CHAPTER TWO

THE ENTREPRENEURIAL DECISION AND PROCESS

2.1 Introduction
For a person who actively starts his or her own business, the experience is filled with

enthusiasm, frustration, anxiety, and hard work. There is a high failure rate due to poor sales,

intense competition, or lack of capital. The financial and emotional risk can be very high. What

then causes a person to make this difficult decision? Thrive

Many individuals have difficulty bringing their ideas to the market and creating a new venture

yet, entrepreneurship and the actual entrepreneurial decision have resulted in several million

new businesses throughout the world.

2.2 The Entrepreneurial Decision

Many companies have been formed through a very personal human process that, although

unique, has some common characteristics. Like all processes, it entails a movement from

something to something – a movement from a present life-style to forming a new enterprise as

indicated below.

The decision to start an entrepreneurial venture consists of several sequential decisions

➢ The decision to leave a present career or life style.

➢ The decision that an entrepreneurial venture is desirable.

➢ The decision that both external and internal factors make the venture possible.

2.2.1 Change from Present Life-style

The decision to leave a present career and life style is not an easy one. It takes a great deal of

energy to change and create something new. The two forces driving a person to leave a present

life-style and start a business are; the pull factors and push factors.

Pull factors are those which encourage individuals to become entrepreneurs by virtue of the

attractiveness of the entrepreneurial option. Some of the most important pull factors are:

• The financial rewards of entrepreneurship

• The freedom to work for oneself

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 • The sense of achievement to be gained from running one’s own venture

• The freedom to pursue personal innovation

• A desire to gain the social standing achieved by entrepreneurs.

Push factors are those which encourage entrepreneurship by making the conventional option

less attractive. Push factors include.

• The limitation of financial rewards from conventional jobs

• Being unemployed in the established economy

• Job insecurity

• The inability to pursue a personal innovation in a conventional job

• Being a misfit in an established organization

The above push and pull forces can also be summarized as: work environment and disruptions

Change from present life Form new enterprise

style Desirable
- Culture
• Work environment
- Subculture
• Disruption - Family
- Teachers
- Peers
Possible
~ Government
~ Background
~ Marketing
~ Finance
~ Role models

The two most important incentives to leave a present life-style and start a business will be

discussed as follows:

1. Work environment

Individuals tend to start businesses in familiar areas that they are working now. And here two

work environments tend to be particularly good in spawning new enterprises. They are: 1)

Research and Development and 2) Marketing. Working in technology (research and

development) individuals develop new product ideas or processes and often leave to form new

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companies when the present employers do not accept the new ideas. Similarly, individuals in

marketing become familiar with the market and unsatisfied customers’ want and needs and

frequently start a new enterprise to fill these needs.

2. Disruptions

Perhaps even more incentive to leave a present life-style and overcome the inertia by creating

something new comes from a negative force disruption. Disruption is a push factor towards

establishing a new venture. A significant number of companies are formed by people who have

retired, who are relocated, or who have been fired. There is no greater force than personal

dislocation to galvanize a personal into action. Another cause of disruption and resulting

company formation is the completion of an education degree.

Yet what causes this change due to personal disruption to result in a new company being formed

instead of something else? The decision to start a new company occurs when an individual

perceives that it is both desirable and possible.

2.2.2 The Decision that an Entrepreneurial Venture is Desirable

The perception that starting a new company is desirable results from an individual’s culture,

subculture, family, teachers, and peers.

Culture

A culture that values an individual who successfully creates a new business will spawn more

company formation than one that does not. For example, the American culture places a high

value on being your own boss, having individual opportunity, being successful, and making

money – all aspects of entrepreneurship. Therefore, it is not surprising to find a high rate of

company formation in the United States. On the other hand, in some countries successfully

establishing a new business and making money is not as highly valued and failure may be a

disgrace.

Subculture

However, even an entire culture is not totally for or against entrepreneurship. Many different

subcultures that shape value systems are operant within a cultural framework. There are pockets

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of entrepreneurial subcultures in every culture. More individuals actively plan to form new

enterprises in these supportive environments.

Family

Family traits play an important role in entrepreneurship. Studies of companies in a variety of

industries in many countries indicate that 50 to 72 percent of founders of companies had fathers

and /or mothers who valued their independence. The independence achieved by being company

owners, professionals, artists, or farmers permeates the entire family life, giving encouragement

and value to the company formation activity.

Teachers

Encouragement to form company is further gained from teachers, who can significantly

influence individuals regarding not only business careers but entrepreneurship as one possible

careers path. Schools with exciting courses in entrepreneurship and innovation tend to spawn.

Peers

Finally, peers are very important in the decision to form a company. An area with an

entrepreneurial pool and meeting places where entrepreneurs and potential entrepreneurs meet

and discussion ideas, problems and solutions spawn more new companies than an area where

this does not occur.

2.2.3 Possibility of an Entrepreneurial Decision

While the desire generated from the individual’s culture, subculture, family, teachers, and peers

must be present before any action is taken, the second part of the question centers around the

question: what makes it possible to form a new company? Several factors – government,

background, marketing, role models, and finance – contribute to the creation of a new venture.

Government

The government contributes by providing the infrastructure to support a new venture. It is no

wonder that more companies are formed in the United States given the roads, communications

and transportation system utilities, and economic stability available versus that available in

other countries. Even the tax rate for companies and individuals in the United States is better

than in countries such as Ireland or England.

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Background

Here the entrepreneur must have the necessary background needed to make the company

formation possible and keep it running. This can be knowledge acquired from formal education

or previous business experience.

Marketing

There must be a sufficient market size for the products or services of the new venture. In

addition, the entrepreneur must have the marketing know-how to put together the best total

package of product, price, distribution and promotion needed for successful product launching.

A company is more easily formed in an area where there is a market demand.

Role Models

The existence of role models will also make the entrepreneurial decision possible. That is, to

see someone else succeed makes it easier to picture yourself doing a similar activity better.

“If that person could do it, so can I”

Finance

While most of the startup money for any new company comes from personal savings, credit,

friends, and relatives there is still often a need for seed (startup) capital. More new companies

are formed when seed capital is readily available.

2.3 The Entrepreneurial Process

The entrepreneurial process includes more than just problem solving in a typical management

position. An entrepreneur must find, evaluate and develop opportunities by overcoming the

strong forces that resist the creation of something new. The entrepreneurial process includes all

the functions, activities, and actions that are part of perceiving opportunities and creating

organizations to pursue them.

However, there are no perfect models on how to succeed as an entrepreneur outside or inside

an organization. Taking an idea, working with it, and eventually turning it into a business or

product usually is not an orderly process. The steps through the process are often unplanned,

are outside the entrepreneur’s total control and usually occur haphazardly. The entrepreneurship

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 process is simply frenetic, often unpredictable, challenging, and exciting all at the same time.

The sequence of events is different for each product or service or each entrepreneur.

An idea’s movement form something a person thinks up to a functioning business can be

thought of as a four-stage model. The four-stage growth model consists of categories of distinct

activities essential for a new venture to progress from an idea to a substantial enterprise. The

four are pre-start up, start up; early growth and later growth stages. Halt’s concise, informative

model high lights activities in each of these growth stages.

The four-stage growth model Figure 2.1

Pre-start up stage Startup stage Early growth stage Later growth stage

The period during The initial period of A period of often rapid The evolution of a venture
into a large company with
which entrepreneurs business when the development and
active competitors in an
plan the venture and entrepreneur must growth when the
established industry when
the preliminary position the venture venture may undergo professional management
work of obtaining in a market and major changes in may be more important
resources and made necessary markets, finances and than entrepreneurial
emotions.
organizing prior to adjustments to resource utilization.
start-up assure survival.

2.3.1 Pre-Startup Stage

During this initial phase, ideas evolve from a creative process to the point of being consciously

perceived as commercial endeavors. Entrepreneurs have already begun to believe that their

ideas are feasible and they become fascinated by visions of their enterprise. However, many of

them will haphazardly plunge into business, without much considerations taken with the

ambition of “finding a gap and filling it”. This lack of preparation too often leads to early failure.

Having a gap and filling it are important, but seldom sufficient for success.

More conscious entrepreneurs will begin by asking questions about the actual potential of their

products or services. They will try to answer questions about production, operations, markets,

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competitors, costs, financing, and potential profits. And they will try to resolve questions about

their own abilities to start business. Depending on the complexity of the proposed enterprise,

the range of pre-start-up activities can be quite extensive, but there are four activities common

Figure 2.2: Four Essential Pre-Start-Up Activities

What is the purpose of the business?

Business Concept
What does the entrepreneur want to
Defined
accomplish with the business?

Product-market research: isisthetheproduct

Product research: product
or or
study needed? Realistic?
service needed? Realistic?Market
Market
research. Who
Who will
willbuy?
buy?Where
Whereareare
they?
they?
What niche?
What rich?
What What
competitors
competitors
exist?
exist?

Financial projections: What cash

Financial plan is needed? How will income be

generateadl??W
Whhaatt eexxppeennsseessaarree

expected? What is invested?

Getting ready to start: The
Borrowed? What is needed to
Pre startup entrepreneur must find resources,
implementation meat operating requirements?
purchase beginning inventory,

A. Business concepts Identified /Identify opportunities hire those needed at startup, and
Entrepreneurs must first conceptualize their business. This conceptualization
obtain necessmay
ary lioccur
censesas
, a
natural extension of the creativity process in which new ideas are shaped into visions of useful
premises leases, facilities, and
products or services. It also may occur in a conscientious plan developed around a perceived
equipment.
“gap” that an entrepreneur might “fill”. The critical question to be answered is “what do I

want to accomplish with this enterprise?

The entrepreneur identifies as many good opportunities as possible. They have to answer these

questions.

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What is the purpose of the venture? What does the entrepreneur want to accomplish with the

business? Does this thing exist already? If it doesn’t can it be made? Who would buy it? Why

would they want it? Where are these customers? Am I the person to make this thing? Am I the

one to sell it? Why would I want to do this?

The business concept may not be fully developed until most of these questions are answered.

B. Product-market study /Evaluating opportunity

Once an entrepreneur has determined that a product or service is feasible, and that he or she

might be capable, the next set of activities involves pragmatic research. This is crucial because

entrepreneurs often jump to early conclusions based on intuition that, under close scrutiny,

reveal fatal flows in their plans. Research is necessary in at least two areas: product

development and marketing. The entrepreneur makes a quick initial assessment of the best

opportunities to select the one, which he/she will try to develop.

Product research requires actual research and development to design the item, investigate

development costs, evaluate materials and explore methods of manufacture. In this regard the

following questions must be raised and properly answered by the entrepreneur such as: can it

be done? Can it be done at a cost that could generate profits? How is it to be done? Who will

do it?

Product research involves in answering the following questions. Who will buy the product or

service? What will they be willing to pay? How can I attract them to my business? If this venture

is a big success what will prevent competitors from overwhelming me? Who are my

competitors? Can I establish a niche in the market? What are my options for long-term growth?

These questions are critical to pursue in concert with product research efforts for several

important reasons.

1st. The product itself is usually modified by feedback from initial market research.

2nd. How a product is marketed often determines how it is designed, manufactured and

packaged.

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3rd. A product is often commercially viable only when markets can be protected against strong

competitors.

The initial stage of marketing research is often rudimentary. Typically, entrepreneurs will

confide in close friends or family members to get reactions to their ideas. This feedback is

useful but often misleading. As they do not want to hurt his heart, they may positively react or

in the contrary not to see someone close losing in the process, they may refuse, even without

objective evaluation. Hence, entrepreneurs should get a professional help to objectively

evaluate its business idea.

C. Financial Planning/Feasibility Study

Although new ventures are usually secured by personal savings, cash influences are needed as

the business begins to grow. Early cash flow is usually acquired through a combination of short-

term loans, home mortgages, and family investments. As the venture evolves further, more cash

is needed and entrepreneurs have to attract capital through sophisticated loans and

knowledgeable investors. Attracting capital requires careful planning and documentation about

products, services, markets, and the entrepreneur’s expectations.

Financial planning during the pre-startup stage will not necessarily be extensive, but it does

have to be based on verifiable information. For example, if an entrepreneur projects a million

dollars in sales during the first year, there should be more than intuition behind the forecast.

Using product and market information, the entrepreneur should be able to justify cos-price

relationships, how sales were estimated, and what will be required in overhead expenses. Using

this information, the entrepreneur can forecast profits and cash flow, the two major pieces of

information required by bank loan officers and investors.

D. Pre-start-up Implementation

If we define the pre-start-up stage as a period that precedes any attempt to generate sales, then

it is a stage similar to that of an Olympic sprinter preparing for a race. The sprinter, like the

entrepreneur, plans, trains, develops strategies, and gets physically and mentally prepared to

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run. Just before the race is to begin, the sprinter gets into the starting blocks to await the gun.

Like the sprinter, an entrepreneur must commit to action and do certain things before the event.

The entrepreneur must establish vendor relations with suppliers, establish a business location,

hire essential personnel, arrange for initial promotions, and set up administration systems. The

entrepreneur, in addition, must find resources, purchase beginning inventory, hire those needed

at start up and obtain necessary license, permits, leases, facilities and equipment.

2.3.2 Start-Up Stage

It is the initial period of business. For companies with products or services to sell, it is the first

stage into revenue-generating activity. The start-up stage has no definite time frame and there

are no models to describe what a business does during this stage: however, there are two

benchmark considerations.

1st Meeting operating objectives

Ideally the venture will generate projected sales or do slightly better. If sales are significantly

below projections the venture risks of running out of cash and closing. If sales are substantially

wider than projections the firm may find itself equally in distress and unable to either finance

growth or replenish inventory. This risk is often overlooked because most people automatically

assume that a higher sales volume means higher profits. Unfortunately, the only time this

assumption is true is when an entrepreneur sells everything for cash and has an unlimited supply

of inventory. Meeting operating objectives does not necessarily mean making a profit. To the

contrary most new ventures operate at a loss for several years. They “break-even” only with

carefully monitored controls but they should be able to structure the business so that variable

costs are covered and cash flow is positive. Does the business have enough cash or financial

resources to cover variable and fixed costs? This is a crucial question. If either condition cannot

be met the enterprise is not viable.

2nd. Positioning the Enterprise

Every successful business starts with a pre conceived business idea, which includes a concept

of the product or service, markets and growth potential. However, entrepreneurs often find that

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reality is quite different from what was envisioned. Two conditions are important here; (1) The

business must survive in the short run, and (2) The business must be positioned to achieve long-

term objectives.

From a survival viewpoint the start-up stage is crucial period when adjustments of prices,

inventory, debt structure, etc are made. From a long-term perspective the business concept must

coincide with realistic prospects for growth. This means that the enterprise must be positioned

to take advantage of growth markets.

Positioning may be made to the product or service the entrepreneur can offer to the market.

Service positioning is the process of organizing the enterprise to provide expertise to a particular

client. Products are positioned by placing them for sale in a particular market niche.

Start-up operating objectives

Sales To attain monthly sales volume as projected at prices projected in feasibility plan

To achieve projected sales mix of products and services as summarized in feasibility

plan.
Revenue To achieve cash flow within budget based on sale volume and price

projections

To meet targets above variable costs with appropriate operating margins

Growth To realize incremental growth within seasonal pattern of forecasts

To maintain balance of growth with ability to underwrite inventory materials

and human resources

Position To solidify a long-term position in appropriate markets as a result of adaptation

during start-up.

To identify market strategy for niches or opportunities in new products, services

or markets during start-up.

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2.3.3 Early Growth Stage

Once the venture is positioned, successful businesses will experience a stage of early growth.

This is a period of intense monitoring, and growth can occur at different rates along a long

continuum, ranging from slow growth through incrementally higher sales to explosive growth

through quantum changes in consumer demand.

This change is illustrated in the following figure

Very slow Perceived comfort zone Very rapid

Sales increases slowly Incremental growth is Sales increases rapidly

because of the nature of within a comfort zone of as new products gain
the product or the the venture’s resources wide acceptance in new
limited market and owner’s resources markets.
and owner’s profit
objectives

Figure 2.3: Continuum of early growth

At the low end of the continuum, entrepreneurs find that they compete in slow-growth markets.

At the end of the continuum; the entrepreneur finds a high-growth sales. Between these

extremes, a majority of entrepreneurs find a “comfort zone” of expansion. Their ventures may

have growth potential, but founders restrain expansion to coincide with personal objectives.

Interesting things can happen to a new venture during this stage. If the entrepreneur has a unique

product or lucrative patent, the business may be actively courted by larger firms. Such

courtships can result in very profitable buyouts or licensing agreements. Mergers are also

common, as companies with complementary strength combine to form a new company

positioned for more rapid growth. Many businesses also experience early growth but find that

the enterprise has severe limitations. In this case, an entrepreneur may simply recognize that

the future holds little growth potential and reposing the venture as a small business.

2.3.4 Later Growth Stage

If the enterprise proves successful in the early growth stage and has momentum, it can find

itself in competition with larger companies. This is the later growth stage, when the rate of

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growth may be slower and the industry has attracted competitors. Companies reaching this stage

often “go public” with stock offerings. Family fortunes turn into corporate equity positions,

private investors convert their holding into publicly traded securities, and management teams

replace the entrepreneurial cadre. In many instances, founders lose the personal identity they

had with their firms, and if they are not ready to adapt to corporate management, they leave.

Those who do adapt enjoy the benefits of corporate management and the profits of being major

stockholders. A few ventures become large without losing control or going public. Their

founders continue to manage their corporations, finance growth through earnings and avoid the

complexities of publicly traded stock.

Understanding the Four-stage growth paradigm

Sequential stages of new venture development represent intervals that focus on different sets of

circumstances. During the pre-start-up stage, the focus is on product, service, and market

planning. The start-up stage requires entrepreneurs to focus on implementation and early

positioning. During the early growth stage, they are concerned with rapid changes in sales and

resources. And during the later growth stage, they must make a successful transition from

personally managed enterprises to professionally managed companies.

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