Entrepreneurship

Assignment No. 01 Entrepreneurship

Question No. 1 Define the concept of entrepreneurship and its historical development. Concept of Entrepreneurship: Entrepreneur traits, creativity, innovation, business planning and growth management are five of the main concepts of entrepreneurship. Lists of characteristics common to entrepreneurs have been published by many authors but others suggest that previous experiences are more important. Entrepreneurial creativity requires a paradigm shift and there are many techniques available to help the entrepreneur to see things in a different perspective, to come up with new ideas. Innovation involves implementing newly created ideas and the process can be classified as invention, extension, duplication and synthesis. Strategic planning is used to assess the entrepreneur's position in external/internal environments, identify key success factors/competencies and to implement a strategy. Finally, the issue of growth management requires the entrepreneur to settle on what size of company he is happy with, how much direct control is afforded to him and how entrepreneurial spirit can be retained in a growing business. Many authors have published lists of characteristics that they consider to be displayed by entrepreneurs. Cunningham and Lischeron (1991) have grouped these contributions into six schools of thought. They classify these as the; "Great Person", Psychological, Classical, Management, Leadership and Intrapreneurship schools of thought. "Great person" - Born entrepreneurs, e.g. Fords, Rockefeller, Trump. Psychological - Entrepreneurial personality, behavior developed over time. Classical - Entrepreneurial key factors are innovation and creativity. Management - Entrepreneurs can be developed or trained in the classroom. Leadership - Attract people to support a vision and transform it into reality. Intrapreneurship - Encouraging people to work in semi-autonomous units. However, much criticism is leveled at these theories because many of the characteristics are not unique to entrepreneurs and can be found in successful managers and executives. Liles (1974:43) proposes that "certain kinds of experiences and situational conditions rather than personality or ego - are the major determinants of whether or not an individual becomes an entrepreneur" and Bailey (2003) questions whether entrepreneurs possess different characteristics or whether they are merely products of unique situational factors. This view is also supported by O'Neile (1989), who affirms that the entrepreneur is a

"product of his historical and environmental circumstances." The choice to become an entrepreneur must be influenced by events that led to the decision, claims Brockhaus and Horwitz (1986). They suggest that previous experience has an effect. These previous experiences could be positive, such as role models and education, or they could be negative displacements. Refugees and migrants may choose entrepreneurship if gaining employment is difficult. Job dissatisfaction or job loss may be other stimuli to select entrepreneurship. Historical Development of Entrepreneurship: The question of why some nations are rich and others are poor has been at the center of economic debate for over two centuries. While the post-WWII Keynesiandominated discussion of economic development focused on and emphasized the importance of such factors as foreign aid and government planning, it is now widely agreed that the entrepreneur is the prime driver of economic progress (Kasper & Streit, 1998: 1-23; Leff, 1979). It is also accepted that the institutions that economic agents (including entrepreneurs) operate in – political, legal and cultural – directly influence their activity and hence economic development (Baumol, 1990; Olson, 1996). Institutions, or the rules of the game, provide a framework which guides activity, removes uncertainty and makes the actions of others predictable. In short, institutions serve to reduce the costs of action and facilitate the coordination of knowledge dispersed throughout society. Economists associated with the Austrian school of economics have long focused their attention on the study of entrepreneurship and the economic analysis of institutions, providing a robust literature emphasizing the importance of these areas (Boettke, 1994; Boettke, 2001: 234-247; Foss, 1997; Wubben, 1997). In contrast to other schools of economic thought, the Austrians have not only realized the importance of institutions, but have attempted to provide a connection between the market process and an economic understanding of institutions. Moreover, Austrians stress that entrepreneurship does not 2 describe a distinct group of individuals, but rather, is an omnipresent aspect of human action. As Mises wrote: In any real and living economy, every actor is always an entrepreneur and speculator… Economics, in speaking of entrepreneurs, has in view not men, but a definite function. This function is not the particular feature of a particular special group or class of men; it is inherent in every action and burdens every actor…The term entrepreneur as used in catalectic theory means: acting man exclusively seen from the aspect of the uncertainty inherent in every action (1949, 252-3).

Economic decision makers do not simply react to given data and allocate their scarce means to realize given ends. The entrepreneurial

element in human action entails the discovery of new data and information; discovering anew each day not only the appropriate means, but the ends that are to be pursued (Kirzner, 1973: 30-87). Moreover, the ability to spot changes in information is not limited to a selective group of agents – all agents posses the capacity to do so. Herein lies the dilemma in the literature on entrepreneurship and economic development. Given the Austrian insight that entrepreneurship is omnipresent, entrepreneurship cannot also be claimed to be the “cause” of economic development. There are countries that have not achieved a level of economic development consistent with their endowment, the state of technology, and the level of human capital investment in the country, yet economic actors are still coping with uncertainty and striving to be alert to hitherto unrecognized opportunities for gain. Obviously, a narrow reading of entrepreneurship cannot help us explain why some nations are rich and other nations linger in poverty. To explore the causal relationship between entrepreneurship and economic growth, we must think more broadly. Entrepreneurship manifests itself differently across alternative institutional regimes and some of these manifestations are consistent with economic development, while others are not. The realization of the role that the rules of the game play in guiding action provides an analytical framework in which we can consider the link between economic progress and entrepreneurship. That is, we must consider the 3 institutions that comprise the societal organizational environment and consider how they serve to channel entrepreneurial activity in one direction or another.

Question No. 2 Part (a) Describe the entrepreneurial decision process.

Entrepreneurial Decision Process Entrepreneurial Decision Making: Decision making lies at the very heart of the entrepreneurial process. Entrepreneurs have to make a plethora of different decisions on a daily basis, for example concerning refinements of the business idea, creating or identifying a market niche, solving technical problems, acquiring resources, recruiting key personnel etc. (Davidsson and Klofsten,

2003). Many of these decisions can have long lasting consequences, and critical decisions taken at early stages may have unforeseeable impacts upon the entire future success and performance of the new venture (Reuber and Fischer, 1999; Vohora, Wright and Lockett, 2004). Studying entrepreneurial decision making, therefore, is important for a better understanding of the process whereby individuals create and exploit new venture opportunities. Sarasvathy (2001a) has identified two modes of reasoning that individuals may apply when making decisions in business settings: causation and effectuation. Causal reasoning is a problem solving decision model that rests on the logic of prediction (Sarasvathy, 2001a; Wiltbank et al., 2006). The choice of means is driven by the entrepreneur’s knowledge of possible means, as well as the characteristics of the effects the entrepreneur wants to create. The market is assumed to exist independent of the entrepreneur and the main task is to grasp as much of that market as possible. This is done by being involved in planning and gathering necessary information to see how strategies materialize according to plan and to identify possible reasons why plan and outcome differ. Career Experience: One particular aspect that can be expected to have a potential impact on entrepreneurial decision making is the career experience of the entrepreneur. A career can be defined as ‘…any social strand of any person’s course through life’ (Goffman, 1961:127), which means that a career does not only include what an individual does in a particular occupation but rather consist of the total experience of an individual’s working life. Previous studies have suggested that individuals tend to focus their attention and activities on what has been working well in the entrepreneurs’ past career. Minniti and Bygrave (2001) argue for example that many entrepreneurs tend to choose actions that replicate, or are closely related to the ones they have already taken, thereby exploiting their pre-existing knowledge (see also similar arguments in Starr and Bygrave, 1992; McGrath, 1999; Politis, 2005). This implies that experienced business founders develop a knowledge corridor through which they interpret the outside world as a basis for their future decision making (Ronstadt, 1988; Venkataraman, 1997). The insights gained from prior career experience can thus be expected to create a perceived ‘path’ for future business venturing where the entrepreneur has moved from his/her specific observations to make broader generalizations and theories of how to achieve success in the new venture. Career Motives: While decision making can be seen as a function of entrepreneurs’ prior experience we may also have to consider that their intentions, in terms of what they aim for and where they want to go in the future, can influence their decision making as well (Krueger, 2003). In this study we are particularly interested in entrepreneurs’ career motives at it is widely acknowledged that the career motives of individuals can both guide and constrain future actions and decision behaviors (Schein, 1987; Brosseau et al., 1996). The basic premise underlying this argument is that most individuals develop diverse concepts of what a career means to them, which in turn greatly influence their choice of career path and experience at work (Brousseau et al., 1996). Most studies of careers in the

entrepreneurship domain have however focused on the decision to start a venture and become an entrepreneur (see e.g., Starr and Fondas, 1992; Harvey and Evans, 1995; Simon et al., 2000). What is less known is how entrepreneurs’ career motives may influence future actions and decision behaviors (Katz, 1994; Shane, Locke and Collins, 2003; Politis, 2005). This implies that the majority of entrepreneurship scholars have put large emphasis on understanding the factors that influence someone to start a new venture, while neglecting the issue of how their preferred career paths and underlying motives can explain entrepreneurial decision making in the new venture creation process.

Question No. 2 Part (b) Describe the role of entrepreneurship in economic development. One of the most important Schumpeterian legacies that continue to inspire and influence ‘neo-Schumpeterian’ theories of technological, institutional and economic change is the idea that innovation is the engine of economic change, and that the entrepreneur is the agent of innovation (Fagerberg 2003; Baumol 1968, 2002). In this paper, we point out that the rich mine of Schumpeter’s heritage contains additional valuable un-mined nuggets. We argue that ‘neo-Schumpeterian’ theories have overlooked some less wellknown writings of Schumpeter, which can add significantly to our understanding of entrepreneurship. Enriching the present-day ‘neo-Schumpeterian’ theories of entrepreneurship and economic change with such additional contributions from Schumpeter’s hand is valuable in its own right. Further value is obtained by the sidepayment that the consideration of Schumpeter’s overlooked works on entrepreneurship provides a more complete and rounded picture of Schumpeter’s heritage. The objective of the present article is to advance the understanding of entrepreneurship, and its role in economic evolution, by a systematic use of Schumpeter’s works, including some overlooked articles. In particular, we draw on works by Schumpeter that until recently were difficult to get hold of, only available in German language, and in one case, entirely unknown. Following the introductory section that establishes the article’s motivation and objective, section two presents a citation analysis of Schumpeter in the entrepreneurship literature. We focus on the top five journals according to the list compiled by Augello (1990) in his

bibliography of the primary and secondary Schumpeter literature. In a nutshell, the result of the citation analysis is that in the literature on entrepreneurship, Schumpeter is ‘much cited and little used’. Unsurprisingly, the citation analysis shows that the Theory of Economic Development is Schumpeter’s most referenced work in the literature on entrepreneurship. However, other works by Schumpeter contain even more important and substantial contributions to his theory on entrepreneurship. These overlooked works include Schumpeter’s most comprehensive article on entrepreneurship, Entrepeneur (Schumpeter 1928), until recently only available in German as well as omitted parts of Theorie der wirtschaftlichen Entwicklung (Schumpeter 1911, the first edition of the German edition of Theory of Economic Development). Not only do these works add detail to Schumpeter’s most cited work in the Anglophone literature on entrepreneurship, they also invite a reinterpretation of Schumpeter’s work on entrepreneurship. Such a reinterpretation, we argue in the following section, makes Schumpeter’s concept of entrepreneurship even more powerful and relevant for understanding technological, institutional and economic evolution.

Question No. 3 Describe the importance of role models and support systems in entrepreneurship. Role Models in Entrepreneurship: Since entrepreneurship studies put the emphasis on the specific tasks (Writing a Business Plan, Entrepreneurial Marketing, Entrepreneurial Finance) during the different stages of the process (pre-seed, seed/start-up, growing), it has received more acceptance in the academic world as well as in the real business world. But again life is more complex than most researchers want it to be. Every single decision-making situation in every start-up process is unique and hardly comparable. The entrepreneurial process is based on assumptions and the reading of market signals. So the task for the entrepreneur is not only to gather all the information needed to make the decision--he or she also has to interpret it the right way. However, if you ask a venture capitalist what the success factors in the entrepreneurial process are, you might receive an answer like this: First, the entrepreneur; second, the entrepreneur; and third, the entrepreneur. How does that go with what we learned from Gardner? Maybe we can take the best of both worlds. Of course, knowing the business and management tools is helpful to every single entrepreneur. On the other hand, it is also correct to say that a lot of as-yet-undiscovered success factors are hidden in the person of the entrepreneur. And as every decision-making situation is different, there are a lot of strategies that work (and, of course, at least as many that do not). Role models, i.e. successful entrepreneurs, can help people to learn how to use the information available to make decisions. They can show them how they gathered and processed information and what management strategies and tools work in different

situations. Finally, they can also help to understand which psychological qualities one needs to succeed. Making university students meet real-life entrepreneurs is a central element in entrepreneurship education. With their help, the academic teacher overcomes another imperfection: his own lack of experience. Support Systems in Entrepreneurship: The Republic of Estonia has been noted for its quick and successful economic development. One of the most important guarantees to the process is the state contribution to developing the respective infrastructure and creating the legislative basis, required for developing entrepreneurship. One of the supportive measures is the tax exemption for investments made for the development of a company. Another measure is the state support system that is being continuously developed. The Estonian Regional Development Fund is the agency that mediates the measures of the support system to the Business Support Centers in the counties. The Saaremaa Business Support Centre, located in Kuressaare, performs the partner obligations of the state by servicing the target group companies as well as performing other activities including: • informing businesses of the measures of the support systems to entrepreneurship; • disseminating information on the services provided by other entrepreneurship supporting funds and foundations; • providing free consultations to businesses in their starting phase; • introducing the consultants from the support system to the users; • Providing the starting businesses with a package of the related materials.

Question No. 2 Part (a) Describe the methods for generating new venture ideas. 1. Focus Groups: These are the groups of individuals providing information in a structural format. A moderator leads a group of people through an open, in-depth discussion rather than simply asking questions to solicit participant response. Such groups form comments in open-end in-depth discussions for a new product area that can result

in market success. In addition to generating new ideas, the focus group is an excellent source for initially screening ideas and concept. 2. Brainstorming: It is a group method for obtaining new ideas and solutions. It is based on the fact that people can be stimulated to greater creativity by meeting with others and participating in organized group experiences. The characteristics of this method are keeping criticism away; free wheeling of idea, high quantity of ideas, combinations and improvements of ideas. Such type of session should be fun with no scope for domination and inhibition. Brainstorming has a greater probability of success when the effort focuses on specific product or market area. 3. Problem inventory analysis: t is a method for obtaining new ideas and solutions by focusing on problems. This analysis uses individuals in a manner that is analogous to focus groups to generate new product areas. However, instead of generating new ideas, the consumers are provided with list of problems and then asked to have discussion over it and it ultimately results in an entirely new product idea. The entrepreneur is not limited by only the three methods presented in this article.

Question No. 4 Part (b) Discuss the various aspects of product planning and development process. An estimated 65 percent of companies struggle to keep product portfolios and developmental activity aligned with corporate strategic plans. A principal reason is that in most organizations, product planning and product development execution are independent, complex processes. What’s more, they are typically carried out by multiple, geographically dispersed teams and functions, with little emphasis on making sure that innovation projects fit the business’ long-term product strategies. The new Sopheon offering addresses these issues by creating a seamless, automated process and decision framework that continually reconciles strategic product planning and operational execution. The software captures and manages detailed project data while simultaneously modeling short- and long-term scenarios around market factors. Gate decisions improve because they include consideration of strategic plans and operational and external issues. At the same time, road mapping decisions are made more dynamically and with greater confidence because they leverage accurate, up-to-date details on current projects. The result is stronger synchronization between product plans and innovation process execution, enabling companies to:

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Increase the visibility of innovation strategies, allowing individuals at all levels— from executives to team members—to clearly see the role they play in supporting innovation initiatives and do a better job of making decisions that ensure objectives are met; Minimize the risk that external factors such as competitor initiatives, regulatory changes or disruptive technologies will negatively impact the return on near- or long-term product innovation investments; Identify market “white spaces” or growth opportunities outside core businesses where product development can lead to significant, profitable new revenue; and Make certain that the generation of new products matches existing and future market demand by creating a continuous innovation stream that predictably and reliably supports achievement of corporate goals.

“Today’s top innovators know that in order to be effective, strategic product planning needs to be more than a once-a-year event,” said Bryan Seyfarth, solutions marketing director for Sopheon. “They treat planning as an ongoing process, and make sure throughout the year that it is linked tightly to the execution of operational initiatives. The strength of the integration between Accolade and Vision Strategist is that it provides an automated structure that improves both planning and execution. The flow of data within the system facilitates regular monitoring of project activities, and helps to ensure that the activities are aligned with strategic plans and goals. As a result, there is a much higher probability that those plans will translate into business-generating realities.”

Question No. 5 Discuss the scope and value of the business plan to investors, lenders, employees, suppliers and customers. The Business Plan is the fundamental road map for any new business. This chapter presents the remaining topics to be included in your final Business Plan and provides a structure for presenting the material in a coherent form to potential lenders, investors and partners. To reiterate, a good Business Plan does the following: • Shows that the proposed business is a serious initiative, undertaken by capable entrepreneurs who under stand and have control of the essential elements that will ensure success. • Increases the chances that an entrepreneur will be able to attract investors, lenders, partners, strategic allies, suppliers and key staff. • Forces the entrepreneur to collect, in one place, all of the thinking and research that has gone into the development of a proposed business.

Lenders (usually bankers) make loans (debt) with the expectation of receiving a very specific set of payments over time. Their requirements are usually well defined in terms of conditions that must be met in advance and over the course of the loan. Lenders do not want to take risks and they do not generally enjoy any benefits of a business being profitable. Lenders want to be repaid and, if the business cannot make that repayment, they want to know that others will make the payment or that assets of equivalent value are available to reimburse them. Investors make equity investments in businesses. They expect a higher return than lenders and are willing to take more risk, but this should not be confused with being risk-takers. They are equally clear about what they are willing to do or not do. Their interests are in seeing a business succeed and in earning a return on their investment. If they become significant participants in a business, they tend to establish very specific (and stringent) targets to make sure that things are going well. When things are not going well, investors often have the ability to make significant changes in a business, including replacement of the management team. It may sound as though the interests of lenders and investors are the same: to get paid. Sometimes this is true, especially when things are going well and especially in the early stages of a business. However, very few businesses go exactly as planned and ‘course corrections’ are needed. Depending on the degree of correction, the interests of lenders and investors may become very different. Why do Investors Invest? Investors provide equity to a business for a variety of reasons. It is important that entrepreneurs understand the goals and objectives of investors before going too far in discussions. Investors provide equity to: • Produce income in the form of cash dividends (often in a particular pattern as in the case of an investment fund that has promised returns to its investors over a specific time period). • Achieve capital growth (with or without specific time constraints; a traditional equity investor-partner is involved over the life of a business whereas a fund investor, as noted above may have a contractual obligation to liquidate its investment in 6, 8 or 10 years). • Enter a market (and thereby avoid the start-up and market research costs and problems of entering a market alone, preferring instead to join forces with a business already developed). • Sell a product (especially equipment).

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Form a partnership and thereby grow quickly (similar in appearance but substantively different from making an investment to enter a market).

In contrast, why do lenders make loans? The list of reasons tends to be shorter, but it is equally important, especially in a new field such as renewable energy, to understand the motives of a lender. Taking it for granted that all lender make loans because that is an important part of their business and a source of profits, there are other reasons to consider. Lenders make loans (provide debt) to: • Build relationships with clients who will be a source of future business.

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Enter new business areas that can expand their loan portfolio profitably and provide a competitive advantage to the bank. Contribute to economic and social growth and thereby stimulate greater lending activity.

It is important to note that many banks simply do not lend for ‘projects’ (bankers separate project finance-which includes loans secured by the infrastructure project itself-from corporate finance-in which the activities and assets of a company guarantee a loan-and many do not lend to groups without substantial experience and

assets). Being aware of the interests of banks in advance can save a great deal of time.