A perspective on entrepreneurship

Perspective on Entrepreneurship The term “entrepreneurship” has entered the business vocabulary as the sass’ equivalent of “professionalism,” the managerial buzzword of the sass. Many individuals aspire to be entrepreneurs, enjoying the freedom, Independence and wealth such a career seems to suggest. And larger corporations want to become more “entrepreneurial,” their shorthand for the innovative and adaptive qualities they see in their smaller ?and often more successful ?competitors. Our purpose in his chapter is to shed some light on the concept of entrepreneurship.

We will define entrepreneurship as a management process, and will discuss why we believe encouraging entrepreneurial behavior is critical to the long-term vitality of our economy.

Finally, we will suggest that the practice of entrepreneurship Is as important, if not more important?to established companies as it is to start-ups. Increasing Interest in Entrepreneurship It would be difficult to overstate the degree to which there has been an increase in the level of Interest in entrepreneurship. A strong Indicator of such Interest is revived by the unprecedented rise in the rate of new business formation.

The number of annual new business Incorporation has doubled In the last ten years, from annual rates of about 300,000 to over 600,000. These trends are mirrored in the capital markets that fund these start-ups.

The decade 1975-1984 saw explosive growth in the amount of capital committed to venture capital firms in the United States. There was a concurrent dramatic increase in the amount of money raised in the public capital markets by young companies. In Dalton to Interest on the part of individuals who wish to become entrepreneurs ND Investors who wish to back them, there has been a wave of Interest In what some refer to as “Entrepreneurship,” or entrepreneurship in the context of the larger corporation.

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In addition to the wealth of books and articles on the subject, some large firms seem to have recognized their shortcomings on certain critical dimensions of performance, and have structured themselves in an attempt to be more innovative. Indeed, we believe that the strengthening of entrepreneurship Is a critically important goal of American society.

The first thirty years of the postwar period In the united States were characterized by an abundance of opportunity, brought about by expanding markets, high investment in the national infrastructure, mushrooming debt. In this environment, it was relatively easy to achieve Professor Howard H. Stevenson prepared this case. HOBS cases are developed solely as the basis for class discussion. Cases are not Intended to serve as management.

Copyright 1983 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http:// www. Hobs. Arvada. Due.

No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means ?electronic, mechanical, photocopying, recording, or otherwise?without the permission of Harvard Business School. 384-131 business success, but this is no longer true. Access to international resources is not as easy as it once was; government regulation has brought a recognition of the full costs of doing business, many of which had previously been hidden; competition from overseas has put an end to American dominance in numerous industries; genealogical change has reduced product life in other industries; and so forth. In short, a successful firm is one that is either capable of rapid response to changes that are beyond its control, or, is so innovative that it contributes to change in the environment. Entrepreneurship is an approach to management that offers these benefits.

Defining Entrepreneurship As we have discussed, there has been a striking increase in the level of attention paid to the subject of entrepreneurship. However, we’ve not yet defined what the term means. As a starting point, it may be helpful to review some of the definitions scholars have historically applied to entrepreneurship. There are several schools of thought regarding entrepreneurship, which may roughly be divided into those that define the term as an economic function and those that identify entrepreneurship with individual traits. The functional approach focuses upon the role of entrepreneurship within the economy.

In the 18th century, for instance, Richard Cancellation argued that entrepreneurship entailed bearing the risk of buying at certain prices and selling at uncertain prices. Jean Baptists Say broadened the definition to include the concept of bringing together the factors of production. Summerset’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.

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 ND sociological sources of entrepreneurship ?as Kent refers to it, “supply-side entrepreneurs with respect to need for achievement, perceived locus of control, and irrigating 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. We believe, however, that neither of these approaches is sound.

Consider, for example, the degree to which entrepreneurship is synonymous with “bearing risk,” “innovation,” or even founding a company. Each of these terms focuses upon some aspect of some entrepreneurs. But, if one has to be the founder to be an entrepreneur, then neither Thomas Watson of IBM nor Ray Crock of McDonald’s will qualify; yet, few would seriously argue that both these individuals were not entrepreneurs. And, while risk bearing is an important element of entrepreneurial behavior, it is clear that many entrepreneurs bear risk grudgingly and only after they have made valiant attempts to get the capital sources and resource providers to bear the risk. As one extremely successful entrepreneur said: “My idea of risk and reward s for me to get the reward and others to take the risks.

With respect to the “supply side” school of entrepreneurship, many questions can be raised. At the heart of the matter is whether the psychological and social traits are either necessary or sufficient for the development of entrepreneurship. 2 Finally, the search for a single psychological profile of the entrepreneur is bound to fail. For each of the traditional definitions of the entrepreneurial type, there are numerous counter-examples that disprove the theory. We simply are not dealing with one kind of individual or behavior pattern, as even a cursory review of well-known entrepreneurs will demonstrate.

Nor has the search for a psychological model proven useful in teaching or encouraging entrepreneurship. Entrepreneurship as a Behavioral Phenomenon Thus, it does not seem useful to delimit the entrepreneur by defining those economic functions that are “entrepreneurial” and those that are not. Nor does it appear particularly helpful to describe the traits that seem to engender entrepreneurship in certain individuals. From our perspective, entrepreneurship is an approach to management that we define as follows: the pursuit of opportunity without regard to resources currently controlled. This summary description of entrepreneurial behavior can be further refined by examining six critical dimensions of business practice.

These six dimensions are the following: strategic orientation, the commitment to opportunity, the resource commitment process, the concept of control over resources, the concept of management, and compensation policy. We shall define these dimensions by “promoter” who feels confident of his or her ability to seize opportunity regardless of the resources under current control. At the opposite extreme is the “trustee” who emphasizes the efficient utilization of existing resources. While the promoter and rustle define the end points of this spectrum, there is a spectrum of managerial behavior that lies between these end-points, and we define (overlapping) portions of this spectrum as entrepreneurial and administrative behavior. Thus, entrepreneurial management is not an extreme example, but rather a range of behavior that consistently falls at the end of the spectrum.

The remainder of this chapter defines these key business dimensions in more detail, discusses how entrepreneurial differs from administrative behavior, and describes the factors that pull individuals and firms towards particular types of behavior. Strategic Orientation Strategic orientation is the business dimension that describes the factors that drive the firm’s formulation of strategy. A promoter is truly opportunity-driven. His or her orientation is to say, “As I define a strategy, I am going to be driven only by my perception of the opportunities that exist in my environment, and I will not be constrained by the resources at hand. ” A trustee, on the other hand, is resource- driven and tends to say, “How do I utilize the resources that I control? ” Within these two poles, the administrator’s approach recognizes the need to examine the environment for opportunities, but is still constrained by a trustee-like focus on resources: “l will prune my opportunity tree based on the resources I control.

I will not try to leap very far beyond my current situation. ” An entrepreneurial orientation places the emphasis on opportunity: “l will search for opportunity, and my fundamental task is to acquire the resources to pursue that opportunity. ” These perspectives are represented on Figure 1 . 3 Figure 1 Promoter Driven by perception of opportunity STRATEGIC ORIENTATION Trustee Driven by resources currently controlled Administrative Domain Pressures toward this side Diminishing opportunity streams Social contracts Rapidly changing: Technology Consumer economics Social values Political rules Performance measurement criteria Planning systems and cycles It is this dimension that has led to one of the traditional definitions of the entrepreneur as opportunistic or ?more favorably ?creative and innovative. But the entrepreneur is not necessarily concerned with breaking new ground; opportunity can also be found in a new mix of old ideas or in the creative application of traditional approaches.

We do observe, however, that firms tend to look for opportunities where their resources are. Even those firms that start as entrepreneurial by recognizing opportunities often become resource-driven as more and more resources are acquired by the organization. The pressures that pull a firm towards the entrepreneurial range of behavior include the following: Diminishing opportunity streams: old opportunity streams have been largely played out. It is no longer possible to succeed merely by adding new options to old products. Rapid changes in: – Technology: creates new opportunities at the same time it obsoletes old ones.

– Consumer economics: changes both ability and willingness to pay for new products ND services. – Social values: defines new styles and standards and standards of living. – Political roles: affects competition through deregulation, product safety and new standards. Pressures which pull a firm to become more “administrative” than entrepreneurial 4 The “social contract”: the responsibility of managers to use and employ people, plant, technology and financial resources once they have been acquired. Performance criteria: how many executives are fired for not pursuing an opportunity, compared with the number that are punished for not meeting return on investment targets? Capacity utilization and sales growth are the typical measures of business success.

Planning systems and cycles: opportunities do not arrive at the start of a planning cycle and last for the duration of a three- or five-year plan. Commitment to Opportunity As we move on to the second dimension, it becomes clear that the definition of the entrepreneur as creative or innovative is not sufficient. There are innovative thinkers who never get anything done; it is necessary to move beyond the identification of opportunity to its pursuit. The promoter is a person willing to act in a very short time frame and to chase an opportunity quickly. Promoters may be more or less effective, but they are able to engage in commitment in a rather revolutionary fashion.

The duration of their commitment, not the ability to act, is all that is in doubt. Commitment for the trustee is time-consuming, and once made, of long duration. Trustees move so slowly that it sometimes appears they are stationary; once there, they seem frozen. This spectrum of behavior is shown on Figure 2. Figure 2 Revolutionary with short duration COMMITMENT TO OPPORTUNITY Evolutionary of long duration Action orientation Acknowledgment of multiple constituencies Short decision windows Negotiation of strategy Risk management Risk reduction Limited decision constituencies Management of fit It is the willingness to get in and out quickly that has led to the entrepreneur’s reputation as a gambler.

However, the simple act of taking a risk does not lead to success. More critical to the success of the entrepreneurs is knowledge of the territory they operate in. Because of familiarity with their chosen field, they have the ability to recognize patterns as they develop, and the confidence to assume the missing elements of the pattern will take shape as they foresee. This early recognition enables them to get a Jump on others in commitment to action. Pressures which pull a business towards this entrepreneurial end of the spectrum include: Action orientation: enables a firm to make first claim to customers, employees and financial resources.

5 Short decision windows: due to the high costs of late entry, including lack of competitive costs and technology. Risk management: involves managing the firm’s revenues in such a way that they can be rapidly committed to or withdrawn from new projects. As George Bernard Shaw put it, “Any fool can start a love affair, but it takes a genius to end one successfully. ” Limited decision constituencies: requires a smaller number of responsibilities and remits greater flexibility. In contrast, administrative behavior is a function of other pressures: Multiple decision constituencies: a great number of responsibilities, necessitating a more complex, lengthier decision process.

Negotiation of strategy: compromise in order to reach consensus and resultant evolutionary rather than revolutionary commitment. Risk reduction: study and analysis to reduce risk slows the decision-making process. Management of fit: to assure the continuity and participation of existing players, only those projects which “fit” existing corporate resources are acceptable. Commitment of Resources Another characteristic we observe in good entrepreneurs is a multistage commitment of resources with a minimum commitment at each stage or decision point. The promoters, those wonderful people with blue shoes and diamond pinky rings on their left hands, say, “l don’t need any resources to commence the pursuit of a given opportunity.

I will bootstrap it. ” The trustee says, “Since my object is to use my resources, once I finally commit I will go in very heavily at the front end. ” The issue for the entrepreneur is: what resources are necessary to pursue a given opportunity? There is a constant tension between the amount of resources omitted and the potential return. The entrepreneur attempts to maximize value creation by minimizing the resource set, and must, of course, accept more risk in the process. On the other hand, the trustee side deals with this challenge by careful analysis and large-scale commitment of resources after the decision to act.

Entrepreneurial management requires that you learn to do a little more with a little less. Figure 3 addresses this concept. Multistage with minimal exposure at each stage Entrepreneurial Domain Single-staged with complete commitment upon decision Lack of predictable resource needs Personal risk reduction Lack of long-term control Incentive compensation Social needs for more opportunity per resource unit Managerial turnover International pressure for more efficient resource use Formal planning systems On this dimension we have the traditional stereotype of the entrepreneur as tentative, uncommitted, or temporarily dedicated?an image of unreliability. In times of rapid change, however, this characteristic of stepped, multistage commitment of resources is a definite advantage in responding to changes in competition, the market, and technology. The process of committing resources is pushed towards the entrepreneurial domain by several factors: Lack of predictable resource needs: forces the entrepreneurs to commit less up front so that more will be available later on, if required.

Lack of long-term control: requires that commitment match exposure. If control over resources can be removed by environmental, political or technological forces, resource exposure should also be reduced. Social needs: multistage commitment of resources brings us closer to the “small is beautiful” formulation of E. F. Schumacher, by allowing for the appropriate level of source intensity for the task.

International demands?pressures that we use no more than our “fair share” of the world’s resources, e. G. , not the 35% of the world’s energy that the United States was using in the early sass. The pressures within the large corporation, however, are in the other direction ?toward resource intensity.