THE NATURE AND IMPORTANCE OF ENTREPRENEURSHIP

LEARNING OBJECTIVES

1. To introduce the concept of entrepreneurship and its historical development. 2. To explain the entrepreneurial process. 3. To identify the basic types of start-up ventures. 4. To explain the role of entrepreneurship in economic development. 5. To discuss ethics and entrepreneurship.

Being an entrepreneur and creating a new business venture is analogous to raising childrenit takes more time and effort than you ever imagine and it is extremely difficult and painful to get out of the situation. Thank goodness you cannot easily divorce yourself from either situation. When people ask me if I like being in business, I usually respond: On days when there are more sales than problems, I love it; on days when there are more problems than sales, I wonder why I do it. Basically, I am in business because it gives me a good feeling about myself. You learn a lot about your capabilities by putting yourself on the line. Running a successful business is not only a financial risk, it is an emotional risk as well. I get a lot of satisfaction from having dared itdone it and been successful.

Research indicates that individuals who study entrepreneurship are three to four times more likely to start their own business, and that they will earn 20 to 30 percent more than students studying in other fields. To understand the field better, it is important to learn about the nature and development of entrepreneurship, the entrepreneurial process, and the role of entrepreneurship in the economic development of a country.

NATURE AND DEVELOPMENT OF ENTREPRENEURSHIP

Who is an entrepreneur? What is entrepreneurship? What is an entrepreneurial process? The development of the theory of entrepreneurship parallels to a great extent the development of the term itself. The word entrepreneur is French and, literally translated, means between-taker or go-between. entrepreneur Individual who takes risks and starts something new

Middle Ages
In the Middle Ages, the term entrepreneur was used to describe both an actor and a person who managed large production projects. In such large production projects, this individual did not take any risks, but merely managed the project using the resources provided, usually by the government of the country. A typical entrepreneur in the Middle Ages was the clericthe person in charge of great architectural works, such as castles and fortifications, public buildings, abbeys, and cathedrals.

17th Century
The reemergent connection of risk with entrepreneurship developed in the 17th century, with an entrepreneur being a person who entered into a contractual arrangement with the government to perform a service or to supply stipulated products. Since the contract price was fixed, any resulting profits or losses were the entrepreneurs

18th Century
In the 18th century, the person with capital was differentiated from the one who needed capital. In other words, the entrepreneur was distinguished from the capital provider (the present-day venture capitalist). One reason for this differentiation was the industrialization occurring throughout the world. Many of the inventions developed during this time were reactions to the changing world, as was the case with the inventions of Eli Whitney and Thomas Edison. Both Whitney and Edison were developing new technologies and were unable to finance their inventions themselves. Whereas Whitney financed his cotton gin with expropriated British crown property, Edison raised capital from private sources to develop and experiment in the fields of electricity and chemistry. Both Edison and Whitney were capital users (entrepreneurs), not providers (venture capitalists). A venture capitalist is a professional money manager who makes risk investments from a pool of equity capital to obtain a high rate of return on the investments.

19th and 20th Centuries

In the late 19th and early 20th centuries, entrepreneurs were frequently not distinguished from managers and were viewed mostly from an economic perspective: Briefly stated, the entrepreneur organizes and operates an enterprise for personal gain. He pays current prices for the materials consumed in the business, for the use of the land, for the personal services he employs, and for the capital he requires. He contributes his own initiative, skill, and ingenuity in planning, organizing, and administering the enterprise. He also assumes the chance of loss and gain consequent to unforeseen and uncontrollable circumstances. The net residue of the annual receipts of the enterprise after all costs have been paid, he retains for himself. entrepreneur as an innovator An individual developing something unique In the middle of the 20th century, the notion of an entrepreneur as an innovator was established: The function of the entrepreneur is to reform or revolutionize the pattern of production by exploiting an invention or, more generally, an untried technological method of producing a new commodity or producing an old one in a new way, opening a new source of supply of materials or a new outlet for products, by organizing a new industry.

DEFINITION OF ENTREPRENEUR TODAY

The concept of an entrepreneur is further refined when principles and terms from a business, managerial, and personal perspective are considered. In particular, the concept of entrepreneurship from a personal perspective has been thoroughly explored in this century. This exploration is reflected in the following three definitions of an entrepreneur: In almost all of the definitions of entrepreneurship, there is agreement that we are talking about a kind of behavior that includes: (1) initiative taking, (2) the organizing and reorganizing of social and economic mechanisms to turn resources and situations to practical account, (3) the acceptance of risk or failure. To an economist, an entrepreneur is one who brings resources, labor, materials, and other assets into combinations that make their value greater than before, and also one who introduces changes, innovations, and a new order. To a psychologist, such a person is typically driven by certain forcesthe need to obtain or attain something, to experiment, to accomplish, or perhaps to escape the authority of others. To one businessman, an entrepreneur appears as a threat, an aggressive competitor, whereas to another businessman the same entrepreneur may be an ally, a source of supply, a customer, or someone who creates wealth for others, as well as finds better ways to utilize resources, reduce waste, and produce jobs others are glad to get. Entrepreneurship is the dynamic process of creating incremental wealth. The wealth is created by individuals who assume the major risks in terms of equity, time, and/or career commitment or provide value for some product or service. The product or service may or may not be new or unique, but value must somehow be infused by the entrepreneur by receiving and locating the necessary skills and resources. Although each of these definitions views the entrepreneur from a slightly different perspective, they all contain similar notions, such as newness, organizing, creating, wealth, and risk taking. Yet each definition is somewhat restrictive, since entrepreneurs are found in all professionseducation, medicine, research, law, architecture, engineering, social work, distribution, and the government. To include all types of entrepreneurial behavior, the following definition of entrepreneurship will be the foundation:

Entrepreneurship is the process of creating something new with value by devoting the Entrepreneurship is the process of creating something new with value by devoting the necessary time and effort, assuming the accompanying financial, psychic, and social risks, and receiving the resulting rewards of monetary and personal satisfaction and independence. This definition stresses four basic aspects of being an entrepreneur. First, entrepreneurship involves the creation processcreating something new of value. The creation has to have value to the entrepreneur and value to the audience for which it is developed. This audience can be (1) the market of organizational buyers for business innovation, (2) the hospitals administration for a new admitting procedure and software, (3) prospective students for a new course or even college of entrepreneurship, or (4) the constituency for a new service provided by a non-profit agency. Second, entrepreneurship requires the devotion of the necessary time and effort. Only those going through the entrepreneurial process appreciate the significant amount of time and effort it takes to create something new and make it operational. As one new entrepreneur so succinctly stated, While I may have worked as many hours in the office while I was in industry, as an entrepreneur I never stopped thinking about the business. The third part of the definition involves the rewards of being an entrepreneur. The most important of these rewards is independence, followed by personal satisfaction. For profit entrepreneurs, the monetary reward also comes into play. For some profit entrepreneurs, money becomes the indicator of the degree of success achieved. Assuming the necessary risks is the final aspect of entrepreneurship. Because action takes place over time, and the future is unknowable, action is inherently uncertain. This uncertainty is further enhanced by the novelty intrinsic to entrepreneurial actions, such as the creation of new products, new services, new ventures, and so on. Entrepreneurs must decide to act even in the face of uncertainty over the outcome of that action. Therefore, entrepreneurs respond to, and create, change through their entrepreneurial actions, where entrepreneurial action refers to behavior in response to a judgmental decision under uncertainty about a possible opportunity for profit. We now offer a process perspective of entrepreneurial action.

ENTREPRENEURS VERSUS INVENTORS

There is a great deal of confusion about the nature of an entrepreneur versus an inventor. An inventor, an individual who creates something for the first time, is a highly driven individual motivated by his or her own work and personal ideas. Besides being highly creative, an inventor tends to be well educated, with college or, most often, postgraduate degrees; has family, education, and occupational experiences that contribute to creative development and free thinking; is a problem solver able to reduce complex problems to simple ones; has a very high level of self-confidence; is willing to take risks; and has the ability to tolerate ambiguity and uncertainty. A typical inventor places a high premium on being an achiever and measures achievement by the number of inventions developed and the number of patents granted. An inventor is not likely to view monetary benefits as a measure of success. As indicated in this profile, an inventor differs considerably from an entrepreneur. Whereas an entrepreneur falls in love with the organization (the new venture) and will do almost anything to ensure its survival and growth, an inventor falls in love with the invention and will only reluctantly modify the invention to make it more commercially feasible. The development of a new venture based on an inventors work often requires the expertise of an entrepreneur and a team approach, as many inventors are unable to focus on just one invention long enough to commercialize it. Inventors really enjoy the process of inventing, not implementing.

THE ENTREPRENEURIAL PROCESS

The process of pursuing a new venture is embodied in the entrepreneurial process, which involves more than just problem solving in a typical management position. An entrepreneur must find, evaluate, and develop an opportunity by overcoming the forces that resist the creation of something new. The process has four distinct phases: (1) Identification and evaluation of the opportunity, (2) Development of the business plan, (3) Determination of the required resources, and (4) Management of the resulting enterprise (see Table 1.1). Although these phases proceed progressively, no one stage is dealt with in isolation or is totally completed before work on other phases occurs. For example, to successfully identify and evaluate an opportunity (phase 1), an entrepreneur must have in mind the type of business desired (phase 4). TABLE 1.1 Aspects of the Entrepreneurial Process
Identify and Evaluate the Opportunity
Opportunity assessment Creation and length of opportunity Real and perceived value of opportunity Risk and returns of opportunity Opportunity versus personal skills and goals Competitive environment

Develop Business Plan

T itle page Table of Contents Executive Summary Major Section 1. Description of Business 2. Description of Industry 3. Technology Plan 4. Marketing Plan 5. Financial Plan 6. Production Plan 7. Organization Plan 8. Operational Plan 9. Summary

Resources Required
Determine resources needed Determine existing resources Identify resource gaps and available suppliers Develop access to needed resources

Manage the Enterprise

Develop management style Understand key variables for success Identify problems and potential problems Implement control systems Develop growth strategy

Identify and Evaluate the Opportunity

Opportunity identification and evaluation is a very difficult task. Most good business opportunities do not suddenly appear, but rather result from an entrepreneurs alertness to possibilities or, in some cases, the establishment of mechanisms that identify potential opportunities. For example, one entrepreneur asks at every cocktail party whether anyone is using a product that does not adequately fulfill its intended purpose. This person is constantly looking for a need and an opportunity to create a better product. Another entrepreneur always monitors the play habits and toys of her nieces and nephews. This is her way of looking for any unique toy product niche for a new venture. Although most entrepreneurs do not have formal mechanisms for identifying business opportunities, some sources are often fruitful: consumers and business associates, members of the distribution system, and technical people. Often, consumers are the best source of ideas for a new venture. How many times have you heard someone comment, If only there was a product that would . . .
window of opportunity The time period available for creating the new venture

The market size and the length of the window of opportunity are the primary bases for determining the risks and rewards. The risks reflect the market, competition, technology, and amount of capital involved. The amount of capital needed provides the basis for the return and rewards. The methodology for evaluating risks and rewards, the focus of Chapters 7 and 9, frequently indicates that an opportunity offers neither a financial nor a personal reward commensurate with the risks involved. One company that delivered bark mulch to residential and commercial users for decoration around the base of trees and shrubs added loam and shells to its product line. These products were sold to the same customer base using the same distribution (delivery) system. Follow-on products are important for a company expanding or diversifying in a particular channel. A distribution channel member such as Kmart, Service Merchandise, or Target prefers to do business with multiproduct, rather than single-product, firms. Finally, the opportunity must fit the personal skills and goals of the entrepreneur. It is particularly important that the entrepreneur be able to put forth the necessary time and effort required to make the venture succeed. Although many entrepreneurs feel that the desire can be developed along with the venture, typically it does not materialize. An entrepreneur must believe in the opportunity so much that he or she will make the necessary sacrifices to develop the opportunity and manage the resulting organization.

Opportunity analysis, or what is frequently called an opportunity assessment plan, is one method for evaluating an opportunity. It is not a business plan. Compared to a business plan, it should be shorter; focus on the opportunity, not the entire venture; and provide the basis for making the decision of whether or not to act on the opportunity. An opportunity assessment plan includes the following: a description of the product or service, an assessment of the opportunity, an assessment of the entrepreneur and the team, specifications of all the activities and resources needed to translate the opportunity into a viable business venture, and the source of capital to finance the initial venture as well as its growth. The assessment of the opportunity requires answering the following questions: What market need does it fill? What personal observations have you experienced or recorded with regard to that market need? What social condition underlies this market need? What market research data can be marshaled to describe this market need? What patents might be available to fulfill this need? What competition exists in this market? How would you describe the behavior of this competition? What does the international market look like? What does the international competition look like? Where is the money to be made in this activity?
business plan The description of the future direction of the business

Develop a Business Plan

A good business plan must be developed in order to exploit the defined opportunity. This is a very time-consuming phase of the entrepreneurial process. An entrepreneur usually has not prepared a business plan before and does not have the resources available to do a good job. It is important to understand the basic issues involved as well as the three major sections of the plan (see Table 1.1). A good business plan is essential to developing the opportunity and determining the resources required, obtaining those resources, and successfully managing the resulting venture.

Determine the Resources Required

The entrepreneur must determine the resources needed for addressing the opportunity. This process starts with an appraisal of the entrepreneurs present resources. Any resources that are critical need to be differentiated from those that are just helpful. Care must be taken not to underestimate the amount and variety of resources needed. The entrepreneur should also assess the downside risks associated with insufficient or inappropriate resources. The next step in the entrepreneurial process is acquiring the needed resources in a timely manner while giving up as little control as possible. An entrepreneur should strive to maintain as large an ownership position as possible, particularly in the start-up stage. As the business develops, more funds will probably be needed to finance the growth of the venture, requiring more ownership to be relinquished. The entrepreneur also needs to identify alternative suppliers of these resources, along with their needs and desires. By understanding resource supplier needs, the entrepreneur can structure a deal that enables the resources to be acquired at the lowest possible cost and with the least loss of control.

Manage the Enterprise

After resources are acquired, the entrepreneur must use them to implement the business plan. The operational problems of the growing enterprise must also be examined. This involves implementing a management style and structure, as well as determining the key variables for success. A control system must be established, so that any problem areas can be quickly identified and resolved. Some entrepreneurs have difficulty managing and growing the venture they created.

Types of Start-Ups What types of start-ups result from this entrepreneurial decision process? One very useful classification system divides start-ups into three categories: lifestyle firms, foundation companies, and high-potential ventures. A lifestyle firm is privately held and usually achieves only modest growth due to the nature of the business, the objectives of the entrepreneur, and the limited money devoted to research and development. This type of firm may grow after several years to 30 or 40 employees and have annual revenue of about$2 million. A lifestyle firm exists primarily to support the owners and usually has little opportunity for significant growth and expansion. The second type of start-upthe foundation companyis created from research and development and lays the foundation for a new business area. This firm can grow in 5 to 10 years from 40 to 400 employees and from $10 million to $20 million in yearly revenue. Since this type of start-up rarely goes public, it usually draws the interest of private investors only, not the venture-capital community. The final type of start-upthe high-potential ventureis the one that receives the greatest investment interest and publicity. While the company may start out like a foundation company, its growth is far more rapid. After 5 to 10 years, the company could employ around 500 employees, with $20 million to $30 million in revenue. These firms are also called gazelles and are integral to the economic development of an area.

ROLE OF ENTREPRENEURSHIP IN ECONOMIC DEVELOPMENT

The role of entrepreneurship in economic development involves more than just increasing per capita output and income; it involves initiating and constituting change in the structure of business and society. This change is accompanied by growth and increased output, which allows more wealth to be divided by the various participants. What in an area facilitates the needed change and development? One theory of economic growth depicts innovation as the key, not only in developing new products (or services) for the market but also in stimulating investment interest in the new ventures being created. This new investment works on both the demand and the supply sides of the growth equation; the new capital created expands the capacity for growth (supply side), and the resultant new spending utilizes the new capacity and output (demand side). In spite of the importance of investment and innovation in the economic development of an area, there is still a lack of understanding of the productevolution process. This is the process through which innovation is developed and commercialized through entrepreneurial activity, which in turn stimulates economic growth.

Government as an Innovator
The government is one conduit for commercializing the results of the synthesis of social need and technology. This is frequently called technology transfer and has been the focus of a significant amount of research effort. Despite this effort, relatively few inventions resulting from sound scientific government-sponsored research have reached (been transferred to) the commercial market. Most of the by-products of this scientific research have little application to any commercial need. The few by-products that are applicable require significant modification to have market appeal. Though the government has the financial resources to successfully transfer the technology to the marketplace, it lacks the business skills, particularly marketing and distribution, necessary for successful commercialization. In addition, government bureaucracy and red tape often inhibit the business from being formed in a timely manner.

Corporate Entrepreneurship
Corporate entrepreneurship (entrepreneurship within an existing business) can also bridge the gap between science and the marketplace. Existing businesses have the financial resources, business skills, and frequently the marketing and distribution systems to commercialize innovation successfully. Yet, too often the bureaucratic structure, the emphasis on short-term profits, and a highly structured organization inhibit creativity and prevent new products and businesses from being developed. Corporations recognizing these inhibiting factors and the need for creativity and innovation have attempted to establish an entrepreneurial spirit in their organizations. In the present era of hyper competition, the need for new products and the entrepreneurial spirit have become so great that more and more companies are developing an entrepreneurial corporate environment, often in the form of strategic business units (SBUs).

Independent Entrepreneurship
The third method for bridging the gap between science and the marketplace is via independent entrepreneurship, such as the creation of a new organization. Many entrepreneurs have a difficult time bridging this gap and creating new ventures. They may lack managerial skills, marketing capability, or financial resources. Their inventions are often unrealistic, requiring significant modification to be marketable. In addition, entrepreneurs frequently do not know how to interface with all the necessary entities, such as banks, suppliers, customers, venture capitalists, distributors, and advertising agencies. Yet, in spite of all these difficulties, entrepreneurship is presently the most effective method for bridging the gap between science and the marketplace, creating new enterprises, and bringing new products and services to the market. These entrepreneurial activities significantly affect the economy of an area by building the economic base and providing jobs. In some areas, entrepreneurship accounts for the majority of new products and net new employment. Given its impact on both the overall economy and the employment of an area, it is surprising that entrepreneurship has not become even more of a focal point in economic development.

ETHICS AND SOCIAL RESPONSIBILITY OF ENTREPRENEURS

The life of the entrepreneur is not easy. An entrepreneur must take risks with his or her own capital in order to sell and deliver products and services while expending greater energy than the average businessperson in order to innovate. In the face of daily stressful situations and other difficulties, the possibility exists that the entrepreneur will establish a balance between ethical exigencies, economic expediency, and social responsibility, a balance that differs from the point where the general business manager takes his or her moral stance. A managers attitudes concerning corporate responsibility are related to the organizational climate perceived to be supportive of laws and professional codes of ethics. On the other hand, entrepreneurs with a relatively new company who have few role models usually develop an internal ethical code. Entrepreneurs tend to depend on their own personal value systems much more than other managers when determining ethically appropriate courses of action. Although drawing more on their own value system, entrepreneurs have been shown to be particularly sensitive to peer pressure and general social norms in the community, as well as pressures from their competitors. The differences between entrepreneurs in different types of communities and in different countries reflect, to some extent, the general norms and values of the communities and countries involved. This is clearly the case for metropolitan as opposed to nonmetropolitan locations within a single country. Internationally, there is evidence to this effect about managers in general. U.S. managers seem to have more individualistic and less communitarian values than their German and Austrian counterparts. The significant increase in the number of internationally oriented businesses has impacted the increased interest in the similarities and differences in business attitudes and practices in different countries. This area has been explored to some extent within the context of culture and is now beginning to be explored within the more individualized concept of ethics. The concepts of culture and ethics are somewhat related. Whereas ethics refers to the study of whatever is right and good for humans, business ethics concerns itself with the investigation of business practices in light of human values. Ethics is the broad field of study exploring the general nature of morals and the specific moral choices to be made by the individual in his relationship with others. While business ethics has emerged as an important topic within popular and academic publications in the past few decades, to date it has been treated a historically and with an orientation dominated by the U.S. perspective. Although the English word ethics is generally recognized as stemming from the Greek thos, meaning custom and usage, it is more properly identified as

originating from swdhthos, in which the concepts of individual morality and behavioral habits are related and identified as an essential quality of existence. A central question in business ethics is, For whose benefit and at whose expense should the firm be managed? In addressing this question we focus on the means of ensuring that resources are deployed fairly between the firm and its stakeholdersthe people who have a vested interest in the firm, including employees, customers, suppliers, and society itself. If resource deployment is not fair, then a stakeholder is being exploited by the firm. Entrepreneurship can play a role in the fair deployment of resources to alleviate the exploitation of certain stakeholders. Most of us can think of examples of firms that have benefited financially because their managers have exploited certain stakeholdersreceiving more value from them than they supply in return. This exploitation of a stakeholder group can represent an opportunity for an entrepreneur to more fairly and efficiently redeploy the resources of the exploited stakeholder. Simply stated, where current prices do not reflect the value of a stakeholders resources, an entrepreneur who discovers the discrepancy can enter the market to capture profit. In this way the entrepreneurial process acts as a mechanism to ensure a fair and efficient system for redeploying the resources of a victimized stakeholder to a use where value supplied and received is equilibrated. Therefore, while there is evidence that some use the entrepreneurial process to exploit others for profit, it is important to understand that the entrepreneurial process can be an important means of helping exploited stakeholders and at the same time setting up a viable business. Think of the entrepreneurial process as a tool that can be used effectively to achieve outcomes for the benefit of others (and the entrepreneur) rather than to the detriment of others. Ethics is not only a general topic for conversation but a deep concern of businesspeople.

THE FUTURE OF ENTREPRENEURSHIP

As evidenced by the many different definitions, the term entrepreneurship means different things to different people and can be viewed from different conceptual perspectives. However, in spite of the differences, there are some common aspects: risk taking, creativity, independence, and rewards. These commonalities will continue to be the driving force behind the notion of entrepreneurship in the future. One thing is clear: The future for entrepreneurship appears to be very bright. We are living in the age of the entrepreneur, with entrepreneurship endorsed by educational institutions, governmental units, society, and corporations.