ENTREPRENEURSHIP THEORIES
• The entrepreneur has been variously defined as a risktaker, an organization builder, a decision maker,
and/or an innovator.
• A large number of research prefer to define him/her as
the owner/initiator of business enterprise (Berna
1960; Bygrave and Hofer 1991; Cole 1959; Sharma
1980; Singh 1963.
•
• The collective wisdom of this school of thought is
summed up by Landau in the following words:
‘Entrepreneurship is the process whereby people,
money, markets, production facilities and knowledge
are brought together to create a commercial
enterprise which did not exist before’ (1982:53)
• This is in the Weberian tradition, according to
which the entrepreneur is the ultimate source of
authority in an organization (Hartman 1959).
• Definitions of this type have been used in many
studies of the characteristics of those who have
started business ventures.
•
• However, the contribution of these to the
understanding of the concept of
entrepreneurship is not substantial, because they
have not tried to focus on the critical function of
the entrepreneur so the concept remains
elusive, and the search for the entrepreneur is
similar to a ‘hurt for Haffalump’, an imaginary
creature (Kilby 1971)
The concept of innovation
The, concept of innovation according to Schumpeter (1934:66), covers the following five cases.
1.
The introduction of new good – that is, one with which consumers are not yet familiar – or of a
new quality of a good.
2.
The introduction of a new method of production, that is, one not yet tested by experience in the
branch of manufacture concerned, which need by no means be founded upon a scientifically new
discovery, and also exist in a new way of handling a commodity commercially.
3.
The opening of a new market, that is, a market into which the particular branch of manufacture
of the county in question has not previously entered, whether or not this market has existed
before.
The conquest of a new source of supply of new materials or half-manufactured goods, again
irrespective of whether this source already exists, or whether it has to be created.
4.
5.
The carrying out of a new organization of any industry, like the creation of a monopoly position
(for example the breaking up of a monopoly position.
The Schumpeterian concept of entrepreneurship has been elaborated by
other prominent writers later, such as; March and Simon (1958), who
stress the need to distinguish between the investor and the innovator
(entrepreneur);
Drucker (1985), who illustrates entrepreneurship and intrapreneurship,
with numerous examples of innovation;
Vesper (1994), who maintains that every new venture is an innovation;
Peterson (1981), who defines entrepreneurship as the process of
unprogrammed innovative recombination of pre-existing elements
of activity; and
Landau (1982), who defines the entrepreneur in terms of two
dimensions, namely, innovativeness and risk-bearing capacity (see
figure 3.1).
Defining ‘Entrepreneur’ as Innovator and Risk-Taker
(High)
Risk-Bearing
Capacity
(Low)
Gambler
Entrepreneur
Consolidator
Dreamer
Low
Source: Adapted from Landau (1982).
Innovativeness
(High)
Resource bases theory
Identifying attributes of strategic resources
Entrepreneurs are individuals and they are unique resources to the new firm,
resources that money cannot buy.
The theory says that firms have different starting points for resources (called
resource heterogeneity) and other firms cannot get them (called resource
immobility).
The theory values creativity, uniqueness, entrepreneurial vision and intuition,
and the initial conditions (history) under which new ventures are created.
What are the origins of new firm? Economic organizations have their origins
in the resources of the entrepreneur and the assets that entrepreneurial
team controls.
Such potentially acquire, and finally combine and assemble.
Firms usually begin their history with a relatively small amount of strategically
relevant resources and skills, and each company’s uniqueness shows how
these resources are expected to perform in the marketplace.
The theory has a rather simple
formula.
•
Buy (or acquire) resource and skills cheaply –Transform (the resource or skills) into a product or
services
•
Deploy and implement (the strategy)
•
Sell dearly (for more than you paid).
However, this is only possible if cheap or undervalued resources and skills exist. And their
availability depends on market imperfections and differences of opinion about prices and events.
The resource based theory holds that Sustainable Competitive Advantage (SCA) is created when
firms possess and employs resources and capabilities that are1.
2.
3.
4.
Valuable because they exploit some environment opportunities.
Rare in the sense that there are not enough for all competitors
Hard to copy so that competitors cannot merely duplicate them.
Non-substitutable with other resources
Resource types
• The resource-based theory recognizes types of
resources: Physical. Reputational. Organization,
Financial, Intellectual/human and Technological.
•
• These can be called or PROFIT factors. These six
types are broadly drawn and include all ‘assets’
capabilities, organizational processes, firm
attributes, information and knowledge.
• We need to review these six types and note the
special situations where these resources may
confer particular advantage or no advantage at
all.
•Physical
•Reputational
•Organizational
•Financial
•Intellectual and Human
•Technological
PHYSICAL RESOURCES
• Physical resource are the tangible property the
firm uses in production and administration.
• These include the firm’s plant and equipment,
and the amenities available at that location.
PROFIT factors cont…
Some firms also have natural resources such as minerals, energy
resources, or land. These natural resources can affect the quality
of its physical inputs and raw materials.
Physical resources can be the source of SCA if they have the four
attributes previously described. But since most physical things can
be manufactured and purchased they are probably not rare or hard
to copy. Only in special circumstances, like a unique historical
situation, will physical resources be a source of SCA.
Fortuna magazine’s annual survey of corporate reputation indicates
that seven of the top ten corporations in any given year have
appeared in the top ten many times before.
•
•
•
•
•
•
•
The Fortune survey uses different criteria for their rankings.
The quality of management
The use of corporate assets
The firm’s value as an investment
The quality of products and services
Innovativeness
The ability to attract develop and retain people
The extent of community and environmental responsibility.
Other research indicates that the importance of these are
product quality management integrity and financial
soundness.
A PSYCHOLOGICAL APPROACH
PERSONALITY CHARACTERISTICS
Are there personality characteristics that help us predict who will be an entrepreneur and who will
not? Who will be a successful entrepreneur and who will not? Over the past few decades,
entrepreneurial research has identified a number of personality characteristics that differentiate
entrepreneurs from others. Among the most frequently discussed are the need for achievement,
locus of control, and risk-taking propensity.
The Need for Achievement The entrepreneurial need for achievement, or n Ach. was first identified
as personally trait by McClelland (1961) in his work on economic development. People with high
levels of n Ach have a strong desire to solve problems on their own, enjoy setting goals and
achieving them through their own efforts, and like receiving feedback on how they are doing. They
are moderate risk takers.
However, the link between n Ach and entrepreneurship has not always held up in empirical testing.
Researchers who have attempted to replicate McClelland’s findings or apply them in other settings
have occasionally been disappointed.
For example, n Ach is a week predictor of a person’s tendency to start a business and people
specially trained to have high n Ach sometimes perform no differently from a control group that
receive no training. The causal link between n Ach and small business ownership has not proven.
Locus of Control
A second trait often associated with entrepreneurship is locus of control. In locus-control theory,
there are two types of people
•
•
Externals, those yond their control and
Internals, those who believe that for the most part the future is theirs to control through their own
effort. Clearly, people who undertake a new business must believe that their efforts will have
something to do with the business’s future performance.
A logical prediction of this theory would be that internals are more entrepreneurial than externals.
But evidence supporting this hypothesis has been inconclusive.
Some studies have shown that there are more internals among entrepreneurs but others show no
difference between entrepreneurs and others. In fact, it could be argued that any good manager
must also possess the qualities of an internal; a person who believes that efforts affect outcomes.
So, while locus of control might distinguish people who believe in astrology and those who do not,
it may not differentiate potential entrepreneurs from potential managers or just plain business
students.
Risk-taking Propensity Related to the need for achievement is risk-taking propensity. Since the
task of new venture creation is apparently fraught with risk and the financing of these ventures is
often called risk capital, researchers have tried to determine whether entrepreneurs take some
risks than other businesspeople. That hypothesis has been tested in a number of way, but the work
by Brockhaus has been most incisive.
One researcher described the search of the entrepreneurial trait this way, “My own personal
experience was that for ten years we can ran a research center in entrepreneurial history, for ten
years we tried to define the entrepreneur. We never succeeded. Each of us had some notion of it –
what he thought was, for his purpose , a useful definition. An I don’t think you are going to get
farther than that.
The trait approach looks for similarity among entrepreneurs. But as the resource-based theory
suggests, if all entrepreneurs have a certain trait or characteristic, it is not an advantage to any of
them, for it is neither rare nor hard to duplicate. To understand entrepreneurship, we must look for
circumstances that produce differences, not similarities. For this we turn to a sociological
framework that emphasizes personal history and the uniqueness of an individual’s path to new
venture creation.
A SOCIOLOGICAL APPROACH
How are entrepreneurs unique? Each has a background, history and biography. The sociological approach tries to
explain the social conditions fro which entrepreneurs emerge and the factors that influence the decision. A
sociological model is presented in figure 2-2. It depicts the decision to become an entrepreneur as a function of
two factors; the impetus factors and the situational factors. The model is multiplicative; A zero on either the
causes means a failure to produce the entrepreneurial event.
IMPETUS FOR ENTREPRENEURSHIP
What propels entrepreneurs forward toward self-employment? There are four factors; negative displacement,
being between things, positive push, and positive pull.
Negative Displacement
Figure below begins with the notion that people who find themselves displaced in some negative way may
become entrepreneurs.
Negative displacement is the alienation of individuals or groups of individuals from the core of society. These
individuals or groups may be seen as ‘not fitting in’ to the main flow of social and economic life. Because they are
on the outer fringes of the economy and of society, they are sensitive to the allure of self-employment; having no
one to depend on, they depend on no one.
An example of this phenomenon is the tendency of immigrants to become entrepreneurs. In societies where economic
rights are more easily exercised than political rights, immigrants turn to entrepreneurship. Throughout the world,
for example. Asian and Jewish immigrants, wherever they have settled, have gone into business for themselves.
The supply of entrepreneurship
Perceptions of Desirability
Culture
Family
Colleagues
Mentors
Peers
Negative Displacement
Immigrant status
Fired
Angered, bored
Middle-aged
Divorced
Perceptions of Feasibility
Support
Demonstration
Models
Mentors
Partners
Between Things
Army
School
Prison
Entrepreneurship
Positive Pull
From partner
From mentor
From investor
From customer
Positive Push
Strong father
Career
Experience
Entrepreneurial Event
Initiative taking
Consolidation of resources
Management of organization
Relative autonomy
Risk bearing
Source: Adapted form A. shapero and L. sokol.
The social Dimension of Entrepreneurship in c,
Kent D. Sexton, and K. Vesper, eds,
Encyclopedia of entrepreneurship (Eaglewood
Cluts NJ. Prentice Hall, 1982) pp 72.90
Sociological approach cont..
Other negative displacement result from being fired from job or being angered or bored by current employment. Many
bored managers and stifled executive in large corporations are leaving their white collar jobs for challenges and
autonomy.
According to Harry Levingsone, a Harvard psychologist who specializes and life cycle issues, “The entrepreneur
psychologically speaking, has a lot more freedom than anybody in a big corporation”
To illustrate this, consider the case of Philip Shawtz, who was an executive with Olin corporation and Airco Inc. He left
his middle-level managerial career to start a business as a wholesaler of packaging materials and cleaning supplies
and to find out “who and what I am "He reports that he enjoys the autonomy and the action of drumming up
business and interacting with customers. He enjoy putting his own personal stamp on his company. Having only
four employees, he can create a family atmosphere, relaxed and friendly.
He imprints his own values of honesty and dependability on the business, something that no middle-level corporate
manager can do.
Middle age or divorce can also provide the impetus for new venture creation. In an unusual example, one entrepreneur
recreated his business because of a midlife crisis. Tom Chappell co-founded a personal-care and health-products
business, Tom’s of Maine Inc. A number of years ago he realized that he was not happy running this business even
though he was successful. He went back to school and obtained a Master’s degree from Harvard Divinity school.
His studies there led him to examine his values and his motivation for managing his own firm. Hen changed the
company’s goals, setting its mission to “address community concerns, in Maine and around the globe, by devoting
a portion of our time, talent and resources to the environment.
Sociological approch cont..
“Between Things”
People who are between things are also more
likely to seek entrepreneurial out-lets than
those who are in the “middle of things”.
Like immigrants, people who are between things
are sometimes outsiders. Three examples are
offered
1. between military and civilian,
2. between students life and a career, and
3. between prison and freedom.
Positive pull
Positive influences also leads to the decision to investigate entrepreneurship. And
these are called positive pull influences.
They can come from a potential partner. A mentor, A parent, an investor, or a
customer.
The potential partner encourages the individual with the offer of sharing the
experience, helping with the work, and spreading the risk.
The mentor raises self-esteem and confidence. Mentors and partners can also
introduce the entrepreneur to people inside the social and economic network for
new venture activity.
There also appears to be a relationship between a parent’s occupation and offspring
entrepreneurship. Many entrepreneurs have a strong self-employed father figure
in the family. Investors that provide the initial financing can convince the
individual that ‘there may be more where that came from.
The prospect of a potential customer pulling the entrepreneur into business raises
some difficult ethical and economic issues. However, having a guaranteed market
for the products or services is a temptation few can resist.
POSITIVE PUSH
The final category of situations that provide impetus and momentum for
entrepreneurship is termed positive push.
Positive-push factors include such things as a career path that offers
entrepreneurial opportunities or a education that gives the individual the
appropriate knowledge and opportunity.
What types of career choices can people make that put them in good position
to become entrepreneurs? Two types of career paths can lead to
entrepreneurship.
The first is the industry path. A person prepares himself for a job or career in
a particular industry and learns everything there is to know about that
industry. Since all industries display some sort of dynamics or change,
over time, entrepreneurial opportunities that exploit that change come
and go. A person with a deep knowledge of the industry is an excellent
position to develop a business that fills a niche or gap created by industry
change.
People taking the industry path to new venture creation emphasize that specialized knowledge is the
key resource. That knowledge may be embodied in particular people, a technology, or a system or
process.
The new firm may be a head-to-head competitor. It may serve a new niche not served by the former
employer, or it may be an upstream firm (a supplier) or a downstream firm (a distributor or
retailer).
Whatever its functional form, a spin-off is a knowledge-based business, its primary resources are the
competencies and experiences and the networks and contacts being transferred to a new venture.
The challenge for these people is to procure the other resources, financial and physical, that will enable
them to make their plan a reality.
A different approach, the sentry path emphasizes the money and the deal. People with careers in
sentry positions see many different opportunities in many different industries. They tend to be
lawyers, accountants, consultants, bankers (especially business loan officers), and brokers.
These people learn how to make deals and find money. They have contacts that enable them to raise
money quickly when the right property comes along.
Perceptions of the situation
Perception of Desirability Entrepreneurship must be seen as desirable in order to be pursued.
The factors that affect the perceptions of desirability can come from the individual’s culture, family,
peers and colleagues, or mentors. For example, the Sikhs and Punjabis who dominate the service
station business in New York City also dominate the transportation and mechanics business in their
native country. Sometimes religion can spark entrepreneurship and entrepreneurship and
legitimize the perception of desirability. For example, Zen Buddhist communities are historically
self-sufficient economically and provide the background for the story of an unusual entrepreneur,
Bernard Glassman.
Glassman was born the son of immigrant Jewish parents and trained as a systems engineer. But
now he is building a better worlds by combining Zen entrepreneurship with a mission to help
people at the bottom of the economic ladder. After Glassman introduction to Buddhism, he found
that meditation alone could not meet his spiritual needs. So he chose the way of Entrepreneurship.
In 1983, he and his Zen community launched Greyston Bakery in Yonkers, New York, supplying highpriced pies and cakes to wealthy consumers. He received his early training as a baker from another
Zen sect in San Francisco. Today his bakery grosses $1.2 million and employs 200 people, many
previously considered unemployed. Many entrepreneurs say that they want to help the poor and
needy, but Glassman has made it happen. Through Greyson’s profile, he has been able to renovate
buildings, provide counseling services , and open a day-care centre. He still has to pay close
attention to the bottom line, however; the bakery is his mandala and he must concentrate intensely
to make it a success.
At the end of the process depicted in the figure, the new venture
creation process begins, The pre-entrepreneurial conditions
described end in the entrepreneurial event, that is, in the creation
and management of a new venture.
One model of this process comprises five components:• Initiative. An individual or team, having been brought to the state
of readiness by personal factors and by perceptions of desirability
and feasibility, begin to act. Evidence of initiative usually includes
scanning the environment for opportunities, searching for
information, and doing research.
• Consolidation of resources. Levels of resource needs are
estimated, alternatives for procurement are considered, and timing
of resource arrival is charted and eventually consolidated into a
pattern of business activity that could be called an organization.
•
Management of the organization. The business’s resource acquisition, transformation, and
disposal are routinized and systemized. Those elements that are not easily systematized are
managed separately.
•
Autonomous action. The management of the new venture is characterized by free choice of
strategy, structure and processes.
•
Risk taking. The initiators have put themselves at risk. They are personally affected by the
variability of returns of the business and by its possible success or failure.
Another process-oriented model by Stevenson emphasizes entrepreneurial behaviour toward resources.
This model makes two valuable contributions to our understanding of the entrepreneurial process;
(1)
It recognizes that no entrepreneur behaves in an entrepreneurl ike manner all the time. There
are forces acting upon the individual that sometimes make entrepreneurial behavior appropriate
and that at other times make administrative or managerial behavior appropriate.
(1)
It emphasizes that the commitment and control of resources are as important to the process as
environmental scanning and opportunity recognition. Each entrepreneur assesses the forces
pushing for entrepreneurial action and those requiring administrative action and then makes the
choice tha tis best for the new venture.