Module 1.

Lecture Handout

Module 1. – THE NATURE OF ENTREPRENEURSHIP

TOPIC INTRODUCTION
The word entrepreneur originates from the French word, entrepreneur, which means "to
undertake" and was first defined by the Irish‐French economist Richard Cantillon. Jean‐
Baptiste Say, a French economist, is believed to have coined the word "entrepreneur" in the
19th century. He defined an entrepreneur as "one who undertakes an enterprise,
especially a contractor, acting as intermediary between capital and labour" (Wikipedia).

There has been a great deal of attention paid to the subject of entrepreneurship over the
past few years, as many people realized that small firms contribute considerably to the
economic growth of a country. Developing countries have established policies and tax
incentives that encourage the planning and implementation of small businesses with the
belief that a small business can potentially grow into a large business.

TOPIC OBJECTIVES
Upon completion of this topic you should be able to:
1. Define the term “business”.
2. Define entrepreneurship.
3. Distinguish between entrepreneurship and an entrepreneur.
4. Explain the entrepreneurial process.
It is important that you familiarize yourself with some key concepts in the field of
entrepreneurship. Let’s start this topic with defining some of these concepts.

DEFINITIONS
Business Defined
Before a potential entrepreneur can start a business, he or she must understand what the
essence of a business is. The term business has a variety of definitions. Let’s examine a
few. A business is:
 “An organization operated with the objective of making a profit from the sale of
goods or services.” (http:/ /www.finet.c o m.hk/acc o unting/b.h tm)
 ”An enterprise, commercial entity, or firm in either the private or public sector,
concerned with providing products (goods or services) to satisfy customer
requirements.” (www.ge o rgetown .e du / uis/i a/dw / GLOS S ARY08 1 6.ht ml )
 ‘The buying and selling of products or services in order to make a profit.”
(Mariotti, 2006)

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  “An economic system in which goods and services are exchanged for one another
or money, on the basis of their perceived worth. Every business requires some
form of investment and a sufficient number of customers to whom its output can
be sold at profit on a consistent basis.”
(http://www.businessdictionary.com/definition/business.html)

The common elements in most of the definitions described above are:

A business sells or buys services and products.
The objective of a business is to make a profit.
 All business entities have customers with specific needs and wants.
 Business requires a solid financial footing.
In most cases a potential entrepreneur will be creating a “small business” that he or she
hopes to grow into a large and successful enterprise. Wikipedia defines a small business as
“a business that is privately owned and operated, with a small number of employees and
relatively low volume of sales. Small businesses are normally privately owned corporations,
partnerships, or sole proprietorships”. (http://en.wikipedia.org/wiki/Small_business)

Now that you have an idea how about the elements of a business, let’s explore the
concepts underlying entrepreneurship.

Entrepreneurship
What is Entrepreneurship? A normal response to this question is that
entrepreneurship is about creating or establishing a business. Entrepreneurship
however is more than simply starting or operating a small business. This is evident in the
responses from the people in the cartoon below.

It is true that entrepreneurship is both a science and an art. The science lies in the proven
process of planning and managing business. The art lies in the innovative thought,
implementation and growth of a business.

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 Let’s examine some different interpretations and definitions of entrepreneurship. From an
economic perspective we might use the following descriptions.

1. Entrepreneurship is a dynamic, social process where individuals, alone or in

collaboration identify financial opportunities and act upon them by establishing new
enterprises.

Entrepreneurship however involves much more than just for a business to be

successful and sustainable.
2. Entrepreneurship is a dynamic, social process where individuals, alone or in
collaboration identify opportunities for innovation and act upon them by transforming
ideas into practical targeted activities whether in a social, cultural or financial context.
(Norway Entrepreneurship Education and Training Action Plan,
http://planipolis.iiep.unesco.org/upload/Norway/Norway_Action_Plan_Entrepreneurship_2009_20
14.pdf)

The above descriptions indicate that entrepreneurship:

 Has impact on individuals.

 Provides financial opportunities.
 Has an impact on the economic well‐being of a society.
 Requires Innovation.
 Is dynamic.

The definitions explored so far imply that entrepreneurship is more than just about
business success and sustainability. The first explanation is based on making business by
establishing new enterprise, while in the second definition new dimensions are added, such
as innovation and other areas of the environment e.g. the social, cultural and financial
context.

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 During this course we will define entrepreneurship as:
The process of identifying business opportunities, allocating resources, and
taking risks to produce goods and services of value, through creative and
innovative processes, to satisfy unmet consumer demands.

IMPORTANT ASPECTS OF ENTREPRENEURSHIP

Building upon the definition, Nieman et al, (2004:9) identified the following concepts as
integral to the understanding of entrepreneurship. Entrepreneurship means that an
individual must be able to:
 Identify an opportunity ‐ This means that there must be a real
business opportunity.
 Be innovation and creativity ‐ Something new and different is required that is
needed by a target audience.
 Gather resources ‐ Capital, labor and operating equipment must be found.
 Create and grow a business ‐ This means the start of a new business venture or
the conversion of an existing business.
 Take risk ‐ There will be both personal and financial risks.
 Create rewards ‐ Reward can be in the form of profit or increased value of the
business.
 Manage a business ‐ This means that there must be planning,
organisation, leadership and control of all the functions.
So if entrepreneurship is a process of starting a new business, generally there also needs to
be someone who undertakes such a process? That is the entrepreneur.

The Entrepreneur
The person who plans, implements and manages a small business is usually called an
entrepreneur. This person must be able to embrace the concepts described by Nieman
above. Some additional definitions of an entrepreneur are:
An entrepreneur, can be defined as "one who
undertakes innovations, finance and business
acumen in an effort to transform innovations into
economic goods.
(Wikipedia)
An entrepreneur is someone (person) who in
pursuit of profits and at a risk makes the most of
the opportunities in the environment by combining
the expertise and resources of the community in
different ways to produce products and services for
the market.
(Cronje et al 2001:5)

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 So based on the above definitions an entrepreneur must:
Be a risk taker.
Be innovative.
 Possess business acumen.
 See potential opportunities in the community.
M. Gerber (1986) in his book “The E‐Myth” describes the entrepreneur in these terms:
The entrepreneur is the visionary in us. The dreamer. The energy behind every
human activity. The imagination that sparks the fire of the future. The
catalyst for change.
The entrepreneur lives in the future, never in the past, rarely in the present. He
(or she) is happiest when left free to construct images of ‘what if’ and ‘if‐when’.

For this course we will define an entrepreneur as:

A person who sees an opportunity in the market gathers his/her resources and
creates and grows a business venture to meet those needs. This person will
bear the risk and will be rewarded with profit if the venture is successful.
Generally, new organizations started by entrepreneurs are small businesses. However,
individuals that plan and implement large business ventures are also considered
entrepreneurs. We can conclude that entrepreneurship is the business process and the
entrepreneur is the person involved in implementing the entrepreneurial process.

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2. IDENTIFYING OPPORTUNITIES
THE ENTREPRENEURIAL PROCESS
The Entrepreneurial Process
includes the systematic steps
required to create and implement a
new business venture. This includes
all the functions, activities, and
actions associated with perceiving
opportunities and creating
organizations to pursue them.
Entrepreneurs often discover this
process through trial and error, but
you can shorten your learning curve
by benefitting from the experiences
of others.
(Source:
http://www.mvp.cfee.org/en/abatt
entwhatiseentprocess.html )
(Source:
http://www.mvp.cfee.org/en/abatt
entwhatiseentprocess.html )
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1. SELF DISCOVERY
Learning what you are doing; examining your strengths and
weaknesses. Examining work experience and relating it to
potential opportunities.
Looking for needs, wants, problems and challenges that are not
yet being met or dealt with effectively
3. GENERATING AND EVALUATING IDEAS
Using creativity and past experience to devise new and
innovative ways to solve a problem, or meet a need and then
narrowing the field to one best idea.
4. PLANNING
Researching and identifying resources needed to turn the idea
into a viable venture. Preparing the research in the form of a
written business plan. Preparing marketing strategies.
5. RAISING START‐UP CAPITAL
Using the business plan to attract investors, venture capitalists
partner. This stage can involve producing prototypes or test‐
marketing services
6. START‐UP
Launching the venture, developing a customer base and
adjusting marketing and operational plans as required
7. GROWTH
Growing the business: developing and following strategic
plans, adapting to new circumstances
8. HARVEST:
Selling the business and harvesting the rewards. For many
entrepreneurs, this also means moving on to new ventures
 and new challenges.

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 Nieman, Hough, and Nieuwenhuizen (2003) break the entrepreneurial process into four
phases:

The Entrepreneurial Process

4
3
Start and
Determine manage the
2 the resources business.
required
Develop a
business plan
1
Identify and evaluate

Opportunities

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HOW ENTREPRENEURS THINK
Entrepreneurs think differently from nonentrepreneurs. Moreover, an entrepreneur in a particular situation
may think differently from when faced with some other task or decision environment. Entrepreneurs must often
make decisions in highly uncertain environments where the stakes are high, time pressures are immense, and
there is considerable emotional investment. We all think differently in these strained environments than we do
when the nature of a problem is well understood and we have time and rational procedures at hand to solve it.
Given the nature of an entrepreneur’s decision-making environment, he or she must sometimes (1) think
structurally, (2) engage in bricolage, (3) effectuate, and (4) cognitively adapt.

Think Structurally

Superficial similarities - Exist when the basic (relatively easy to observe) elements of the technology resemble
(match) the basic (relatively easy to observe) elements of the market.

Structural similarities - Exist when the underlying mechanisms of the technology resemble (or match) the
underlying mechanisms of the market.

Forming opportunity beliefs often requires creative mental leaps. These creative mental leaps are launched from
a source—one’s existing knowledge. In the case of entrepreneurial opportunities, an example of a creative
mental leap is from knowledge about existing markets to a new technology that could lead to products/services
that satisfy that market. Alternatively, the creative mental leap could be from knowledge about a technology to
a new market that could benefit from its introduction. Making these connections between a new product (or
new service, new business model, or new technology) and a target market where it can be introduced is aided by
the superficial and structural similarities between the source (e.g., the market) and the destination (e.g.,
technology). Superficial similarities exist when the basic (relatively easy to observe) elements of the technology
resemble (match) the basic (relatively easy to observe) elements of the market. In contrast, structural similarities
exist when the underlying mechanisms of the technology resemble (or match) the underlying mechanisms of the
market. The entrepreneurial challenge often lies in making creative mental leaps based on structural similarities.
This is best illustrated with an example based on a real case that Denis Gregoire from Syracuse University and
me (Dean Shepherd from Indiana University) used as part of a study of entrepreneurial thinking.4 FIGURE 1.1
Entrepreneurial Action Reprinted with permission from McMullen, J., and Shepherd, D. A. (2006).
Entrepreneurial Action and the Role of Uncertainty in the Theory of the Entrepreneur. Academy of Management

Langley Research Center. It involves big and bulky flight simulators used by space shuttle pilots. As such, the
technology’s superficial elements are very similar to a market for airline pilots training in flight simulators. In
contrast, it has little superficial similarity with a target market of K–12 school children and their parents. The
technology underlying the superficial situations includes attaching sensors to individuals’ forefingers to monitor
the electric conductivity of their skin to send signals to computer processors in another machine with which the
individual interacts. Ultimately, these one-to-one relationships (skin to sensor and sensor to computer)
culminate into a network of higher-order relationships that reflect the overall capabilities of the technology, its
aims, and/or its uses. Therefore, the technology is capable of helping shuttle pilots (or airline pilots or teenage
drivers) improve their abilities to focus, pay attention, and concentrate for an extended period. Looked at in a
new light, however, the technology shares high levels of structural similarities with the target market of parents
who seek nonpharmaceutical alternatives to treat attention deficit (ADHD). This opportunity to apply the
technology to the market of parents seeking nonpharmaceutical alternatives to treat ADHD was not obvious to
individuals who were distracted from the deeper structural similarities by the superficial mismatch between the
technology and the new market. Thus, individuals who can see or create structural matches between a
technology and a target market, especially in the presence of superficial mismatches, are more likely to
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recognize entrepreneurial opportunities. Knowledge specific to a technology and/or a market can facilitate this
ability,5 and the good news is that this skill can also be enhanced through practice and training

Bricolage

Bricolage Entrepreneurs making do by applying combinations of the resources at hand to new problems and
opportunities

Entrepreneurs often lack resources. As a result, they either seek resources from others to provide the “slack”
necessary to experiment and generate entrepreneurial opportunities or they engage in bricolage. By bricolage
we mean that some entrepreneurs make “do by applying combinations of the resources at hand to new
problems and opportunities.”6 This involves taking existing resources (those at hand) and experimenting,
tinkering, repackaging, and/or reframing them so they can be used in a way for which they were not originally
designed or conceived.7 From this process of “making do,” entrepreneurs can create opportunities. Baker and
Nelson (2005: 341–42) offer the following example of bricolage. Tim Grayson was a farmer whose land was
crisscrossed by abandoned coal mines. He knew that the tunnels—a nuisance to farmers because of their
tendency to collapse, causing mammoth sinkholes in fields—also contained large quantities of methane.
Methane is another nuisance, a toxic greenhouse gas that poisons miners and persists in abandoned mines for
generations. Grayson and a partner drilled a hole from Grayson’s property to an abandoned mine shaft, then
acquired a used diesel generator from a local factory and crudely retrofitted it to burn methane. During the
conversion process, Grayson was repeatedly blown off his feet when the odorless, colorless gas exploded. His
bricolage produced electricity, most of which he sold to the local utility company using scavenged switchgear.
Because Grayson’s generator also produced considerable waste heat, he built a greenhouse for hydroponic
tomatoes, which he heated with water from the generator’s cooling system. He also used electricity generated
during off-peak hours to power special lamps to speed plant growth. With the availability of a greenhouse full of
trenches of nutrient-rich water that were heated “for free,” Grayson realized he might be able to raise tilapia, a
tropical delicacy increasingly popular in the United States. He introduced the fish to the waters that bathed the
tomato roots and used the fish waste as fertilizer. Finally, with abundant methane still at hand, Grayson began
selling excess methane to a natural gas company. As you can see from this example, bricolage is a resourceful
way of thinking and behaving that represents an important source of entrepreneurial opportunities.

Effectuation

Effectuation process A process that starts with what one has (who they are, what they know, and whom they
know) and selects among possible outcomes

As potential business leaders, you are trained to think rationally and perhaps admonished if you do not. This
admonishment might be appropriate given the nature of the task, but it appears that there is an alternate way of
thinking that entrepreneurs sometimes use, especially when thinking about opportunities. Professor Saras
Sarasvathy (from Darden, University of Virginia) has found that entrepreneurs do not always think through a
problem in a way that starts with a desired outcome and focuses on the means to generate that outcome. Such
a process is referred to as a causal process. But, entrepreneurs sometimes use an effectuation process, which
means they take what they have (who they are, what they know, and whom they know) and select among
possible outcomes. Professor Sarasvathy is a great cook, so it is not surprising that her examples of these
thought processes revolve around cooking. Imagine a chef assigned the task of cooking dinner. There are two
ways the task can be organized. In the first, the host or client picks out a menu in advance. All the chef needs to
do is list the ingredients needed, shop for them, and then actually cook the meal. This is a process of causation.

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 11

It begins with a given menu and focuses on selecting between effective ways to prepare the meal. In the second
case, the host asks the chef to look through the cupboards in the kitchen for possible ingredients and utensils
and then cook a meal. Here, the chef has to imagine possible menus based on the given ingredients and utensils,
select the menu, and then prepare the meal. This is a process of effectuation. It begins with given ingredients
and utensils and focuses on preparing one of many possible desirable meals with them.

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