particular meaning is the correct one. The word is in practice used in these different ways, and those trying to understand it need to be aware of what it means to whoever is using it.

One end of the spectrum of meaning could be considered to be the ‘narrow’ definition of enterprise, which could be summarized as:

– Enterprise = entrepreneurship, which means– starting up a business,– being in business, and– growing and developing a business.

The other end of the spectrum could be enterprise as a positive, flexible, and adaptable attitude to change. It is the exercise of enterprising attributes. It is a new balance in power between the institution and the individual. In this context it has a far wider application than just business, as such attributes can be applied 11 all walks of life. It could be summarized as:

– Enterprise = innovative attributes and behaviorSimon Bridge, Ken O’Neill and Stan Cromie, Understanding Enterprise, Entrepreneurship and Small Business, London: MacMillan Press, 1998.

‘Towards an “Enterprising” Culture – A Challenge for Education and Training’, OECD/CERJ Educational Monograph, No. 4 (1989) pp. 6-7.


Historical Perspectives: Ancient and Medieval

Human activity and acting agents can be divided into two broad classes – those who lead and

those who follow

– Entrepreneurial talent, however ill-defined, has always been closely aligned with the quality of

leadership

– E.g., the general who designed and executed a successful strategy took considerable risks and stood to

gain substantial economic benefits

The Greek idea of stasis led to the idea of economic activity as a zero sum game

– Despite centuries of market experience, this idea persisted through the age of mercantilism and even

today

In medieval Italy, the capitalist loaned money to the merchant-adventurer

– The capitalist was a passive risk-bearer whereas the merchant-adventurer took an active role in trade

or commerce

• But the majority of the profits went to the investing partner

– It was generally agreed that merchants were entitled to compensation for risk and recompense for their

labor

– Merchants needed to have “good judgment with respect to risks, be well-informed with respect to

goods qualities, prices and cost, be attentive to detail, and prepared to suffer hardships and manner of

risks”


Tax Farming

Tax farming is an early example of entrepreneurship involving risk bearing and

individual initiative– A tax farmer is an individual who successfully bids for the exclusive right to collect taxes in

the name of the Crown

– The amount of the bid is related in a predictable way to the bidder’s evaluation of the amount

of taxes he can collect

The incentive that spurs each entrepreneur to action is the opportunity to obtain profit– But the entrepreneur must also be reasonably assured that he may keep entrepreneurial profits

that he acquires legitimately

– Which in turn requires stability of institutional practices

Historically, the risk-bearing function of entrepreneurship became less important

after the establishment of limited liability and the new forms of business organization

it generated– Subsequently, innovation came to be stressed over other aspects of entrepreneurship in

theories of economic development


Richard Cantillon’s Essai sur la nature du commerce en general was published posthumously in

1755, but written two decades earlier– He recognized three classes of economic agents

• Landowners who are financially independent

• Entrepreneurs who engage in market exchanges at their own risk in order to make a profit

• Hirelings who eschew active decision making in order to secure contractual guaranties of stable income

– The entrepreneur is someone who exercises business judgment in the face of uncertainty

– The city (i.e. the chain of distribution from producers/farmers to consumers) creates opportunities for

entrepreneurs willing to take risks in order to make goods available at the appropriate time and place

– Cantillon emphasized the economic function of the entrepreneur over his/her social status

Cantillon argued that the origin of entrepreneurship lies in the lack of perfect foresight we have

with regard to the future– This lack of perfect foresight is not a defect of the market system, but a part of the human condition

– Uncertainty is a pervasive fact of everyday life, and those who must deal with it continually in

their economic decisions are entrepreneurs

– Consequently, it is the function of the entrepreneur, not his/her personality, that counts for

economic analysis

Richard Cantillon (1680 – 1734)


Jean Baptiste Say (1762 – 1832)The vigor of entrepreneurial activity depends upon the composition, distribution, and security of property rights. Because entrepreneurial activity

is profit seeking, it requires incentives to propel it. These incentives are provided by the structure of property rights within a representative government. Say was quite clear on this, avowing that “political economy recognizes the right of property solely as the most powerful of all encouragements to the multiplication of wealth.” Furthermore, where private property exists in reality as well as in right, “then, and then only, can the sources of production, namely land, capital, and industry, attain their utmost degree of fecundity.”

Say’s theory of the entrepreneur is part of a threefold division of human industry into distinct operations:1. The first step is the scientific one. Before any product can be made, say a bicycle, certain knowledge about the nature and purpose of it must be understood. It

must be known, for example, that a wheel is capable of continuous, circular motion and that a force exerted on a chain and sprockets can propel the wheel forward.

2. The second step, the entrepreneurial one, is the application of this knowledge to a useful purpose (i.e., the development of a mechanism-the bicycle) with one or more wheels capable of transporting someone from one place to another.

3. The final step, the productive one, is the manufacture of the item at the hands of manual labor.

In his Treatise he observed that the entrepreneur “estimates needs and above all the means to satisfy them,. .. [and] compares the end with these means. Hence his principal quality is to have good judgment. He can lack the personal knowledge of science, by judiciously employing that of others, he can avoid dirtying his own lands by using the hands of others, but he must not lack judgment; for then he might produce at great expense something which has no value.”

Say’s entrepreneur is an economic catalyst, a pivotal figure. But Say did not follow Cantillon, by making uncertainty the mainstay of entrepreneurship. Risk is incidental to Say’s notion of entrepreneurship because he saw no necessary dependency of entrepreneurial activity upon capital accumulation. For the first time in economic literature, entrepreneurial activity became virtually synonymous with management, in the contemporary sense of that term. Management may, but does not necessarily, supply capital to the enterprise. And Say had no difficulty, theoretically speaking, separating the entrepreneurial function from the capitalist function, even though both functions could be, and often were, combined in the same person.

Say’s entrepreneur may be characterized as a “guardian” of equilibrium. The “judgment” extolled by Say as a requisite of entrepreneurial activity is confined to relations within a production process and does not extend beyond that process to the discovery of new processes or to changes inspired by a new social structure. Because he did not see a necessary relationship between capital accumulation (investment) and entrepreneurial activity, Say did not place the entrepreneur in a dynamic environment. His role was conceived within a purely stationary equilibrium characterized by the equality of prices of products with their costs of production. The primary source of entrepreneurial income in this system is not profit as a premium for risk but rather wages as a payment for a highly skilled type of scarce labor.

By portraying the entrepreneur chiefly as a superior form of labor, Say consciously or unconsciously directed attention away from the uniqueness of the entrepreneur and thus from his/her role as a force of change in a dynamic economy.


Frank Knight distinguished between risk and uncertainty– Some forms of risk can be mitigated insurance

• To be insurable, there must be a known probability distribution associated with risk, either because of large numbers of individuals exposed to risk or repeated exposures to the same risk by the same individuals

– Insurance companies tend to underwrites losses from named perils that are calculated to occur with predictable frequency, the do not typically insure against errors in judgment

– Cantillon’s entrepreneurs are constantly called upon to exercise their business judgment, and if the guess wrong, they must pay the price

– Uncertainty, in the sense of things unknowable, is inherent in the nature of competitive market activity, and there is no way to separate these two concepts

– “The main immediate sources of uncertainty are the amount of supply to be expected from other producers and the consumers’ wants and purchasing power”

Knight viewed the creation of markets as an entrepreneurial function– Prices allocate resources but they do not create markets, entrepreneurs do– The primary function of management is the selection of people who make the decisions required by

the operations of the firm– But entrepreneurs are more than contractors – they are specialists at uncertainty bearing, and

while the contract is one way to reduce uncertainty, some uncertainty can never be eliminated– Therefore, the size of firms depends, among other things, upon the available supply of

entrepreneurial qualities

Frank Knight (1885 – 1972)


Reflecting Austrian economists’ interest in disequilibrium processes, Joseph

Schumpeter made the entrepreneur the mechanism of economic change– He argued that the very existence of entrepreneurial profits means that equilibrium

has been disturbed

– He conceived economic reality as a dynamic process of churning from one

equilibrium to the next, and the real action occurs in disequilibrium

The really relevant problem is not how capitalism administers existing structures but

how it creates and destroys them– This process he calls “creative destruction” and is the essence of economic development

– I.e., development is a disturbance of the circular flow• It occurs in industrial and commercial life, not in consumption

• It is a process defined by the carrying out of new combinations in production – it is

accomplished by the entrepreneur

– The essential function of the entrepreneur is distinct from that of capitalist, landowner,

laborer, inventor, but is almost always mingled with other functions• Management does not elicit the truly distinctive role of the entrepreneur, but decision-making

is another matter

Joseph Schumpeter (1883 – 1950)


Creative DestructionCapitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary. And this evolutionary character of the

capitalist process is not merely due to the fact that economic life goes on in a social and natural environment which changes and by its change alters the data of economic action; this fact is important and these changes (wars, revolutions and so on) often condition industrial change, but they are not its prime movers. Nor is this evolutionary character due to a quasi-automatic increase in population and capital or to the vagaries of monetary systems, of which exactly the same thing holds true. The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers, goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.

As we have seen in the preceding chapter, the contents of the laborer's budget, say from 1760 to 1940, did not simply grow on unchanging lines but they underwent a process of qualitative change. Similarly, the history of the productive apparatus of a typical farm, from the beginnings of the rationalization of crop rotation, plowing and fattening to the mechanized thing of today–linking up with elevators and railroads–is a history of revolutions. So is the history of the productive apparatus of the iron and steel industry from the charcoal furnace to our own type of furnace, or the history of the apparatus of power production from the overshot water wheel to the modern power plant, or the history of transportation from the mailcoach to the airplane. The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation–if I may use that biological term–that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in. . . .

Every piece of business strategy acquires its true significance only against the background of that process and within the situation created by it. It must be seen in its role in the perennial gale of creative destruction; it cannot be understood irrespective of it or, in fact, on the hypothesis that there is a perennial lull. . . .

The first thing to go is the traditional conception of the modus operandi of competition. Economists are at long last emerging from the stage in which price competition was all they saw. As soon as quality competition and sales effort are admitted into the sacred precincts of theory, the price variable is ousted from its dominant position. However, it is still competition within a rigid pattern of invariant conditions, methods of production and forms of industrial organization in particular, that practically monopolizes attention. But in capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest-scale unit of control for instance)–competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives. This kind of competition is as much more effective than the other as a bombardment is in comparison with forcing a door, and so much more important that it becomes a matter of comparative indifference whether competition in the ordinary sense functions more or less promptly; the powerful lever that in the long run expands output and brings down prices is in any case made of other stuff.

It is hardly necessary to point out that competition of the kind we now have in mind acts not only when in being but also when it is merely an ever-present threat. It disciplines before it attacks. The businessman feels himself to be in a competitive situation even if he is alone in his field or if, though not alone, he holds a position such that investigating government experts fail to see any effective competition between him and any other firms in the same or a neighboring field and in consequence conclude that his talk, under examination, about his competitive sorrows is all make-believe. In many cases, though not in all, this will in the long run enforce behavior very similar to the perfectly competitive pattern. From Capitalism, Socialism and Democracy (New York: Harper, 1975) [orig. pub. 1942], pp. 82-85.


Schumpeter described innovation in several ways:– Creation of a new good or new quality of good

– Creation of a new method of production

– The opening of a new market

– The capture of a new source of supply

– A new organization of industry (e.g. creation or destruction of a monopoly)

– Over time the force of these new combinations dissipates, as the “new”

becomes part of the “old”

– According to Schumpeter, “everyone is an entrepreneur only when he

actually carries out new combinations, and loses that character as soon as he

has built up his business, when he settles down to running it as other people

run their businesses”

Entrepreneurship requires an act of will, not of intellect – it depends on

leadership

Schumpeter and Innovation


Hebert and Link summarize historical perspectives of the entrepreneur and define him as

1. the person who assumes the risk associated with uncertainty

2. the person who supplies financial capital

3. an innovator

4. a decision maker

5. an industrial leader

6. a manager or superintendent

7. an organizer and coordinator of economic resources

8. the owner of an enterprise

9. an employer of factors of production

10. a contractor

11. an arbitrageur

12. an allocator of resources among alternative uses

Early economists were unable to separate the idea of the entrepreneur from the idea of the capitalist– We now know that entrepreneurial gains bear no definite relation to the size of the capital employed in enterprise, but what both the

capitalist and the entrepreneur have in common is the element of risk– The earliest capitalists were the landed aristocracy whose capital was not risked in the production and sale of goods, which is why

Cantillon excluded them from the class of entrepreneurs who “live at uncertainty”– The “new” capitalists of Smith’s day were those adventurous people who took on large business risks in the hope of reaping great

profits– Investigation of the rewards for individual effort placed the differences between capitalist and entrepreneur in bold relief – it was then

that perception, ingenuity, and judgment came to the fore as characteristics of the entrepreneur– Whatever their nature in other respects, entrepreneurs’ gains will practically always bear some relation to monopolistic pricing

Theorizing about entrepreneurship is part of the search for the basic tenets of the dynamics of economic life

A Taxonomy of Entrepreneurial Theories


A Summary of Historical Perspectives

Hebert and Link summarize the definition of the entrepreneur as someone who

specializes in taking responsibility for and making judgmental decisions that affect

the location, the form, and the use of goods, resources, or institutions

This definition incorporates the ideas of risk, uncertainty, innovation, perception, and change

– Uncertainty is a consequence of change whereas innovation is a precept of change

This person has a comparative advantage in decision making and make decisions that

run counter to the conventional wisdom either because he has better information or a

different perception of events and opportunities

Entrepreneurial activities are performed in all societies by individuals whose judgment

differs from the norm

The basic features of the entrepreneur are perception, courage, and action

– Entrepreneurial action also implies that entrepreneurs have the courage to embrace

risks in the face of uncertainty


Summary: The Entrepreneur MattersSmall business remains the source from which most successful big businesses spring, but alongside this feet has emerged another of equal

significance: small business has had and continues to have a dynamic impact on the economy while still in its small business state. Small

business currently constitutes four-fifths of the total business population, provides half of the country’s jobs, and a like share of its gross

national product. In addition, it generates a large proportion—probably about half-of the net new jobs created in the economy, about half

of the innovations reaching the market, and spends its R&D dollars three or four times more effectively than its Brobdingnagian

brethren. In times past, all these figures were of course larger still.

Regardless of firm size, then, dominant individuals hold the key to enduring success. In all but the tiniest companies, they must function

through an organization; therefore, they must know how to build teams, run them, and rebuild them when required. Functioning thus,

they play a role often appreciated only in the failure that attends its absence, a role difficult to define tidily, a role that has carried many

names, but that these days most often sports one of its older titles— “entrepreneurship”—loosely defined (as I have defined it here)

as the art of aggressive management, practiced by an innovative, growth-oriented manager. This part and the characters who play it

have long been elements of the business historian’s repertoire, though lately displaced from the footlights by the scenery, consisting

largely of corporate office blocks.

…a distinction exists between those whose goal is growth and those whose goal is stability. For some this may be the distinction between the

entrepreneur and the manager, or between “creative” and “routine entrepreneurs. The Schumpeterian version of the entrepreneur as

innovator dominates American business history, and most figures pas and present who fit the Schumpeterian mold have fallen into the

growth-oriented category as well. In fact, their obsession with growth appears to have spawned their drive to innovate, rather than vice

versa. Contemporary studies of successful entrepreneurs show, for example, that they have little interest in technology per se, see

it as an instrument with which to achieve growth, and will abandon any particular innovation without remorse the moment a

better profit engine appears.

This growth orientation may mean expansion of a firm’s total volume through innovation, merger, acquisition, addition of new technology,

or the construction of new facilities. Alternatively it may mean growing new products or services to replace old ones (that is, some

version of the “milk the cash cows to feed the rising stars while you kill off the dogs” theory). Failing these strategies, stagnation puts a

firm on the long road toward oblivion, from which rescue depends the arrival of an entrepreneurial manager.

Harold C. Livesay, “Entrepreneurial Dominance in Businesses Large and Small” in The Business History Review (Spring, 1989).


The Entrepreneur Matters (contd.)This growth orientation may mean expansion of a firm’s total volume through innovation, merger, acquisition, addition of new

technology, or the construction of new facilities. Alternatively it may mean growing new products or services to replace old

ones (that is, some version of the “milk the cash cows to feed the rising stars while you kill off the dogs” theory). Failing these

strategies, stagnation puts a firm on the long road toward oblivion, from which rescue depends the arrival of an entrepreneurial

manager.

Not surprisingly, then, those judged “entrepreneurial” in business literature, both scholarly aid popular, have exhibited a

commitment—often a ferocious commitment—to growth.

Such entrepreneurs, planning for, achieving, and managing growth in constantly changing business environments, offer the only

hope for long-run survival in a competitive arena. Companies following static policies, or organizations that baffle individual

attempts to whip them into action, can survive only where tariff or other barriers prevent effective competition from

aggressively managed rivals.

…as a firm grows it must develop an organization to manage the full scope of its activities— searching for markets, marshalling

goods and services to penetrate them, setting goals, making long-range plans allocating resources, achieving growth—but that

organization, although necessary to avoid failure, is not sufficient to guarantee success. Only the presence of dynamic

individuals can assure an unrelenting commitment to quality, innovation, and growth through dl stages of a firm’s development.

Growth-oriented small businesses usually begin life as vehicles for the talent of the founding entrepreneur. In fact, such firms

emerge so often as the articulation of an entrepreneur’s creative will, applied to an innovation, and targeted on a market

perception, that the late Al Shapero defined an entrepreneur simply as “somebody who invents a business and knows how to

make it grow.”

The conclusions that I drew from my own research into the pygmies and giants of contemporary American business resonated

strongly with many of the lessons embedded in the non-historical literature of entrepreneurship. The fate of the inventors in my

study certainly bore out these axioms: the presence of entrepreneurial skill in the inventor or one of his associates did not

assure success, but the absence of it proved an insuperable obstacle that no degree of technical sophistication in the

invention itself could overcome. Harold C. Livesay, “Entrepreneurial Dominance in Businesses Large and Small” in The Business History Review (Spring, 1989).


Collective EntrepreneurshipTo the extent that we continue to celebrate traditional myth of the entrepreneurial hero, we will slow the progress of change and

adaptation that is essential to our economic success. If we are to compete effectively in today’s world, we must begin to celebrate collective entrepreneurship, endeavors in which the whole of the effort is greater than the sum of individual contributions. We need to honor our teams more, our aggressive leaders and maverick geniuses less.

The older and still dominant American myth involves two kinds of actors: entrepreneurial heroes and industrial drones—the inspired and the perspired.

In this myth, entrepreneurial heroes personify freedom and creativity. They come up with the Big Ideas and build the organizations—the Big Machines—that turn them into reality. They take the initiative, come a up with technological and organizational innovations, devise new solutions to old problems. They are the men and women who start vibrant new companies, urn around failing companies, and shake up staid ones. To all endeavors they apply daring and imagination.

There is just one fatal problem with this dominant myth: it is obsolete. The economy that it describes no longer exists. By clinging to the myth, we subscribe to an outmoded view of how to win economic success—a view that, on a number of counts, endangers our economic future.

Americans continue to lead the world in breakthroughs and cutting-edge scientific discoveries. But he Big Ideas that start in this country now quickly ravel abroad, where they not only get produced at high speed, at low cost, and with great efficiency, but also undergo continuous development and improvement. And all too often, American companies get bogged down somewhere between invention and production.

If America is to win in the new global competition, we need to begin telling one another a new story in which companies compete by drawing on the talent d creativity of all their employees, not just a few maverick inventors and dynamic CEOs. Competitive advantage today comes from continuous, incremental innovation and refinement of a variety of ideas that spread throughout the organization. The entrepreneurial organization is both experience-based and decentralized, so that every advance builds on every previous advance, and everyone in the company has the opportunity and capacity to participate.

Collective entrepreneurship thus entails close working relationships among people at all stages of the process. If customers’ needs are to be recognized and met, designers and engineers must be familiar with sales and marketing. Salespeople must also have complete understanding of the enterprise’s capacity design and deliver specialized products. The company’s ability to adapt to new opportunities and capitalize on them depends on its capacity to share information and involve everyone in the organization in a systemwide search for ways to improve, adjust, adapt, and upgrade.

Robert B. Reich, “Entrepreneurship Reconsidered: The Team as Hero,” in Harvard Business Review, May-June 1987.


Contemporary Approaches to Defining Entrepreneurs 1Per Howard Stevenson (Harvard):

1. Functional:

– The functional approach focuses upon the role of entrepreneurship within the economy.

– In the 18th century, for instance, Richard Cantillon argued that entrepreneurship entailed bearing the risk of

buying at certain prices and selling at uncertain prices. Jean Baptiste Say broadened the definition to

include the concept of bringing together the factors of production. Schumpeter’s work in 1911 added the

concept of innovation to the definition of entrepreneurship. He allowed for many kinds of innovation

including process innovation, market innovation, product innovation, factor innovation, and even

organizational innovation. His seminal work emphasized the role of the entrepreneur in creating and

responding to economic discontinuities.

2. Psychological:

– While some analysts have focused on the economic function of entrepreneurship, still others have turned

their attention to research on the personal characteristics of entrepreneurs.

– Considerable effort has gone into understanding the psychological and sociological sources of

entrepreneurship—as Kent refers to it, “supply-side entrepreneurship.” These studies have noted some

common characteristics among entrepreneurs with respect to need for achievement, perceived locus of

control, and risk-taking propensity. In addition, many have commented upon the common—but not

universal thread of childhood deprivation and early adolescent experiences as typifying the entrepreneur.

These studies—when taken as a whole—are inconclusive and often in conflict. Howard Stevenson, A Perspective on Entrepreneurship, (HBS Case: 1983).


Contemporary Approaches to Defining Entrepreneurs 2Per Mark Casson (Reading, UK):

1. Functional:

– In the context of the entrepreneur, the functional approach says quite simply that ‘an entrepreneur is what an

entrepreneur does’.

– It specifies a certain function and deems anyone who performs this function to be an entrepreneur.

2. Indicative:

– The indicative approach provides a description of the entrepreneur by which he may be recognized.

– Unlike a functional definition, which may be quite abstract, and indicative definition is very down-to-earth. It describes

an entrepreneur in terms of his legal status, his contractual relations with other parties, his position in society, and so on.

By and large, economic theorists have adopted a functional approach and economic historians an indicative

one. This is as it should be. Economic theory offers a set of concepts and techniques for analysing the allocation

of scarce resources. Unless entrepreneurship ultimately derives from a scarce resource it is of little economic

interest, even though it may be of social importance. To analyse the allocation of the resource, and to explain the

valuation it commands, it is sensible to define the resource in terms of the use to which it is put.

For the economic historian, however, the starting point is a set of concepts relevant to the recording and interpreting

of events. Such concepts form a descriptive rather than an analytical framework. Their primary role is in the

development of a taxonomy rather than a theory. It is therefore natural to work with definitions which relate

directly to observables, and which distinguish the major types of economic agent observed in practice.

Mark Casson, The Entrepreneur, (Barnes & Noble Books: 1982).

1 Confidential - for classroom use only The Nature of Entrepreneurship.

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